Bernanke, Draghi and other central bankers are wrong

Let’s try something different, thought the city officials of the Austrian town of Wörgl in 1931. The country had just fallen into a huge economic depression. How could the circulation of money be stimulated? Wörgl came up with his own approach. From then on, every banknote had to be stamped monthly, at a rate of 1 percent of the value – otherwise the note would no longer be valid. For example, people would quickly spend their money to avoid paying the stamp. It was never entirely clear how that experiment turned out. The Austrian central bank did not like the fact that Wörgl went his own, radical way and quickly intervened. In his book The Price of Time , British financial historian (and ex-investment strategist) Edward Chancellor tells the story with a sense of irony. What Wörgl did – and thought the central bank was so idiotic – was in fact a precursor to what central banks themselves would do en masse less than a century later, according to Chancellor: make interest rates negative, which means that saving costs money. According to Chancellor, the Austrian central bank’s instincts in 1931 were a lot more accurate than the policies of the past 15 years, in which interest rates went lower and lower after the crisis of 2008 – and even dropped below zero. His book is a sharp argument against the monetary policy of recent years, and therefore against the choices of central bankers such as Mario Draghi of the European Central Bank and Ben Bernanke of the US Federal Reserve. The latter recently received the Nobel Prize in Economics. Chancellor doesn’t like the idea that low interest rates will jump-start the economy, as central bankers have long argued. The theory, already taught in high schools, is that low interest rates stimulate investment, leading to jobs and consumer spending. But Chancellor says economic data points in a different direction. Due to low interest rates, companies – and private equity firms – have mainly made acquisitions with borrowed money, which lead to less investment. Chancellor mentions the acquisition of Kraft by Heinz in 2015, which led to a mega-debt of 33 billion dollars, which weighed on the results of the group. At the same time, according to Chancellor, low interest rates have harmful side effects. Without interest of any height, the threshold to capital disappears. According to the Brit, countless zombie companies have been kept afloat, since they could borrow cheaply. He takes the Italian cement industry as a prime example, which struggled with enormous overcapacity, but in which no company went bankrupt for years. Since 2008, listed companies have mainly bought their own shares with borrowed money. Investors were desperately looking for places to put their money down to get some return. That in turn led to huge bubbles – think of the wave of IPOs of start-ups that had barely proven themselves, from Uber and Just Eat Takeaway to manufacturers of electric trucks. Chancellor even concludes that the Arab Spring was more or less caused by the Federal Reserve. According to him, the high food prices that plagued protesters in Tunisia and Egypt, for example, were partly due to speculation by investors in, for example, grain. From nothing to nowhere The breadth of Chancellor’s knowledge is impressive. He cites many recent studies, draws on the work of thinkers such as Marx, Hayek and Locke, and goes deeply into history. In the nineteenth century, according to him, low interest rates in the United Kingdom led to the construction of useless railway lines, from nothing to nowhere. He identifies an early example of – later completely normal – monetary easing: Emperor Tiberius allowed rich families to borrow for free from the public treasury in ancient Rome after a banking crisis. However, the book is not entirely successful. The fact that Chancellor cites so many contemporary economists, examples and data betrays that his insights and theses are far from new. While he pretends that only he and a few lonely economists and bankers realize that low interest rates are harmful. Criticism of low interest rates is anything but contrarian. She has been heard in many places in recent years. Putting all the evidence together at low interest rates is a huge achievement and sums it all up for the reader, but it seems a bit mustard after dinner and doesn’t lead to much new insight. The fact that low interest rates encourage bubbles is one of the book’s main arguments, but that has been reported in newspapers for years. The Price of Time also contains a lot of repetition. At times it reads a bit stiff and all the claims start to make you dizzy, as if Chancellor has overturned his barrel of source material on the page. Nevertheless, the book is recommended for those who want to know what influence central bankers have on the state of the world. Gradually, a deeper layer emerges: people often think that they can steer the economy in a certain direction by turning a number of buttons – but according to Chancellor this is a big fiction. Or as economist William White puts it in the book: “Central bankers are making a grave epistemological mistake by failing to treat the economy as a complex system.” In that respect, the relatively short historical part at the beginning of the book is the most interesting. Chancellor notes here that in Babylonia, ancient Rome, and ancient Greece, there seems to have been no connection between interest and economic growth. Interest rates were largely set on the basis of tradition – no one pretended to control the economy. At the Temple of Apollo on the Greek island of Delos, you could borrow at 10 percent for three centuries, until 200 BC – perhaps smarter economic policies than Bernanke, you hear Chancellor think. Book The Myth of Low Interest Edward Chancellor: The Price of Time. Allen Lane, 398 pages €34.95 ●●so ●● A version of this article also appeared in the newspaper of October 22, 2022