The Fed had hoped that by boosting asset prices with easy money, consumers would go out and spend more. But within a few years of the crisis, the ‘wealth effect’ – people’s propensity to spend their capital gains – had fallen to half its historic average.51 Having borrowed too much during the credit boom, most Americans were forced to curb their

traditional view that charging for loans was inherently unjust.

Yet Bagehot’s stringent conditions were not followed. Modern lenders of last resort have only a tenuous connection with their Victorian antecedents. They do not lend at high interest but at the lowest rates. Their emergency loans are not provided for a short period, but for years on end. They do not lend against high-quality collateral but reach to

Böhm-Bawerk declared that the cultural level of a nation is mirrored by its rate of interest. In the ancient world, interest rates charted the course of great civilizations. In Babylon, Greece and Rome interest rates followed a U-shaped curve over the centuries; declining as each civilization became established and prospered, and rising sharply

As a banker and financial journalist, Bagehot observed that outbreaks of financial recklessness did not occur at random. Rather, they tended to appear at times when money was easy and interest rates

While the rich got richer, the poor stopped having children. High levels of student debt, weak income growth and elevated house prices discouraged young couples from starting a family. In the United Kingdom, the birth rate and housing market were inversely related: as house prices went up, the number of births fell.105 In parts of Europe worst

For Turgot, the world of finance was a mirror held up to the world, with real and financial assets exchangeable for each other. Since land, buildings and factories produce income, so money must yield interest. This important insight is too often overlooked by modern economists.

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

The most important question addressed in this book is whether a capitalist economy can function properly without market-determined interest.