The Price of Time: The Real Story of Interest

In both Catholic and Protestant circles, interest came to represent the lender’s stake in the success and profit of the borrower, while usury was associated with the extortion of the needy.

To twenty-first-century policymakers, the interest rate is simply a lever used to control inflation and tweak economic output. Yet an acquaintance with the Babylonian origins of interest should give pause for thought. Interest has always been with us because resources have always been scarce and must be rationed somehow, because wealth is unequally

The entire difference between a bad and a good Economist is apparent here. A bad one relies on the visible effect, while the good one takes account of both the effect one can see and of those one must foresee.16

Economists talk about time preference rather than impatience to describe how people value present and future goods differently. An individual’s time preference can be seen as a kind of personal rate of interest.

connection between nature’s productivity and interest was suggested by nineteenth-century German economist Karl Arnd, who claimed that the interest rate was regulated by ‘the proportion, in which the timber in European forests is augmented through their annual growth … at the rate of 3 or 4 to 100. As a result interest in these countries cannot fal

Low interest rates fed the demand for credit, while financial innovation increased its supply. The explosive growth of the market for complex mortgage securities was driven in large part by a desperate search for yield at a time when interest rates were at multi-decade lows.

Bastiat was having none of this. Interest wasn’t theft, he maintained, but a fair reward for a mutual exchange of services. The lender provides the use of capital for a period of time, and time has value. Bastiat cites the famous lines from Benjamin Franklin’s Advice to a Young Tradesman (1748): ‘Time is precious. Time is money – Time is the stuff

Bastiat foresaw disaster if Proudhon’s plans were put into practice. If lending were not rewarded, there would be no lending.

‘Paradoxical as it may seem, the riches of nations can be measured by the violence of the crises which they experience,’ opined the nineteenth-century French economist Clément Juglar.13 Once creative destruction is taken into account, Juglar’s observation doesn’t appear so puzzling.