Book Review — The Price of Time by Edward Chancellor
In a recent encounter, I was approached by someone requesting a loan of approximately N2 million. One of my initial questions to him was how much he intended to repay. His proposed amount did not satisfy me given the current inflationary environment, and the conversation ended there. The disparity between the loan amount I was willing to provide and the amount he was willing to repay is referred to as the interest rate, which I had long taken for granted.
However, Edward Chancellor’s 2022 book, “The Price of Time: The Real Story of Interest”, delves into the 5,000-year history of interest, shedding light on how this disagreement extends far beyond my personal encounter. Surprisingly, the dislike for high interest rates is not a phenomenon exclusive to our time. In fact, when the Archbishop of Canterbury criticized a UK payday lending firm a few years ago, he echoed the sentiments of influential figures from the past ten centuries, including Aristotle, Plato, St. Augustine, Thomas Aquinas, Dante, Luther, and Shakespeare, who all expressed disdain for usurers. Criticism of interest rates has come from both the left and the right, with notable figures like Marx and Hitler sharing a dislike for it.
Chancellor’s argument challenges the notion that eradicating or lowering interest rates below the market rate benefits the masses, asserting that it actually leads to misallocation of capital and fuels economic bubbles. The book draws striking parallels between the present global economic situation and 18th-century France. John Law, who could be considered one of the most influential figures in the history of finance and possibly the richest person to have ever lived, pushed interest rates down and printed money by purchasing government debts tied to the Mississippi Company he created. Eventually, the scheme collapsed, resulting in rampant inflation and significant harm to many individuals.
Similar circumstances unfolded during the 2008 financial crisis when bailouts of “too-big-to-fail” corporations and near-zero interest rates implemented by the US Federal Reserve led to inflated global asset prices and the ongoing battle against high inflation. A recurring theme throughout the book is that we continue to repeat the same mistakes. Chancellor cites examples such as the Roaring Twenties, the Railway Mania of the 1840s, and Japan in the 1980s to illustrate how low interest rates often make investors restless, prompting them to seek higher returns through alternative investment vehicles. This unrest in the market consistently follows periods of low interest rates.
Throughout the book, notable figures like Ben Bernanke, Janet Yellen, and Mario Draghi are mentioned. Chancellor argues that their actions, which they justify by invoking the statements of Walter Bagehot, a renowned 19th-century journalist, do not adhere to his principles. Bagehot provided stringent conditions for acting as a “banker of last resort,” such as short-duration loans and lending only against high-quality collateral, which have been disregarded. Instead, these central bankers justify extreme measures citing deflation as a risk, which Bagehot never regarded as a financial risk.
The consequences of such actions were evident during the 2008 financial crash, which led to further bailouts rather than holding business and financial executives accountable. Resources were used to amass wealth for a select few, with executives earning exorbitant salaries while workers suffered job losses and squeezed incomes.
Using examples from the United States, Europe, and Asia, especially China, Chancellor argues that unconventional monetary policies have exacerbated inequality. While people generally accept the fortunes earned by successful entrepreneurs and sports personalities, resentment builds when senior executives amass vast wealth by cutting investments, taking on debt, and diminishing their company’s (and the economy’s) growth prospects. Laid-off workers are forced to accept lower wages and reduced benefits, leading to societal polarization in Western countries. The public’s faith in the policy-making establishment has been shaken as a result of the financial crisis.
Recent events have only reinforced the wisdom of Chancellor’s analysis. Attempts to address bubbles by printing more money have merely masked underlying economic problems. Rather than resolving the issues, this approach has allowed them to grow larger. Chancellor expresses concern that the emerging super bubbles in the coming years could destabilize democratic systems. Economic growth has slowed to historic lows across America and Europe, and central bankers’ efforts to create stability have backfired. Although unemployment rates decreased sharply after the financial crisis, middle-class prospects have deteriorated. In developed countries, significant portions of the population face stagnant income growth, inadequate retirement savings, and unaffordable housing.
Curiously, instead of viewing prolonged central bank interference in the market as a failure of interventions, it is being framed as a failure of capitalism itself. Chancellor highlights the example of Iceland during the 2008 crisis, which took a different approach by allowing the market to function. While providing support to affected citizens, Iceland allowed its banks to fail and subsequently held over two dozen bankers accountable through legal action which landed them in jail. A decade after the crisis, Iceland’s GDP had surpassed its pre-crisis peak, outperforming most developed nations. The economy became more diversified as debt levels declined, leading to increased sustainability. Iceland experienced an unemployment rate similar to that of the United States during the crisis, but it soon returned to its average level. Furthermore, income inequality, as measured by Iceland’s Gini coefficient, decreased after 2008.
While reading the book, numerous questions arose for Chancellor, the financial historian. How does the Islamic world fit into the context of this analysis, considering that interest is prohibited? Given the current state of the world, with the prevention of creative destruction, what lies ahead? What advice does he have for young people who will bear the brunt of this upheaval and are increasingly discontent with the system?
“The Price of Time” addresses the asymmetry of monetary policy in the Greenspan era and beyond, highlighting the long-term negative effects. It is a masterfully written book and it comes as no surprise that it was longlisted for the 2022 Financial Times Business Book of the Year Award. This 416-page book may not be easily digestible for newcomers, but it is highly recommended for anyone seeking to understand how the economic system operates, identify market bubbles, and, most importantly for average individuals, safeguard themselves against financial ruin. It is the most comprehensive and insightful book on finance I have ever read.
