The US Federal Reserve is a monument to the idea that the market, if left on its own, will destroy everything in its path, including itself. Three recent books suggest that the Fed has the capacity to function as a device of indicative planning, coordinating economic activities to fulfill democratically determined social purposes.
NEW YORK – By now you’ve probably heard of collateralized debt obligations, quantitative easing, helicopter drops, shadow banking, hedge funds, private equity, leveraged buyouts, asset pricing, cryptocurrencies, and so on. You may not be able to explain them all – to be honest, few can – but you know that they are somehow associated with central banking or high finance. Maybe you’ve also figured out the difference between fiscal and monetary policy, discretionary and otherwise. Quite possibly you can name the people who propose and enact such policy, like the current Federal Reserve chair, Jerome Powell, and his immediate predecessors, Janet Yellen, Ben Bernanke, and Alan Greenspan.
How come? Why are the arcane terms of finance – the “secrets of the temple,” as William Greider famously called them – so familiar, and how have its gray protagonists become household names?
The short answer is easy: where bankers go, it seems, shit inevitably meets fan. But even in the absence of scandal and/or a crisis on the scale of the post-2008 Great Recession, most economists, analysts, and business leaders agree that “financialization” of the economy is the reason that banking and bankers have obtruded so consequentially on everyday discourse in the United States. This is how Thomas Piketty’s Capital in the Twenty-First Century, a ponderous, utterly serious parody of Karl Marx’s Capital, could become a bestseller here as elsewhere in the world. And it is why the first signs of rebellion against this new regime appeared way downtown in Manhattan, where Wall Street could be occupied.
By “financialization,” these observers mean various things, among them deindustrialization, globalization, and inexorably increasing inequality in the advanced capitalist or “post-industrial” societies of the West. The result, by all accounts, is that what the left used to call “finance capital” has become the cutting edge of innovation, the mouthpiece of neoliberalism, and the principal beneficiary of economic change since the 1970s. For example, the share of corporate profits accruing to “financial services,” including insurance and real estate, rose from 10% to 30% between 1950 and 2005, and the financial sector now accounts for 20% of GDP. Private-equity firms like Kohlberg Kravis Roberts (KKR) now manage 11% of all US pension-fund money, roughly $500 billion. Taken together, the Big Three index funds – BlackRock, Vanguard, and State Street – control over $20 trillion in assets, making them the largest shareholder in 40% of all publicly-traded companies in the US, and in 90% of the S&P 500.
These firms – “shadow banks” unbound by any statutory or customary constraints the Fed can impose on “member banks” – have presided over crisis after crisis since October 1987, when a stock market awash in idle money generated by Ronald Reagan’s tax cuts crashed and burned. Or, rather, with the Fed backstopping them as the “lender of last resort”– ensuring enough liquidity to cash out depositors and clients when they panic and need more than a paper claim on future earnings – these firms have inflated one bubble after another, from the dot-com debacle in 2000 to the 2007-08 subprime mortgage meltdown. Or, even worse, they have profited from the economic catastrophes such crises keep producing.
For Marx, that carbuncled mole, this reckless use of “other people’s money” became inevitable when the emergence of the corporate legal form separated ownership and control of productive assets. Modern credit – the stock market, corporate securities, futures trading, and so on – elevated “a new financial aristocracy”: men who could gamble without fear of losing anything, using the savings of working people or wealthy individuals or, eventually, the corporations themselves, which (or is it who?) couldn’t find any other outlet for their massive profits.
The newest issue of our magazine, PS Quarterly: Age of Extremes, is here. To gain digital access to all of the magazine’s content, and receive your print copy, subscribe to PS Premium now.
Subscribe Now
The panic of 2008-09 brought this new aristocracy to everyone’s attention again, because Wall Street had moved in next door. Those of us with pensions or mortgages realized that a third of the value of our assets was gone, wiped out by the “irrational exuberance” of financiers who had bet on (or against, as per “the big short”) a continuous, even perpetual rise in housing prices. Their huge investments in collateralized debt obligations – mortgages bundled and sold to pension and mutual funds as investment-grade securities, supposedly as safe as milk – had gone south. Those of us with steady jobs in the real (nonfinancial) economy realized that we, too, were now at risk of downsizing and unemployment. But why? Hadn’t Lehman Brothers disappeared altogether, and hadn’t Bear Stearns and AIG, two other giant “shadow banks” on the verge of insolvency, been absorbed, with the Fed’s approval and assistance, into the bowels of JPMorgan and Citibank? As all Americans would soon understand, our elected representatives were fixing to bail out all the remaining banks, shadowy or not, at our (public) expense, through a byzantine program called the Troubled Assets Relief Program (originally authorized to spend $700 billion).
Then, long before anyone understood how far the Fed had already stretched its mandate as the “lender of last resort” – and long before a full recovery from the post-2008 Great Recession – came COVID-19. The scale of the Fed’s economic interventions since the colossal financial panic in March 2020, when the pandemic became official and it seemed the world would end by April, is almost unimaginable. The financial markets survived because Powell followed Bernanke’s lead by inventing entirely new ways to quell panic and restore confidence.
Deus ex Washington?
These new tools – known collectively as “unconventional monetary policy” – are the main subject of three new books that are, miraculously, anything but arcane. They’re written by real pros, but they’re free of bank-speak, and indeed sound almost colloquial (perhaps because we’re now so steeped in the financial jargon of our time). All three books leave no doubt that there is no such thing as a self-regulating market; if their authors do not argue this point explicitly, they either assume it or demonstrate it.
Quite apart from being an exact accounting of precisely what “our” central bank has done to save capitalism as we know it, Lev Menand’s short study, The Fed Unbound, is the best book ever on the Federal Reserve System (I’ve read them all and even wrote one). Menand illuminates its origins, evolution, and newfound powers in prose that makes his daunting subject seem a common-sensical topic of everyday conversation, just as it was in the nineteenth century, when Americans constantly debated the “money question” because they, the common people, knew they understood the relevant issues and how to act on them.
Menand’s subject is “economic” or, more narrowly, “financial,” but his argument is profoundly and necessarily political. He asks whether democracy can survive the well-meaning and effective machinations of unelected officials who, tasked with resuscitating a system that had died overnight, spent about $3 trillion as authorized (or not) by Congress through the CARES Act and other legislation. The Fed used that money to flood financial markets with cash, snapping up bonds issued by corporations (among them Apple, AT&T, Ford, Toyota, and BMW) and state and municipal governments (including Illinois and New York City), and purchasing dollar holdings from central banks in Europe and Asia. But, as Menand shows, the bailouts of 2009 and 2020-21 actually exacerbated inequality, because they willy-nilly rewarded owners of assets, including real estate, and the proprietors of shadow banks, not people with little or no savings. By doing the right thing, saving the system, Powell and then-Treasury Secretary Steven Mnuchin made the central problem of our time worse: by reviving capitalism, they diminished democracy.
What is to be done? Rein in the shadow banks, Menand insists, and subject them to the regulations and policies that govern “member banks.” Otherwise, they will cause yet another financial crisis that spills over into the real economy. Menand, a law professor at Columbia, may not be a source of radical alternatives such as the vision the Populists proposed in their 1892 Omaha Platform. It’s enough for him to point out that “shadow banks privatize the gains from government-backed money creation,” and that the Fed now functions as a national investment authority with the proven capacity for indicative planning of economic development. We don’t need Wall Street to remain as the headquarters of post-industrial capitalism: we’ve got civil servants who can do better than the bankers.
Gluttons for Crisis
Bernanke never gets around to this argument, but his exposition of events corroborates Menand’s account. 21st Century Monetary Policy is a repulsive title – who wants to read a treatise on monetary policy in any century? But Bernanke has a “platform,” as publishers say, because he was present at the creation of the unbound Fed, the one that sustained the shadow banks and their junior partners in finance before, during, and after the Great Recession. That means he gets to be boring and is still expected to sell books. He covers much of the same ground as Menand, but, being a former academic at Princeton University before being appointed to George W. Bush’s Council of Economic Advisers and then promoted to chair of the Fed, he lards his account with larger dollops of economic theory and ersatz history. The book’s most interesting chapters thus cover the causes of the panic and the crisis he managed, an issue Menand ignores.
Here, Bernanke cites himself profusely, without shame, and that is a good thing, because his notion of a “global savings glut” is the groundwork for the best explanation, in theory and in fact, of the Great Recession. The glut refers to the growing gap between business revenue – earnings, profits, depreciation funds, and so on – and business investment, reflected in the piles of cash on hand at companies like Apple, or the share buybacks that inflate stock prices and drive CEO compensation to majestic heights. And it raises an obvious question that goes unasked in this and all other extant books on banking: If profits are as pointless as the “global savings glut” suggests, has the “love of money” become the “somewhat disgusting morbidity” John Maynard Keynes said it was?
As an explanation of chronic economic crisis, the “global savings glut” is consistent with those advanced by Larry Summers and Robert Gordon, two post-Keynesian “stagnationists” who think the rate of economic growth keeps falling because the pace of innovation and the volume of new investment outlets keeps declining. It also jibes with the ideas of the eminent Financial Times commentator Martin Wolf, a kind of Keynesian himself, and, for that matter, with those of Bernanke’s predecessor, Greenspan, the one and only disciple of Ayn Rand to lead the Fed. And it’s an explanation that comports with the theories of Charles Conant, the principal intellectual architect of the Federal Reserve System, who convinced his contemporaries that surplus capital – money idled by the lack of productive investment outlets, but too restless not to seek remunerative returns in speculative, bubble-inflating channels – was the root cause of modern economic crises. The “global savings glut” is a new name for Conant’s way of thinking.
In this sense, Bernanke returns us to the founding moment, and reminds us that the Fed is a monument to the idea that the market, if left to evolve on its own, will destroy everything in its path, including itself. “Remember, markets are not ends in themselves,” Greenspan himself insisted: “They are constructs to assist populations in achieving the optimum allocation of resources.” Bernanke, like Menand, would heartily agree, and would, I am sure, define “resources” as broadly as possible, to include immaterial goods such as literacy and ideas.
Central Bankers’ Central Plan
Edward Chancellor’s book, The Price of Time, has the most intriguing title of the three under review. Its contents, however, never quite live up to their packaging, even though the author’s agile, astringent style and single-minded – one might say monomaniacal – pursuit of his intellectual prey make for an easy, almost pleasurable read. The argument is quite simple. Almost every “great mind” since Plato has excoriated lenders of money at interest. But they’re wrong, because without such honorable intermediaries, there would be no saving, no investment, no increased productivity or per capita incomes, no modernity, no capitalism. We could go even further. The late anthropologist David Graeber convincingly showed that debt is a trans-historical human device dating from the fourteenth century BC. Without money (or whatever – apparently cattle or corn seeds will do) loaned at interest, there would be no human civilization as such.
So, the heroes of Chancellor’s story are, in chronological order, Elizabeth I, who legalized usury in 1571; John Locke, who thought low interest rates must rob widows and orphans of their pensions; Daniel Defoe, who denounced John Law, the eighteenth-century inventor of modern central-banking policy (keep interest rates low at all cost!); Anne Robert Jacques Turgot, the famed Physiocrat; Ben Franklin, who famously equated time and money (after Thomas Wilson, a sixteenth-century critic of usury); Claude-Frédéric Bastiat, who, like Marx, made fun of Proudhon’s proposal to cancel debt and abolish interest altogether; Walter Bagehot, the revered author of Lombard Street (1873) – and of course Eugen von Böhm-Bawerk and his student, Friedrich von Hayek, both of whom believed, according to Chancellor, that “the cultural level of a nation is mirrored in its rate of interest.”
No, he is not kidding. Chancellor ransacks all of recorded history to prove that artificially low interest rates – which deviate from the (not “a”) natural rate set by anonymous market forces –are a symptom of decadence, the herald of impending demise. “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 during periods of decline and fall. Very low interest rates appear to be the calm before the storm . . . Given the extraordinarily low interest rates of the early twenty-first century, this is not a comforting thought.” No, it is not, but then it is countermanded by Chancellor’s own account of Western European flourishing in the sixteenth and seventeenth centuries, when low interest rates prevailed; by no one’s reckoning did civilization there fail in the eighteenth or nineteenth centuries.
Chancellor claims no originality in grinding his axe: the book is in effect a compendium of opinion on money at interest, a kind of Bartlett’s Familiar Quotations for quant jocks and financial geeks who believe as fervently as the author in markets unbound by any social purpose or regulatory authority (except as temporary measures, in the depths of a depression). Its novelty, if that is the right word, resides in its relentless repetition of the idea that interest rates kept low by easy money – invariably the fault of some sort of central bank, which pumps too much paper into circulation – lead to bubbles, crisis, economic devastation, and increased inequality. The South Sea Bubble and its French twin, Law’s scandalous New World scheme, became, according to Chancellor and the contemporary authorities he cites, the template for this pattern, and for the modern central-bank policies that reinforce it.
In these terms, the massive meltdown of 2020 was rehearsed on a smaller scale in the financial panic of 2008-09. The pandemic simply vanishes, replaced as a probable cause by the machinations of Greenspan, Bernanke (especially Bernanke!), Yellen, and Powell. Both episodes were caused by gross deviations from “the” natural rate of interest, not by a glut of surplus capital, nor by secular stagnation, and certainly not by the catastrophic effects of COVID-19. The central bankers were channeling the spirit of Law, not Bagehot.
Chancellor concludes with a paean to Hayek’s 1944 bestseller, The Road to Serfdom, a fitting end to a book that treats law, custom, and government itself as an intruder on, indeed an invader of, the hallowed ground of the market, where liberty, property, and Jeremy Bentham – yes, he, too, is quoted, to the same effect as the others – must rule. Hayek’s central claim was that “a government which undertakes to direct economic activity will have to use its power to realize somebody’s ideal of distributive justice.” Only “absolute equality” would reconcile the competing ideals, and this would destroy initiative, ambition, and every other character trait that sustains capitalism and, with it, freedom as such. Chancellor restates the claim by suggesting that Hayek’s fear of central planning should be redirected to central banking: “Central planning in the twenty-first century has involved manipulating the most important price in a market-based economy, the universal price, namely the rate of interest.”
It sounds preposterous, but there’s enough truth in the claim to entertain if not accredit it. At any rate, it’s consistent with the arguments of Menand and Bernanke, and with those of Marx and Greenspan as well. They suggest, or rather assume, as Chancellor does but only grudgingly, that the Fed and its policymaking armature have the intellectual capacity and the legal powers to function as a device of indicative planning, through which economic activities can be coordinated to fulfill democratically determined social purposes. (Bernanke’s Nobel Prize-winning work on bank runs as a cause, not merely a consequence, of deep economic crisis is a case in point.) By all accounts, central banks – particularly the Fed, because the dollar is still the world’s dominant currency – already act as investment authorities, but their recent bailouts have exacerbated economic inequality, and have done little or nothing to address climate change.
We can fulfill the broken promise of the Fed by recognizing and acting on these evident yet unknown realities. But, as Menand insists, first we must recognize what our nineteenth-century forebears knew: that the task before us is a political project, to be decided by democratic means.
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Edward Chancellor, The Price of Time: The Real Story of Interest, Atlantic Monthly Press, 2022.
Lev Menand, The Fed Unbound: Central Banking in a Time of Crisis, Columbia Global Reports, 2022.
NEW YORK – By now you’ve probably heard of collateralized debt obligations, quantitative easing, helicopter drops, shadow banking, hedge funds, private equity, leveraged buyouts, asset pricing, cryptocurrencies, and so on. You may not be able to explain them all – to be honest, few can – but you know that they are somehow associated with central banking or high finance. Maybe you’ve also figured out the difference between fiscal and monetary policy, discretionary and otherwise. Quite possibly you can name the people who propose and enact such policy, like the current Federal Reserve chair, Jerome Powell, and his immediate predecessors, Janet Yellen, Ben Bernanke, and Alan Greenspan.
How come? Why are the arcane terms of finance – the “secrets of the temple,” as William Greider famously called them – so familiar, and how have its gray protagonists become household names?
The short answer is easy: where bankers go, it seems, shit inevitably meets fan. But even in the absence of scandal and/or a crisis on the scale of the post-2008 Great Recession, most economists, analysts, and business leaders agree that “financialization” of the economy is the reason that banking and bankers have obtruded so consequentially on everyday discourse in the United States. This is how Thomas Piketty’s Capital in the Twenty-First Century, a ponderous, utterly serious parody of Karl Marx’s Capital, could become a bestseller here as elsewhere in the world. And it is why the first signs of rebellion against this new regime appeared way downtown in Manhattan, where Wall Street could be occupied.
By “financialization,” these observers mean various things, among them deindustrialization, globalization, and inexorably increasing inequality in the advanced capitalist or “post-industrial” societies of the West. The result, by all accounts, is that what the left used to call “finance capital” has become the cutting edge of innovation, the mouthpiece of neoliberalism, and the principal beneficiary of economic change since the 1970s. For example, the share of corporate profits accruing to “financial services,” including insurance and real estate, rose from 10% to 30% between 1950 and 2005, and the financial sector now accounts for 20% of GDP. Private-equity firms like Kohlberg Kravis Roberts (KKR) now manage 11% of all US pension-fund money, roughly $500 billion. Taken together, the Big Three index funds – BlackRock, Vanguard, and State Street – control over $20 trillion in assets, making them the largest shareholder in 40% of all publicly-traded companies in the US, and in 90% of the S&P 500.
These firms – “shadow banks” unbound by any statutory or customary constraints the Fed can impose on “member banks” – have presided over crisis after crisis since October 1987, when a stock market awash in idle money generated by Ronald Reagan’s tax cuts crashed and burned. Or, rather, with the Fed backstopping them as the “lender of last resort”– ensuring enough liquidity to cash out depositors and clients when they panic and need more than a paper claim on future earnings – these firms have inflated one bubble after another, from the dot-com debacle in 2000 to the 2007-08 subprime mortgage meltdown. Or, even worse, they have profited from the economic catastrophes such crises keep producing.
For Marx, that carbuncled mole, this reckless use of “other people’s money” became inevitable when the emergence of the corporate legal form separated ownership and control of productive assets. Modern credit – the stock market, corporate securities, futures trading, and so on – elevated “a new financial aristocracy”: men who could gamble without fear of losing anything, using the savings of working people or wealthy individuals or, eventually, the corporations themselves, which (or is it who?) couldn’t find any other outlet for their massive profits.
Secure your copy of PS Quarterly: Age of Extremes
The newest issue of our magazine, PS Quarterly: Age of Extremes, is here. To gain digital access to all of the magazine’s content, and receive your print copy, subscribe to PS Premium now.
Subscribe Now
The panic of 2008-09 brought this new aristocracy to everyone’s attention again, because Wall Street had moved in next door. Those of us with pensions or mortgages realized that a third of the value of our assets was gone, wiped out by the “irrational exuberance” of financiers who had bet on (or against, as per “the big short”) a continuous, even perpetual rise in housing prices. Their huge investments in collateralized debt obligations – mortgages bundled and sold to pension and mutual funds as investment-grade securities, supposedly as safe as milk – had gone south. Those of us with steady jobs in the real (nonfinancial) economy realized that we, too, were now at risk of downsizing and unemployment. But why? Hadn’t Lehman Brothers disappeared altogether, and hadn’t Bear Stearns and AIG, two other giant “shadow banks” on the verge of insolvency, been absorbed, with the Fed’s approval and assistance, into the bowels of JPMorgan and Citibank? As all Americans would soon understand, our elected representatives were fixing to bail out all the remaining banks, shadowy or not, at our (public) expense, through a byzantine program called the Troubled Assets Relief Program (originally authorized to spend $700 billion).
Then, long before anyone understood how far the Fed had already stretched its mandate as the “lender of last resort” – and long before a full recovery from the post-2008 Great Recession – came COVID-19. The scale of the Fed’s economic interventions since the colossal financial panic in March 2020, when the pandemic became official and it seemed the world would end by April, is almost unimaginable. The financial markets survived because Powell followed Bernanke’s lead by inventing entirely new ways to quell panic and restore confidence.
Deus ex Washington?
These new tools – known collectively as “unconventional monetary policy” – are the main subject of three new books that are, miraculously, anything but arcane. They’re written by real pros, but they’re free of bank-speak, and indeed sound almost colloquial (perhaps because we’re now so steeped in the financial jargon of our time). All three books leave no doubt that there is no such thing as a self-regulating market; if their authors do not argue this point explicitly, they either assume it or demonstrate it.
Quite apart from being an exact accounting of precisely what “our” central bank has done to save capitalism as we know it, Lev Menand’s short study, The Fed Unbound, is the best book ever on the Federal Reserve System (I’ve read them all and even wrote one). Menand illuminates its origins, evolution, and newfound powers in prose that makes his daunting subject seem a common-sensical topic of everyday conversation, just as it was in the nineteenth century, when Americans constantly debated the “money question” because they, the common people, knew they understood the relevant issues and how to act on them.
Menand’s subject is “economic” or, more narrowly, “financial,” but his argument is profoundly and necessarily political. He asks whether democracy can survive the well-meaning and effective machinations of unelected officials who, tasked with resuscitating a system that had died overnight, spent about $3 trillion as authorized (or not) by Congress through the CARES Act and other legislation. The Fed used that money to flood financial markets with cash, snapping up bonds issued by corporations (among them Apple, AT&T, Ford, Toyota, and BMW) and state and municipal governments (including Illinois and New York City), and purchasing dollar holdings from central banks in Europe and Asia. But, as Menand shows, the bailouts of 2009 and 2020-21 actually exacerbated inequality, because they willy-nilly rewarded owners of assets, including real estate, and the proprietors of shadow banks, not people with little or no savings. By doing the right thing, saving the system, Powell and then-Treasury Secretary Steven Mnuchin made the central problem of our time worse: by reviving capitalism, they diminished democracy.
What is to be done? Rein in the shadow banks, Menand insists, and subject them to the regulations and policies that govern “member banks.” Otherwise, they will cause yet another financial crisis that spills over into the real economy. Menand, a law professor at Columbia, may not be a source of radical alternatives such as the vision the Populists proposed in their 1892 Omaha Platform. It’s enough for him to point out that “shadow banks privatize the gains from government-backed money creation,” and that the Fed now functions as a national investment authority with the proven capacity for indicative planning of economic development. We don’t need Wall Street to remain as the headquarters of post-industrial capitalism: we’ve got civil servants who can do better than the bankers.
Gluttons for Crisis
Bernanke never gets around to this argument, but his exposition of events corroborates Menand’s account. 21st Century Monetary Policy is a repulsive title – who wants to read a treatise on monetary policy in any century? But Bernanke has a “platform,” as publishers say, because he was present at the creation of the unbound Fed, the one that sustained the shadow banks and their junior partners in finance before, during, and after the Great Recession. That means he gets to be boring and is still expected to sell books. He covers much of the same ground as Menand, but, being a former academic at Princeton University before being appointed to George W. Bush’s Council of Economic Advisers and then promoted to chair of the Fed, he lards his account with larger dollops of economic theory and ersatz history. The book’s most interesting chapters thus cover the causes of the panic and the crisis he managed, an issue Menand ignores.
Here, Bernanke cites himself profusely, without shame, and that is a good thing, because his notion of a “global savings glut” is the groundwork for the best explanation, in theory and in fact, of the Great Recession. The glut refers to the growing gap between business revenue – earnings, profits, depreciation funds, and so on – and business investment, reflected in the piles of cash on hand at companies like Apple, or the share buybacks that inflate stock prices and drive CEO compensation to majestic heights. And it raises an obvious question that goes unasked in this and all other extant books on banking: If profits are as pointless as the “global savings glut” suggests, has the “love of money” become the “somewhat disgusting morbidity” John Maynard Keynes said it was?
As an explanation of chronic economic crisis, the “global savings glut” is consistent with those advanced by Larry Summers and Robert Gordon, two post-Keynesian “stagnationists” who think the rate of economic growth keeps falling because the pace of innovation and the volume of new investment outlets keeps declining. It also jibes with the ideas of the eminent Financial Times commentator Martin Wolf, a kind of Keynesian himself, and, for that matter, with those of Bernanke’s predecessor, Greenspan, the one and only disciple of Ayn Rand to lead the Fed. And it’s an explanation that comports with the theories of Charles Conant, the principal intellectual architect of the Federal Reserve System, who convinced his contemporaries that surplus capital – money idled by the lack of productive investment outlets, but too restless not to seek remunerative returns in speculative, bubble-inflating channels – was the root cause of modern economic crises. The “global savings glut” is a new name for Conant’s way of thinking.
In this sense, Bernanke returns us to the founding moment, and reminds us that the Fed is a monument to the idea that the market, if left to evolve on its own, will destroy everything in its path, including itself. “Remember, markets are not ends in themselves,” Greenspan himself insisted: “They are constructs to assist populations in achieving the optimum allocation of resources.” Bernanke, like Menand, would heartily agree, and would, I am sure, define “resources” as broadly as possible, to include immaterial goods such as literacy and ideas.
Central Bankers’ Central Plan
Edward Chancellor’s book, The Price of Time, has the most intriguing title of the three under review. Its contents, however, never quite live up to their packaging, even though the author’s agile, astringent style and single-minded – one might say monomaniacal – pursuit of his intellectual prey make for an easy, almost pleasurable read. The argument is quite simple. Almost every “great mind” since Plato has excoriated lenders of money at interest. But they’re wrong, because without such honorable intermediaries, there would be no saving, no investment, no increased productivity or per capita incomes, no modernity, no capitalism. We could go even further. The late anthropologist David Graeber convincingly showed that debt is a trans-historical human device dating from the fourteenth century BC. Without money (or whatever – apparently cattle or corn seeds will do) loaned at interest, there would be no human civilization as such.
So, the heroes of Chancellor’s story are, in chronological order, Elizabeth I, who legalized usury in 1571; John Locke, who thought low interest rates must rob widows and orphans of their pensions; Daniel Defoe, who denounced John Law, the eighteenth-century inventor of modern central-banking policy (keep interest rates low at all cost!); Anne Robert Jacques Turgot, the famed Physiocrat; Ben Franklin, who famously equated time and money (after Thomas Wilson, a sixteenth-century critic of usury); Claude-Frédéric Bastiat, who, like Marx, made fun of Proudhon’s proposal to cancel debt and abolish interest altogether; Walter Bagehot, the revered author of Lombard Street (1873) – and of course Eugen von Böhm-Bawerk and his student, Friedrich von Hayek, both of whom believed, according to Chancellor, that “the cultural level of a nation is mirrored in its rate of interest.”
No, he is not kidding. Chancellor ransacks all of recorded history to prove that artificially low interest rates – which deviate from the (not “a”) natural rate set by anonymous market forces –are a symptom of decadence, the herald of impending demise. “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 during periods of decline and fall. Very low interest rates appear to be the calm before the storm . . . Given the extraordinarily low interest rates of the early twenty-first century, this is not a comforting thought.” No, it is not, but then it is countermanded by Chancellor’s own account of Western European flourishing in the sixteenth and seventeenth centuries, when low interest rates prevailed; by no one’s reckoning did civilization there fail in the eighteenth or nineteenth centuries.
Chancellor claims no originality in grinding his axe: the book is in effect a compendium of opinion on money at interest, a kind of Bartlett’s Familiar Quotations for quant jocks and financial geeks who believe as fervently as the author in markets unbound by any social purpose or regulatory authority (except as temporary measures, in the depths of a depression). Its novelty, if that is the right word, resides in its relentless repetition of the idea that interest rates kept low by easy money – invariably the fault of some sort of central bank, which pumps too much paper into circulation – lead to bubbles, crisis, economic devastation, and increased inequality. The South Sea Bubble and its French twin, Law’s scandalous New World scheme, became, according to Chancellor and the contemporary authorities he cites, the template for this pattern, and for the modern central-bank policies that reinforce it.
In these terms, the massive meltdown of 2020 was rehearsed on a smaller scale in the financial panic of 2008-09. The pandemic simply vanishes, replaced as a probable cause by the machinations of Greenspan, Bernanke (especially Bernanke!), Yellen, and Powell. Both episodes were caused by gross deviations from “the” natural rate of interest, not by a glut of surplus capital, nor by secular stagnation, and certainly not by the catastrophic effects of COVID-19. The central bankers were channeling the spirit of Law, not Bagehot.
Chancellor concludes with a paean to Hayek’s 1944 bestseller, The Road to Serfdom, a fitting end to a book that treats law, custom, and government itself as an intruder on, indeed an invader of, the hallowed ground of the market, where liberty, property, and Jeremy Bentham – yes, he, too, is quoted, to the same effect as the others – must rule. Hayek’s central claim was that “a government which undertakes to direct economic activity will have to use its power to realize somebody’s ideal of distributive justice.” Only “absolute equality” would reconcile the competing ideals, and this would destroy initiative, ambition, and every other character trait that sustains capitalism and, with it, freedom as such. Chancellor restates the claim by suggesting that Hayek’s fear of central planning should be redirected to central banking: “Central planning in the twenty-first century has involved manipulating the most important price in a market-based economy, the universal price, namely the rate of interest.”
It sounds preposterous, but there’s enough truth in the claim to entertain if not accredit it. At any rate, it’s consistent with the arguments of Menand and Bernanke, and with those of Marx and Greenspan as well. They suggest, or rather assume, as Chancellor does but only grudgingly, that the Fed and its policymaking armature have the intellectual capacity and the legal powers to function as a device of indicative planning, through which economic activities can be coordinated to fulfill democratically determined social purposes. (Bernanke’s Nobel Prize-winning work on bank runs as a cause, not merely a consequence, of deep economic crisis is a case in point.) By all accounts, central banks – particularly the Fed, because the dollar is still the world’s dominant currency – already act as investment authorities, but their recent bailouts have exacerbated economic inequality, and have done little or nothing to address climate change.
We can fulfill the broken promise of the Fed by recognizing and acting on these evident yet unknown realities. But, as Menand insists, first we must recognize what our nineteenth-century forebears knew: that the task before us is a political project, to be decided by democratic means.