Paradoxical as it may seem, the riches of nations can be measured by the violence of the crises which they experience

“If interest rates are kept below their natural level, misguided investments occur: too much time is used in production, or, put another way, the investment returns don’t justify the initial outlay. ‘Malinvestment’, to use a term popularized by Austrian economists, comes in many shapes and sizes. It might involve some expensive white-elephant project, such as constructing a tunnel under the sea, or a pie-in-the-sky technology scheme with no serious prospect of ever turning a profit.”

“Summers also claimed that technology was reducing the demand for capital. Digital businesses, such as Facebook and Google, had established dominant global franchises with relatively little invested capital and small workforces. In his book The Zero Marginal Cost Society (2014), the social theorist Jeremy Rifkin heralded the passing of traditional capitalism.16 If the Old Economy was marked by scarcity and declining marginal returns, Rikfin argued that the New Economy was characterized by zero marginal costs, increasing returns to scale and capital-lite ‘sharing’ apps (such as Uber, Lyft, Airbnb, etc.). The demand for capital and interest rates, he said, were set to fall in this ‘economy of abundance’. There was some evidence to support Rifkin’s claims. The balance sheets of US companies showed they were using fewer fixed assets (factories, plant, equipment, etc.) and reporting more ‘intangibles’ – namely, assets derived from patents, intellectual property and merger premiums. In much of the rest of the world, however, the demand for old-fashioned capital remained as strong as ever. After the turn of the century, the developing world exhibited a voracious appetite for industrial commodities that required massive mining investment. China embarked on what was probably the greatest investment boom in history. Before and after 2008, global energy consumption rose steadily. The world’s total investment (relative to GDP) remained in line with its historical average.17 Rifkin’s ‘economy of abundance’ remained a tantalizing speculation.”

“As a cynical pamphleteer observed, demands for lowering interest were really designed for the ‘ingrossing all trade, into the hands of a few rich Merchants, who have Money enough of their own to Trade with, to the excluding all young men, that wants it’.13”

“Wilson then goes on to provide a new definition of interest: ‘Usurye is also saide to be the price of tyme, or of the delaying or forbearing of moneye.’ Interest has been described in many ways over the years – it’s often referred to as the ‘price of money’. But Wilson knew better. Interest, he said, is the price of time. There is no better definition. In”

“After Augustus’ death, the Emperor Tiberius hoarded money, with the result that interest rates rose above the legal limit and a banking crisis erupted in AD 33. Tiberius then decided to lend out the imperial treasure free of interest to patrician families, which brought about an immediate decline in interest rates and an end to the crisis.55 His actions constituted the world’s first experience of quantitative easing.fn9”

“As Bastiat understood, a very low rate of interest may benefit the rich, who have access to credit, more than the poor.”

“The most encompassing view of interest is contained in the notion of interest as the ‘time value of money’ or, simply, as the price of time.”

“This book is about the role of interest in a modern economy. It was inspired by a Bastiat-like conviction that ultra-low interest rates were contributing to many of our current woes, whether the collapse of productivity growth, unaffordable housing, rising inequality, the loss of market competition or financial fragility. Ultra-low rates also seemed to play some role in the resurgence of populism as Sumner’s Forgotten Man started to lose patience.”

“Firms in industries with the greatest increase in concentration enjoyed higher profits. But, as Adam Smith observed, monopolies don’t serve the public good. Rather, monopolies create barriers to entry which discourage the establishment of new firms and innovation.29 Rising industry concentration was associated with higher pay for senior executives, a decline in workers’ bargaining power, and falling investment and R&D. Economists at the National Bureau of Economic Research found that while ‘low interest rates have traditionally been viewed as positive for economic growth … extremely low interest rates may lead to slower growth by increasing market concentration.”

“John Bull’, says someone, ‘can stand a great deal, but he cannot stand two per cent …’ Here the moral obligation arises. People won’t take 2 per cent; they won’t bear a loss of income. Instead of that dreadful event, they invest their careful savings in something impossible – a canal to Kamchatka, a railway to Watchet, a plan for animating the Dead Sea, a corporation for shipping skates to the Torrid Zone. A century or two ago, the Dutch burgomasters, of all people in the world, invented the most imaginative occupation. They speculated in impossible tulips.”

“The fever for start-ups didn’t spread far beyond Silicon Valley. In fact, new business formation in the United States fell sharply after 2008. In 2016, business deaths outnumbered births for the first time since the Census Bureau started keeping records in 1978.”

“whenever money becomes very cheap, experience teaches us to expect that it will be misspent. John Bull, as it has been wisely observed, can stand a good deal, but he cannot stand two per cent. The particular form of mania differs in various years; but when the common and tried employments of money yield but a low profit, recourse will be had to new and untried ones, some of which will be unprofitable, and a few of which will be absurd. It is only at the outset of such manias that warning is of the least use – when they attain a certain growth, advice is thrown away. Everybody is seen speculating; and what every one does must be judicious. Foolish person No. II. imitates foolish person No. I.20”

“There never was a ‘canal to Kamchatka’, any more than there was a plan for animating the Dead Sea. A canal construction mania, however, did take place in England in the early 1790s. Canals were capital-intensive projects that took years to complete and even longer to pay back. Such long-dated investments are inevitably sensitive to changes in the discount rate. It is no surprise, therefore, to discover that canal-projecting was most intense when interest rates reached a low point.26 The economist and statistician Thomas Tooke considered the fall in interest rates, which dipped below 3 per cent in the 1790s, as ‘both a cause and an effect of the great extension of the country bank system which about that time took place’.27 The canal mania ended with a banking crisis in 1793 after war broke out with Revolutionary France.”

“Shut out of the European market by Napoleon’s Continental Blockade, English merchants turned with an eager eye towards the South American trade. According to a contemporary account, the exportations consequent on the first opening of the trade to Buenos Ayres, Brazil, and the Caraccas were most extraordinary. Speculation was then carried beyond the boundaries within which even gambling is usually confined, and was pushed to an extent and into channels that could hardly have been deemed practicable. We are informed by Mr. Mawe, an intelligent traveller, resident at Rio Janeiro, at the period in question, that more Manchester goods were sent out in the course of a few weeks, than had been consumed in the twenty years preceding … Elegant services of cut-glass and china were offered to persons whose most splendid drinking-vessels consisted of a horn, or the shell of a cocoa nut … and some speculators actually went so far as to send out [ice] skates to Rio Janeiro.34 The story that ice skates had been shipped south of the Equator entered City legend. When Bagehot alluded to this episode nearly half a century later his readers would have understood the reference.”

“Among the speculators was the journalist Charles Mackay, an acquaintance of Charles Dickens and author of Extraordinary Popular Delusions and the Madness of Crowds – the first popular account of early speculative manias, published in 1841.37 The book’s warnings about the dangers of speculation were lost not only on the British public but also on Mackay himself.”

“In Das Kapital, Marx made an insightful comment on the failure of Overend Gurney. High interest might indicate prosperity, wrote Marx, but it could also indicate ‘that the country is undermined by the roving cavaliers of credit who can afford to pay a high interest because they pay it out of other people’s pockets … and meanwhile they live in grand style on anticipated profits.’54”

“Bagehot penned an editorial (The Economist, 23 November 1867) ‘On the Dangers of Lending to Semi-Civilised Countries’. The borrower under scrutiny was Egypt. It was not a question of that country’s great resources or agricultural fertility. Rather, what is required for the repayment of foreign debts, wrote Bagehot, is ‘a continuous polity; a fixed political morality; and a constant possession of money’. Egypt did not possess these qualities. The editorial concluded starkly: ‘We lend to countries whose condition we do not know, and whose want of civilisation we do not consider, and, therefore, we lose our money.’66”

“In February 1876, Bagehot reflected on the foreign lending craze. It was a familiar story. Periods of low domestic interest rates, it seemed, made the specious promise of high yields on foreign debt particularly attractive: the human mind likes 15 per cent; it likes things which promise much, which seem to bring large gains very close, which somehow excite sentiment and interest the imagination. The manufacturers of ‘financial schemes’ know this, and live by it. A long and painful experience is necessary to teach men that ‘15 per cent’ is dangerous; that new and showy schemes are to be distrusted; that the popular instinct on them is essentially fallible, and tends to prefer the brilliant policy above the sound – that which promises much and pays nothing, above that which, promising but little, pays that little.68”

“Easy money is the great cause of over-borrowing. When an investor thinks he can make over 100 per cent per annum by borrowing at 6 per cent, he will be tempted to borrow, and to invest or speculate with borrowed money.”

“By placing too low a discount on the future earnings of companies, investors ended up paying too much. The discounting error was widely acknowledged at the time. In early 1928, Moody’s Investors Services declared that stock prices had ‘over-discounted anticipated progress’.30 After the crash, Benjamin Graham and David Dodd wrote in their book Security Analysis that the late 1920s witnessed ‘a transfer of emphasis [in the valuation of stocks] from current income to future income and hence inevitably to future enhancement of principal value’.31 Or, as the market analyst Max Winkler memorably described: ‘The imagination of our investing public was greatly heightened by the discovery of a new phrase: discounting the future. However, a careful examination of quotations of many issues revealed that not only the future, but even the hereafter, was being discounted.”

“An axiom of the Austrian school was that interest is necessary so that investment and consumption decisions are co-ordinated over time.55 As we have seen, Böhm-Bawerk argued that the rate of interest reflects society’s time preference. He also claimed that the level of interest determines how much capital is tied up in production, and thus the return on capital.fn11 When interest is determined in a free market, he said, time preference and the return on capital should equalize. The danger comes when the authorities interfere with interest rates. When interest rates are pushed too low, credit takes off and bad investments (‘malinvestment’) abound.”

“History, it is said, is written by the victors. In the late 1920s, Hayek claimed that monetary policy had taken the wrong course and predicted a deflationary bust. Irving Fisher, on the other hand, saw nothing wrong at the time with either America’s economy or its monetary policy, famously opining in the summer of 1929 that US stocks had reached a ‘permanently high plateau’. If accuracy of prediction is what matters for economic theory, as Milton Friedman later claimed, then Hayek’s interpretation should have become the received wisdom of his profession. Yet the Austrian’s interpretation of the 1920s and its aftermath has been more or less air-brushed from the history books, while Fisher’s monetarist view has become received wisdom.”

“Metrics serve to stifle innovation and creativity; they imitate science but resemble faith. When an institution is guided by some specific target, critical judgement is suspended. In the 1970s, the American social scientist Donald Campbell pointed out that ‘the more any quantitative social indicator is used for social decision-making, the more subject it will be to corruption pressures and the more apt it will be to distort and corrupt the social processes it is intended to monitor.’ Historian Jerry Muller adds a corollary to Campbell’s Law, namely: ‘anything that can be measured and rewarded will be gamed.”

“The mistake in setting targets lies in assuming that relationships between variables – in this case a certain measure of the money supply and inflation – are stationary. In the real world, human behaviour responds to attempts at control. ‘The essence of Goodhart’s Law,’ write John Kay and Mervyn King in their book Radical Uncertainty, is that ‘any business or government policy which assumed stationarity of social and economic relationships was likely to fail because its implementation would alter the behaviour of those affected and therefore destroy that stationarity.”

“Tis not altogether improbable, that when the nation become heartily sick of their debts, and are cruelly oppressed by them, some daring projector may arise with visionary schemes for their discharge. And as public credit will begin, by that time, to be a little frail, the least touch will destroy it, as happened in France; and in this manner it will die of the doctor. David Hume, ‘Of Public Credit’, 1752”

“As Gordon’s book The Rise and Fall of American Growth went to press in early 2016 (its publication facilitated by digital technologies), the internet continued to disrupt countless industries while the media fanned fears of an impending ‘second machine age’, in which robots replace human workers. Gordon’s Northwestern colleague Joel Mokyr suggested that a ‘shortfall of imagination [is] largely responsible for much of today’s pessimism’. Mokyr listed a number of revolutionary new technologies then under development, including 3D printing, graphene and genetic engineering, to which might be added autonomous cars and clean energy.19 Finance writer William Bernstein accused secular stagnationists of conflating what they couldn’t conceive with that which was not possible.20 Hansen made the same mistake. The most reliable prediction, Bernstein concluded, is to assume that past economic trends continue.”

“The highly abnormal is becoming uncomfortably normal. Claudio Borio, 2014 As we have seen in Chapter 3, David Hume held that money was a mere representation of things. A loan may be denominated in money, but what is actually lent is a certain quantity of labour or stock, he maintained. Given money’s fictitious value, Hume believed that a change in the amount of money would affect prices but not interest. In his view, interest was determined by frugality (savings) and industry (the return on capital). The Scottish philosopher imagined what would happen if money dropped like manna from Heaven: For, suppose that, by miracle, every man in GREAT BRITAIN should have five pounds slipt into his pocket in one night; this would much more than double the whole money that is at present in the kingdom; yet there would not next day, nor for some time, be any more lenders, nor any variation in the interest … this money, however abundant … would only serve to encrease the prices of every thing, without any farther consequence … The overplus of borrowers above that of lenders continuing still the same, there will follow no reduction of interest. That depends upon another principle; and must proceed from an encrease of industry and frugality, of arts and commerce.”

“Borio cast aside the money veil to reveal a world of asset price bubbles, financial cycles, and credit booms and busts: ‘Think monetary! Modelling the financial cycle correctly … requires recognising fully the fundamental monetary nature of our economies,’ was Borio’s clarion call.7 The financial system, he asserted, doesn’t just allocate resources, it generates purchasing power. It has a life of its own. Finance and macroeconomics are ‘inextricably linked’. We inhabit a looking-glass world. Finance does not mirror reality, but acts upon it.fn2 Economics without finance, said Borio, is like Hamlet without the prince.”

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate … It will purge the rottenness out of the system. High costs of living and high living will come down … enterprising people will pick up the wrecks from less competent people. Andrew Mellon, 1932”

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,’ opined the nineteenth-century French economist Clément Juglar.13 Once creative destruction is taken into account, Juglar’s observation doesn’t appear so puzzling. Some economists take a ‘pit-stop’ view of recessions, seeing them as periods when efficiency measures are most likely to be undertaken.14 Business failures, which soar during economic downturns, are seen as essential to the economy’s evolution over time. As the saying attributed to the former astronaut and airline boss Frank Borman goes, ‘capitalism without bankruptcy is like Christianity without hell.’ If that is the case, then monetary policy should not interrupt a recession’s cleansing effect.fn4 Put another way, if financial stability is destabilizing (as Hyman Minsky maintained), too much economic stability induces sclerosis.”