Locke’s argument is a turning point in Edward Chancellor’s polemical history of interest from antiquity to the present. It was Locke who supposedly first recognised what all anti-usurers before him had not: that interest wasn’t only an appropriate instrument for use in complex societies, but that it was low rates, more than high, that had deleterious social effects, redistributing money from the lender to the borrower, encouraging dangerous risk-taking, and exacerbating inequality. Chancellor – who shares a libertarian suspicion of easy money as a modern artifice that disrupts natural market forces – describes the centuries since as a succession of failures to heed Locke’s warning, with interest rates dwindling to an all-time low in the early 21st century. There is a paradox in the history he narrates: while the legitimacy of charging interest was widely accepted only in modernity, the broad trend is that rates have been falling for all of recorded history. In Mesopotamia, interest on barley loans was 33 per cent for more than a thousand years. In 325 ce, just before Saints Jerome and Ambrose established Christian doctrine on usury, Constantine reconfirmed the maximum Roman rate of 12 per cent. When Locke was warning of the perils of low rates, England was debating whether to move from 6 per cent to 4 per cent. Between the financial crisis of 2007-8 and the successive rate rises that began last year, most central banks had with only brief exceptions kept rates around 0 per cent, if not lower.
Chancellor blames this steady fall of interest rates for nearly every major crisis of modernity. Easy money will always lead to dangerous speculation, he reasons, as investors try to make up for lost returns by backing ‘something impossible’, as the Victorian financial journalist Walter Bagehot once wrote: ‘a canal to Kamchatka, a railway to Watchet, a plan for animating the Dead Sea, a corporation for shipping skates to the Torrid Zone’. Bagehot is one of several 19th-century liberals Chancellor cites approvingly. Another is the Viennese economist Eugen von Böhm-Bawerk, whose multi-volume Capital and Interest – a sprawling intellectual history of interest, theoretical treatise and anti-Marxist polemic rolled into one – was the first major success for the so-called Austrian School of free market economics, which later included Friedrich Hayek and Ludwig von Mises, and was foundational for a strand of neoliberal thought that remains an influence on many libertarians and conservatives in Europe and the United States.
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Polemics against low interest rates became commonplace in the years following the 2007-8 crisis, as central banks, which slashed rates and adopted unconventional monetary policies, were blamed for worsening inequality, heedless speculation and, most recently, the return of inflation. Chancellor’s contribution to the genre was published just as this era of easy money came to a close. In March 2022, the Federal Reserve began raising rates to halt the upward march in consumer prices. Since then, central banks have responded to stubbornly persistent inflation by continuing to push them higher. The question is whether this dynamic will lead to a recession, or if central banks will orchestrate a ‘soft landing’, in which inflation is curbed without precipitating a collapse in output and employment. Opinion on the likelihood of a recession fluctuates by the day. But the effects of higher rates have already been felt. An early casualty was Silicon Valley Bank, which failed in March after rate hikes caused the value of its bond investments to plummet and its depositors to withdraw in panic. The bank’s collapse stirred fears of a wider financial crisis and showed the dangers of making large bets on the assumption that borrowing would stay cheap indefinitely.
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The value of such a purge becomes murkier, though, the further one departs from the excesses of Silicon Valley. The collateral damage caused by collapsing institutions can be enormous; this is why governments now feel they have to respond even to the failure of regional banks. And if increased rates lead to higher unemployment, the result will almost certainly be to weaken the hard-won leverage of organised labour. By contrast, higher rates tend to strengthen the hand of budget hawks: in the US, the rising cost of borrowing is now being cited as a reason to cut social spending. What’s more, the shock waves of tighter money are not limited by national boundaries. The raising of interest rates in the US has major effects across the global economy. When Paul Volcker, as Fed chair under Reagan, reined in US inflation by dramatically hiking rates between 1979 and 1981, he precipitated an economic slump from which parts of Latin America and Africa still haven’t fully recovered. Today, many lower-middle-income countries face the possibility of severe economic and political stress as the cost of borrowing rises and their foreign debt becomes unaffordable. Sri Lanka’s debt crisis last year was followed by a popular uprising and the collapse of the government; this year, Pakistan approached the brink of default as its unsustainable foreign obligations exacerbated the country’s deteriorating economic and political situation. More than fifty of the world’s poorest countries face similar pressures as interest rates climb and their external debts, which ballooned during the pandemic, become more difficult to service.
Blame for the predicament of sovereign debtors in distress is often placed on the debtors – the governments that borrowed heavily when loans were cheap – rather than on the US and European financial institutions that made the debt of ‘frontier’ economies such a popular investment when low interest rates at home made other bond investments less attractive. Now, with the end of easy credit, pressure is put on these governments to balance their budgets by slashing public spending. As a consequence, they face the prospect of years of lost growth, deteriorating public services and infrastructure, and political instability. Here the argument for creative destruction rings hollow: we are no longer talking about entrepreneurs being forced back to the drawing board when their ventures are cut off from cheap money, but immiseration, social crisis and government collapse. There are no zombie countries whose destruction will make us better off.
From a review of The Price of Time: The Real Story of Interest, by Edward Chancellor:
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