The Price of Time: The Real Story of Interest 
by Edward Chancellor.
Penguin, 398 pp., £12.99, September, 978 1 80206 015 7
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The earliest known​ interest-bearing debt is recorded on a 4500-year-old clay cone from southern Iraq. Its cuneiform inscription narrates a border dispute between two ancient Sumerian cities, Umma and Lagash, over control of a fertile plain and a debt in barley that the former owed to the latter. Unable to repay the debt, which had grown to astronomical proportions, Umma’s ruler attacked Lagash but was killed as he fled the scene of battle. The clay cone is a memorial to his defeat, one of several remarkable artefacts produced by the long-running conflict between the two cities. Another relic features one of the oldest surviving visual representations of warfare: a phalanx of spear and shield-wielding Lagash soldiers in formation, a kettle of vultures carrying off the heads and limbs of their slain enemies, a naked priest pouring libations over a pile of corpses, and a sacrificial bull tied on its back to the ground.

It’s striking that the earliest narratives of unmanageable debt and organised human violence coincide. The societies of ancient Mesopotamia developed numerous types of credit – to finance long-distance trade, for example, or to help struggling farmers – as well as instruments of coercion to enforce the claims of lenders. Some of these involved the pledging of oneself or one’s family as security; there were also occasional amnesties for those trapped by unsustainable obligations. The Code of Hammurabi, composed around 1750 BCE, contained extensive rules about borrowing, including a limit on for how long – three years – a debtor could enslave himself in lieu of repayment.

Beyond Mesopotamia, evidence of interest-bearing loans during the Bronze Age is sparse. There is no record of interest being used in the New Kingdom of Egypt between the 16th and 11th centuries BCE, for instance. But in the subsequent ten centuries it became widespread. Ancient Sanskrit texts discuss the rates lenders could charge and lay down rules about the pledging of oneself or one’s sons as security. In China, there is clear documentation of interest, at high rates, from at least the fourth century BCE. The first mention in Greece is from the fifth century; thereafter, Greek drama, philosophy and history are full of stories of distressed debtors, shady lenders, and the ethical dubiousness of charging interest. In the Republic, Plato insisted that interest-bearing loans put the polis at risk of revolt by the immiserated poor.

The danger posed by interest necessitated controls, the most enduring of which was in Deuteronomy 23, which forbade the Israelite from charging interest to his ‘brother’, but permitted it with the ‘stranger’. This traditional distinction between relations of exchange with members of one’s own group, based on principles of reciprocity, and those with outsiders, where no such principle applied, was weakened wherever interest-bearing debt was widely used. When Aristotle dismissed interest in Politics – he called it the unnatural ‘birth of money from money’ – he wrote as a conservative critic of what was already a common practice in fourth-century Athens, where older economic notions of kinship were receding. In the Roman Republic at around the same time, efforts to outlaw interest were abandoned in favour of legal limits on the maximum rate a lender could charge, which remained a feature of Roman law for centuries. The widespread ancient practice of debt slavery was formally abolished in Athens in the early sixth century and in Rome in the late fourth. But the practice was never entirely eradicated.

In medieval Europe, usury was denounced on the combined authority of Aristotle and Deuteronomy, though there was confusion over whether the biblical endorsement of charging interest to gentiles meant that it was in general permissible across religious divides. Various passages in the Gospels, particularly Luke 6 (‘lend, expecting nothing in return’), appeared to support a broad prohibition of usury, as in Islam; whether Jews could licitly demand interest from non-Jews remained a point of theological debate. Thomas Aquinas, one of the most influential medieval opponents of usury, described it as an unlawful attempt to charge someone for the use of time itself. For later defenders of interest this was what made it so useful: it was an enticement to get someone to part with their money temporarily instead of profiting from it in other ways. Pleasure is supposedly more valuable today than it will be tomorrow; deferral has a cost. But to the canonists, unlike the capitalists, this made no sense. Time wasn’t something that could be bought or sold.

The efforts of the medieval church to outlaw interest were mostly ineffective, as merchants and bankers simply redescribed the many fees they charged to borrowers in less offensive terms, often suggesting that the sum added to the amount borrowed was a ‘donation’ from borrower to lender. The Reformation transformed the theology of money, allowing ideas about interest to catch up to existing practices. Calvin attacked both pillars of medieval anti-usury reasoning: ancient Jewish law shouldn’t be binding on Christians, so long as lending at interest didn’t violate norms of charity, and Aristotle’s concept of the ‘barrenness’ of money was illogical. Other assets that didn’t bear ‘offspring’, such as houses and land, could generate rent; so too could money. This became a common rebuttal to the Aristotelian view, as formal prohibitions on interest were gradually overturned. In 1571, Queen Elizabeth repealed English anti-usury provisions, setting a maximum rate of 10 per cent. Excessive charges on borrowers were to be avoided only when they represented a grossly unjust theft from the disadvantaged; otherwise, the use of interest-bearing loans was widely accepted in Europe as it entered an era of expanding commercial activity and costly warfare.

During the 17th century, lending and borrowing grew much more complex, particularly in England after the Glorious Revolution, when the Bank of England was founded, the national debt was established, and many other instruments of modern finance were first developed. The maximum permitted rates continued to fall as the state borrowed more and more to finance a century of nearly ceaseless warfare. The first era of easy money began after English usury laws were amended in 1714 to allow no lending over 5 per cent; in France rates fell even lower. Two of the first modern crises caused by the bursting of asset bubbles followed shortly afterwards, when the Mississippi and South Sea Companies collapsed in 1720.

By this point, debates about money had largely been secularised, as discussion turned more on the economic effects of different rates than on the exegesis of ancient texts. In a pamphlet from 1691, John Locke made an early, influential argument against efforts to hold down interest rates, claiming that this incentivised speculation, hurt prudent savers, and benefited only ‘bankers and scriveners’ who were ‘skilled in the arts of putting out money’. There should be no legal regulations at all, he insisted, on the ‘price of the hire of money’.

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.

A common enemy of the Austrian-inclined are central bankers, who, regardless of their political affiliation, manipulate interest rates to encourage the maximum rate of employment compatible with a certain level of inflation – which, until recently, has meant keeping rates low. It is better, on the Austrian view, to allow the market to determine interest rates than to empower technocrats to set them – even if, in a crisis, this means accepting the worst until the economy somehow rights itself without the assistance of monetary stimulus. The historical evidence sometimes marshalled to support this radical view is from the major economic recession that followed the end of the First World War. In 1920, when the US Federal Reserve, along with other major central banks, sought to contain inflation by raising interest rates to historic heights, the result was one of the sharpest economic contractions of the 20th century. In the US, already the world’s largest economy, the worst of it was, more or less, over by the end of 1921, and all without the kind of Keynesian stimulus that would later become common. This is taken as proof that allowing tight money, austerity and deflation to run their course will enable the market to heal the economy, unaided, more quickly and efficiently than the state could ever manage.

But in fact it’s difficult to take any straightforwardly anti-interventionist lessons from this episode, not least because recovery in the US began only after monetary policy was eased – not tightened – in mid-1921. Elsewhere, the crisis was anything but short-lived, especially among commodity producers in Asia, Latin America and Africa, who faced deflationary pressures for years. In the UK, the 1920s were more of a lost decade than a boom time. The major depression of the 1930s, and Europe’s subsequent slide into the political abyss, demonstrated the risks of letting crises run their course. The most conspicuous consequence of high interest rates – mass unemployment – was their most damning indictment. It became politically impossible for democracies to ignore the trauma caused by severe economic slumps.

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.

Hard-money enthusiasts saw the fate of Silicon Valley Bank as an indication that high rates were doing their job, killing off ‘zombie’ companies which cling on, despite their bad business models, because risk-taking is easy when borrowing costs almost nothing. On this view, holding rates down interrupts the process that Schumpeter called ‘creative destruction’, whereby capitalism weeds out weak companies and bad ideas to make room for the new. Some thought they were seeing the first signs of the bursting of a tech bubble which since 2008 has enriched the wealthy and produced such boondoggles as FTX and Theranos, but produced little in the way of widely shared growth and prosperity.

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.

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