We’re never long or far from a reminder that interest rates have a powerful effect on the human economy. Nearly $700 billion has flowed into money-market mutual funds this year because they offer a decent yield–4+%–when many bank savings accounts pay next to nothing. In this inflationary period, that’s a financial no-brainer, as well as a reminder that Merrill Lynch pioneered the “Cash Management Account” at a similar stretch in 1977. Then, too, a safe harbor was attractive amid stormy prospects for businesses and households.
In between the two inflationary eras, the Federal Reserve Board dramatically altered conditions, first by hiking interest rates to restore price stability, and then–particularly since the global financial crisis of 2007-8–by making money nearly “free,” with real interest rates close to zero. The economic distortions have benefitted some and caused pain to others, but the constant truth is that distortions they have been. Rather, a natural rate of interest that reflects the value of time preferences (both for borrowers and lenders) is what all economies need to stay on an even keel.
That is what commentator Edward Chancellor is showing in his latest book, The Price of Time: The Real Story of Interest. Because Chancellor takes a contrary view to most in the contemporary intelligentsia, being sympathetic to the “Austrian school” of economics, he doesn’t get the widespread plaudits his wry history and analysis might otherwise. But the Manhattan Institute in New York is honoring him at its annual Hayek Lecture and Prize this week.
Whether in Mesopotamia or modern societies, the lessons from monetary manipulations are many. They include not just pernicious inflation, but speculation, perpetuation of failed investments, and confusion about the proper level and use of debt. Although emergency infusions of liquidity can calm panics, sustained “easing” such as the U.S. and other major economies have just tried for 15 years brings grief in return. At least we got one good book out of it.
June 5, 2023
Tim W. Ferguson 