Anarchists at the bank

Edward Chancellor opens The Price of Time by recounting the debate in 1849 between two members of the National Assembly of France, the free trader Frédéric Bastiat and the anarchist Pierre-Joseph legitimacy Proudhon, who argued in a socialist newspaper over the of charging interest. Proudhon repurposed his greatest hit, “property is theft”, declaring that interest too is theft; Bastiat argued contrariwise that interest constitutes a legitimate and socially useful charge for the use of capital over a period of time. The reader may feel that Chancellor need not rehearse these cases: diverting though disagreeable Frenchmen may be, we live in a time of capital’s triumph, when borrowing, both personal and national, has reached enduringly high levels. Debt is king, and surely Bastiat has long since won the argument. But, Chancellor warns, such complacency is unearned: modern-day Proudhonian anarchists occupy not the streets but the commanding heights, infesting the leadership suites of central banks and eroding the moral character of capitalism. Readers who find this proposition so absurd as to warrant no further perusal of Chancellor’s book will miss some intriguing history, a fair number of entertaining jeremiads and a gaping disparity between a problem acutely described and a barely proposed solution.

The first section of the book, pleasantly titled “Of Historical Interest”, begins with the earliest instances of lending for profit, which quite probably predated not only industry, banking and coins, but perhaps even money of any kind or concept. In ancient agricultural societies a loan of seed or stock would be visibly and commonsensically productive, yielding a crop or progeny great enough to enable a profitable division of the fruits between borrower and lender. Thus, lending at interest became commonplace and promoted prosperity – unless, of course, the borrower met with drought, blight, plunder or any of a series of catastrophes that might prevent repayment. As a result rows and wars over borrowing at interest, as well as debt relief, are nearly as old as buying “on time”.

Chancellor carries this story through the medieval period to the early-modern system of John Law – which caused the Mississippi Bubble and collapse – and on into the earliest years of the US Federal Reserve System at the start of the twentieth century, leaving off with the great crash of 1929. He then shifts to a new section, “How Low Rates Begot Lower Rates”, a discussion of our own time, interpolating further history as necessary. This shift from history forwards to history backwards deprives the reader of knowing how Chancellor would narrate the response to the Great Depression and its consequences, which – though he will allude to it later – becomes an telling conspicuous hole in his story.

Instead one encounters Chancellor’s bracing condemnations of political economy in the decades around the turn of the twenty-first century, the time of central banks keeping interest rates low and targeting inflation. We live in an age of metrics, Chancellor says, and metrics beget manipulation. Tell people they may have a bonus for hitting a target and they will bang away at it like rats at the pellet-producing lever, irrespective of the collateral consequences. Our method of choosing targets is flawed: “quantitative targets get chosen because they are easy to quantify”, Chancellor writes, “but factors that are not easily measured tend to get overlooked”. Choosing targets simply because we can measure success there, without considering the effects of others, produces “adverse, including short-termism, the diversion of resources into bureaucracy, risk aversion, unjustified rewards, and the undermining of institutional culture”.

As Chancellor points out, this reduction of ambition to target warps commerce. Executives hired to contracts specifying bonuses for increased earnings per share have no incentive to focus on any other index of business success, and indeed are being implicitly asked to engage in brazen stock manipulation. They use corporate coffers to borrow money that they then spend on buying back their own company’s stock from outside shareholders. By the logic of arithmetic – that is, reducing the denominator of the fraction in “earnings per share” – they have improved the metric without actually improving productivity or real profitability, and have burdened the company with debt that it might later struggle to pay. But they have earned their bonus and increased the value of those shares still held – at least for now.

Readers familiar with the fixations on ranking, the proliferation of bean-counting and the resultant hollowing-out of purpose that lately threaten so much that has ever been worthwhile in universities or many another endeavor similarly afflicted by our contemporary plague of outside consultants, strategic plans and benchmarks will find themselves resistlessly nodding along with Chancellor’s tale of perversely incentivized destruction. Such readers may also catch themselves wondering what happened to the story of interest, which gets almost lost amid all the other factors contributing to these problems, but the buyback schemes Chancellor describes can only work if companies may borrow money cheaply enough to make the short- term arithmetic pan out; that is, buybacks are enabled by low interest rates, and if rates were higher, executives would have to find some other, possibly worthier way to enrich themselves.

Low interest rates encourage other forms of fibbing. If money saved or lent at prevailing rates can produce only meagre returns, then people with money will seek more profitable opportunities. These yield-chasers spread money around among improbable schemes in hopes of finding the one that will succeed – which, of course, encourages entrepreneurs to spin wild tales of future returns, in the present, they burn borrowed money.

The reason interest rates have stayed so low so long is that central bankers – the anarchists of Chancellor’s introduction – sought to avoid a new Great Depression in response to the financial crisis of 2007-08. This cheap money, Chancellor believes, has enabled not only financial shenanigans and the dissolution of manufacturing bases, but also the real-estate bubble, overvaluations of gee-whiz stocks such as Tesla and wealth inequality more generally. An unrelieved collapse, he writes, would have been preferable. “During sharp economic downturns… sales dry up. Bankers call in their loans and become reluctant to supply new credit. Firms must cut costs fast, laying off less productive workers and finding other efficiency improvements. The weakest players fail. Survivors emerge from the trial leaner and fitter, better adapted to the new business conditions. The broad economy benefits from this dose of salts.”

The obvious rejoinder is that (as John Maynard Keynes observed) even if, in the long run, deflation, illness and bankruptcy benefit that abstraction “the broad economy”, in the long run we are all dead, and in a severe crisis (as Milton Friedman said of his own support for the New Deal) “the short run deserved to dominate”. Chancellor does not acknowledge that there might be a crisis so severe as to shift priorities towards relief.

Setting that objection aside, his analysis cannot bear the weight he puts on it. He says that low interest rates create inequality. The Great Depression began a dozen years of falling rates, which hit historic lows at the end of the war. But, Chancellor also notes, the Great Depression inaugurated the Great Compression – a decades-long period of historically low inequality. There is something missing from the story.

The Price of Time only fleetingly mentions a key contributor to the Great Compression – the New Deal – in a discussion of buybacks. They did not happen for a long time because, the author says, “under President Roosevelt’s New Deal, it was made illegal for companies to acquire their shares in the market, this being regarded as a form of stock manipulation. But this law was repealed in 1982″. Despite Edward Chancellor’s more general conviction that regulations don’t work – “clever financiers can always find loopholes in the rules” – his own history supplies evidence that they do. And there could be more in that vein: discussion of how income taxes, welfare policies and financial regulation contribute to a more just and moral society. But readers will have to find it in books that explore remedies other than higher interest rates and a dose of salts.

Eric Rauchway teaches history at the University of California, Davis. His most recent book is Why the New Deal Matters2021

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