The price of time: The real story of interest By EdwardChancellor, Allen Lane. 2022. pp. 398. £25.00 (hbk). ISBN: 978‐0241569160. £12.99 (ebk). ISBN: 978‐1802060164

Since 2008 Western economies have stagnated. In Britain worker productivity declined in the 2010s, and the economy grew at its slowest pace since the Industrial Revolution. In the Eurozone the economy has hardly moved from its pre-crisis level, and in America productivity growth was half its historical average in the five years to 2014; and things have not got much better since. Something is seriously wrong with today's economies. And yet the oft-repeated explanations for this phenomenon of secular stagnation – declining population growth and an ageing population, new technologies being less productive than old ones, and a global savings glut – just don't seem to cut the mustard. In The Price of Time Edward Chancellor, a financial historian and columnist for Reuters, argues the chief reason for this predicament is ultra-low interest rates and quantitative easing. The book is divided into two parts. The first part charts the history of interest rates from ancient Mesopotamia to the Great Depression, and the second part explains exactly how low interest rates today have caused secular stagnation. The former endeavour is integral to illuminating the Hayekian explanation for the business cycles economies regularly experience. Two periods warrant illustration, after which I discuss three of the seven effects Chancellor attributes to low interest rates which have emerged today. [A]s a rule, panics do not destroy capital; they merely reveal the extent to which it has previously been destroyed by its betrayal into hopelessly unproductive works. (p. 74) The Victorian journalist Walter Bagehot issued a warning and a recommendation after coming to an understanding of these crises. He warned that Britain could simply not stand interest at two per cent without its financial system being driven into speculative manias, risky investments and bad loans. And he recommended that during a panic the Bank of England “should lend copiously against good securities and at a high rate of interest”: the doctrine of ‘lender of last resort’ (p. 74). Today central bankers have taken up this recommendation in earnest, or rather they have taken up the convenient part of it. As Chancellor opines though, it is the greatest of shames they have rarely stopped “to consider Bagehot's warnings about the adverse consequences of easy money” (p. 81). Easy monetary policy is also said to have played the crucial role in causing the Great Depression in America. Unlike in nineteenth century Britain though, the central bank took on an activist approach to managing the price level. This was facilitated by the adoption of the gold–exchange standard, where government bonds counted as reserves alongside gold, creating an elasticity in the money supply which was not present before. Thanks to Knut Wicksell, who argued the natural rate of interest should be pursued, and was identified indicated in an economy by neither inflation nor deflation, price stabilisation was vigorously adopted by the US Federal Reserve. Many eminent economists of the day defended this endeavour, John Maynard Keynes, Ralph Hawtrey, and Irving Fisher among them. And between 1922 to 1929 these men achieved their ambition, with US consumer prices barely budging at all. To many economists this was enough to ensure stability. Underneath the surface though the US economy was in deep trouble. Between 1924 and 1928 bank credit doubled, helped in part by $500 million of open market operations the Fed engaged in to ensure price stability (and to assist Britain in its tough fight to restore parity with the dollar). “Easy money fostered credit growth, and credit growth fostered speculative excesses” (p. 90). Although the discount rate did not seem too low during the period, averaging at more than 4 per cent in real terms between 1922 and 1929, Chancellor contends such an appearance is deceptive. With the natural rate of interest roughly following the trend rate of annual economic growth, which between 1923 and 1928 was around 8 per cent, it is clear interest rates were artificially low. Following Hayek, Chancellor argues that the policy of price stabilisation masked inflation within the economy, which may be measured against the counterfactual of falling prices (which would have been large due to the significant productivity gains from the rapid technological developments of the period, such as electrification and Fordism). Given this evidence, Chancellor sides with Hayek in viewing the bust as the inevitable result of malinvestment, induced by low rates, which would be liquidated when interest rates eventually had to rise to their natural level. While the first part of the book investigates the history of interest, it also serves to explain how low interest rates cause boom and bust. The second part of the book serves to show how low interest rates have ensured stagnation. And it is here, I believe, that Chancellor makes his most illuminating observations. Seven effects of low interest rates are explained, concerning the allocation of capital, the financing of companies, the level of savings, the capitalisation of wealth, the distribution of wealth, the measurement of risk, and the regulation of international capital flows (p. 139). The first three warrant mention. In the past booms have been followed by busts, induced by increasing interest rates, whereby malinvestments have been liquidated, leaving plentiful factors of production for new entrepreneurs to make use of. However, due to loose monetary policy following 2008, this hasn't happened to anywhere near the extent it has in the recent past. In the US junk bonds defaulted at only half the rate they had in the previous two downturns, and in Britain the insolvency rate was lower following 2008 than in the milder recessions of the early 1990s. In Europe, by as late as 2016, a tenth of firms were still unable to cover their interest payments from profits – making them ‘zombies’ by the OECD's definition. Essentially, capital goods and labour are today tied up in unproductive firms, depriving new entrepreneurs of such resources, and thus denying economies the dynamism and increased productivity they typically generate. Although I think this explanation is compelling, Chancellor should have explained exactly why banks have been unwilling to lend to new entrepreneurs. Too much is simply asserted. Nonetheless, unlike many of the alternative explanations for dismal productivity growth since 2008 – “demographic headwinds, excessive business regulation, a lack of innovation” (p. 151) – the zombification of economies does appear to explain why productivity growth has plunged only since the crash, a very strong point in its favour. On a general note, Chancellor could have cited some economic theory to explain the causal links he implicitly relies on. There should have been a couple of pages of explicit summary of the Austrian theory of the business cycle, especially its explanation of why interest rates have to eventually increase. If this book was pitched just at economists there would be no need, but given this book is aimed at laymen as well it really would help. Easy monetary policy has also facilitated widespread mergers and acquisitions and share buybacks. “The number of listed US companies halved in the two decades prior to 2016” (p. 161). In 2015 “global mergers topped $5 trillion for the first time” and increasingly they were becoming larger, with over 70 of these deals coming in at over $10 billon when completed (p. 160). Among these was the merger between Kraft and H. J. Heinz. By 2018 it was estimated private equity was sitting on $1 trillion “of dry powder to finance future deals” (p. 163). According to Chancellor, this tendency has led to the concentration of industry, which in turn has resulted in a decline in worker bargaining power, higher executive pay, and reduced investment and R&D. Certainly the last two of these have hindered productivity growth. In the same year share buybacks by S&P 500 companies also reached $720 billion, almost 50 per cent above the level before 2008. Chancellor argues this has hindered productivity growth too, because as buybacks increase capital spending typically falls. In large part he attributes the move to buybacks, alongside low interest rates, to the shift in corporate management's priorities from maximising profits to maximising shareholder value, which can, of course, be directly influenced by share repurchasing. Another crucial impact of low interest rates has been to reduce the level of savings, and to render pension funds increasingly unable to meet their liabilities. In America after 2008 the “net savings rate (which includes capital consumption) turned negative for the first time since the Great Depression” (p. 191). By 2017 in Britain the household saving rate had fallen to its lowest level on record, and the same went for Canada too. As any right-minded economist will tell you, this absence of savings only lessens investment and thus suppresses productivity growth. Pension funds are now having particular trouble in this environment as their liabilities (facing lesser discount rates) are expanding immensely. Some have “rolled the dice – chasing higher returns with riskier investments”, only increasing the instability of the financial system (p. 196). And although it may appear higher interest rates are the obvious solution to this problem, Chancellor astutely points out that although liabilities would be reduced, higher rates would slash the value of pension assets as well, much of which is in real estate, “making a bad problem even worse” (p. 198). The only relief which has come to this situation recently is declining life expectancy in the US and the UK, but this is hardly reason to cheer. Chancellor makes clear the pensions predicament is the direct result of forcing down what he emphatically calls “the wage of abstinence” (p. 188) below its natural rate: a rate which is crucial in coordinating present with future consumption, as Böhm-Bawerk and classical economists such as Nassau Senior and J. S. Mill have always maintained. The Price of Time definitely delivers on giving the real story of interest. The first part is an exemplary application of Hayek's business cycle theory to the many crises of the past, really bringing his ideas to life through detailed financial evidence and intellectual biography. But it is the second part where the work truly shines, showing exactly how low interest rates, via seven effects, have caused the secular stagnation we are experiencing today. In sum, The Price of Time is an excellent book which is incredibly informative and very enjoyable to read. I would thoroughly recommend it to both economists and laymen alike.

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