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1:04

morning and thank you everybody for coming, and thanks

1:06

again to Professor Hoppe and the Property and Freedom

1:08

Society for inviting me to speak today. I'm

1:11

going to discuss the topic of interest rates

1:13

on a free market. Now,

1:15

historically, interest is perhaps

1:18

one of the most controversial economic

1:20

and moral topics in

1:22

general. In monotheistic religions

1:24

and in Buddhism and in all

1:27

kinds of different philosophers' works across

1:29

time, people have had

1:32

bad things to say about

1:34

interest, and religions have

1:36

forbidden it in many cases, and they've described

1:38

it as being as bad as murder in

1:41

some cases, and we

1:44

see this repeated across cultures,

1:46

across time and across space, which

1:48

is really curious. But

1:51

within the religious invocations

1:55

against usury and

1:57

against interest, Rothbard argues there is

1:59

no... nothing in the Gospels of the

2:01

early fathers, despite their hostility to trade,

2:03

that can be construed as urging the

2:05

prohibition of usury. I'm

2:08

not entirely sure how much, how

2:11

accurate this is, but I'm going to take

2:13

Rothbard's words for it. And

2:15

the prohibition of usury first came in 325 AD

2:17

at the Council of Niseya, and then in

2:22

the fifth century, Pope Leo extended it to the

2:24

laity, and then Charlemagne in 789 was

2:30

the first secular legislative to ban usury.

2:34

Now these are not

2:36

exactly arguments, they are bans,

2:39

but in terms of arguments against usury,

2:42

Rothbard in the history of economic thought has

2:44

a good discussion of the evolution of this

2:46

argument. So Aristotle offered an argument saying that

2:50

usury is hated because its gain

2:52

comes from money itself and not from that for

2:54

the sake of which money was invented. For

2:57

money was brought into existence for the purpose of

2:59

exchange, but interest increases the amount of the

3:01

money itself. Consequently, this

3:03

form of the business of getting wealth

3:06

is of all forms the most contrary

3:08

to nature. This

3:10

isn't very compelling, and Rothbard and

3:12

many other economists have offered good

3:14

arguments against it. Just because

3:16

something was invented for one purpose doesn't mean it

3:18

can't be used for another purpose. And

3:21

the idea that just money

3:26

not having any use in something

3:28

else is somehow forbidden, a

3:31

lot of things get used for other things. So it's not

3:33

very convincing. Aquinas had

3:36

a convoluted argument against

3:38

interest, wherein he argued

3:42

that since money is like

3:44

food and that it is consumed when it is used,

3:46

it makes no sense to pay if you're

3:49

going to return it. If you're going to return

3:51

it, it's a consumable good, so you've already returned

3:54

the same thing. It makes sense

3:56

to charge rent on, in his opinion, things

3:58

that are not consumed like a house. house because

4:01

you return the house, but you don't consume it during

4:03

its use, so you have to pay a rent on

4:05

it. And that also doesn't make

4:08

a lot of sense because people can

4:10

charge prices for all kinds of

4:12

things. And when people charge prices in general,

4:14

they charge them based on subjective valuation of

4:16

the sum of all the

4:18

services that the good renders. So it's

4:21

not entirely convincing to say that people

4:23

shouldn't be able to charge for something

4:25

for which others are willingly paying. Another

4:29

argument is that it is maybe immoral to not

4:31

share risk for the lender and the borrower to

4:33

not share the risk equally because the borrower bears

4:35

the risk while the lender only shares in the

4:37

upside. But if this is immoral,

4:40

then why do borrowers accept it willingly?

4:43

Rothbard goes through a

4:45

lot of these arguments, and I

4:47

think the very powerful argument against

4:49

them is that people continue to

4:51

find ways to

4:54

introduce interest. So throughout the Middle Ages,

4:56

even though a lot of places had

4:58

banned interest, there were all kinds of

5:00

creative arrangements that merchants came up with

5:03

to introduce interest into the contract without

5:05

making it look to the church authorities

5:07

that this was interest. And

5:09

then Rothbard provides some of the arguments from

5:13

scholastics and Calvinist priests

5:15

and scholars on

5:17

the problem of

5:19

interest. And so Cardinal

5:21

Hosteianesis in the 13th century

5:25

introduced the concept of opportunity cost, that when

5:27

you're lending money, you're forgoing

5:29

the ability to make returns on investments

5:31

yourself. And for that, people

5:35

require compensation for lending. In

5:37

the 15th century, there was a complete

5:40

refutation of the arguments, according to Rothbard.

5:43

And then there was the argument

5:45

that liquidity has its value, and

5:47

so forgoing liquidity requires

5:50

the person charging. John

5:52

Calvin argued that money is not sterile.

5:55

And that's contrary to Aristotle, because it generates profits through trade.

5:58

And then Rothbard said, the

6:00

Dutch Calvinist Claude Sommes put the final

6:03

nail in the coffin. Money lending is

6:05

a business like any other and so

6:07

just like people spend time and effort

6:09

in order to provide apples

6:11

or wheat or meat for the market,

6:14

people will also spend time and effort to

6:16

try and provide capital for the market and

6:18

so they require compensation for it. And

6:21

Rothbard says on Sommes

6:23

he did make the important theoretical point

6:25

however that as in any other part

6:27

of the market if the

6:29

number of users multiplies, the price of

6:32

money or interest will be driven down

6:34

by the competition so that

6:36

if one doesn't like high interest rates,

6:39

the more users the better. And

6:42

I think this is a very interesting line

6:44

of thought which we're going to get back

6:46

to later in this discussion. Now

6:48

in this end of the 18th century

6:51

Jeremy Bentham provided

6:53

the argument, the liberal argument

6:56

against or for interest lending

6:58

which is that if some man of sane

7:01

mind acting freely wants to enter

7:03

into a particular arrangement with money

7:06

there is no good argument

7:09

for stopping him if he sees that this is

7:11

beneficial to them. But until here

7:13

we see that we haven't really

7:15

formulated a precise

7:19

economic argument for interest. They've

7:21

refuted, all the economists that

7:23

we've seen they've refuted some of

7:25

the fallacious arguments against interest. They've

7:27

introduced the liberal argument which is people

7:30

should be free to do what they

7:32

want but there was no clear explanation

7:34

of why is it economically that

7:38

people engage in interest lending.

7:40

And for that we have

7:42

to wait till Turgot, Bombarek

7:44

and Frank Fetter introduced the

7:47

time preference explanation for interest. So Turgot was

7:49

the first to bring this up according to

7:51

Rothbard. He introduced the concept of

7:53

subjective valuation to the question. And

7:55

so the subjective value of the monetary sums is

7:58

what matters and not the quantity of interest. of

8:00

metal involved. That was, I think, the key

8:02

breakthrough into Gold's work. That it's perfectly

8:05

normal for somebody to prefer a smaller sum

8:07

of coins today, 100 coins today, over 110

8:13

coins next year, because valuation

8:15

is not inherent in the

8:17

physical coins. Valuation

8:19

is subjective. And so it might be the case

8:21

that I value 100 points today more than I

8:24

value 110 coins next year. And

8:26

so therefore, I'm conducting a beneficial

8:28

trade for myself when I trade

8:31

taking 100 coins today, and then I

8:33

pay 110 coins next

8:35

year. So the value, this

8:38

is basically the concept of time

8:40

preference. People value a satisfaction today

8:42

more than they value the same

8:44

satisfaction in the future. So once

8:46

you accept that value is subjective,

8:48

and that people value things subjectively, it's

8:51

perfectly normal to understand that they would

8:53

value a smaller sum, more

8:55

than a larger sum. And that's why they take

8:57

the loan. That's why they accept the loan. And

9:00

time preference later on, Baumberg and Frank

9:03

Fetter and Austrian economists will elaborate on

9:05

this concept more. And I

9:07

think it is, it's a category

9:09

of human action. It's something that pervades

9:12

all of human actions in that we

9:14

always prefer the present to the future.

9:17

Present is certain, the future is uncertain.

9:19

The future can only come by surviving

9:22

the present. So the present's needs

9:24

are always more pressing. There's no future if

9:26

you don't survive to get to the future.

9:28

So you have to prioritize the present to

9:31

prioritize your survival. And the present

9:33

is where all the senses experience life, it's where you

9:35

experience pleasure and pain, and all of the

9:38

sensations that drivers toward action.

9:41

So time preference is always positive. But

9:44

it varies between people and it varies

9:46

in the same person at different times.

9:48

So your time preference is constantly changing

9:50

throughout life, due to the conditions and

9:52

the circumstances of life. But

9:55

the fact that the valuation differs between

9:58

people, the fact that people more

12:00

than I value the money today. And the reason

12:02

for that is that I have a lower discounting

12:04

of the future than he does. So he might

12:06

be in a position where he needs the money

12:09

right now because he's got an emergency. So he's

12:11

got a much higher time preference, so he's willing

12:13

to pay a sum that would allow me and

12:16

justify for me the choice of forgoing the

12:18

liquidity for that period of time.

12:21

So this then creates a lending

12:23

market because it's not just individuals trading together,

12:25

then there becomes a lending market, which is

12:27

like a market for time. And

12:29

that market will then have a general

12:32

market interest rate, which is

12:34

the sum, if you want, of all of the

12:37

market, the origin of the interests and the

12:39

contribution of the people. And as Hoppe describes

12:42

it in Democracy, the God that Failed, this

12:45

market-determined interest rate is the aggregate sum

12:47

of all individual time preference rates reflecting

12:50

the social rate of time preference

12:52

and equilibrating social savings, i.e.

12:54

the supply of present goods offered for

12:56

exchange against future goods, and

12:59

social investment, i.e. the demand

13:01

for present goods thought

13:04

capable of yielding future returns. So

13:08

the time preference of people is

13:10

what shapes the market interest rate.

13:12

So market interest rates have their

13:14

origin in human action, and in

13:16

particular in the discounting that humans

13:18

place on the future. And

13:21

so as Rothbard elaborates in

13:23

Man, Economy and State, the

13:25

function of the capitalist in the market

13:28

economy is a time function. Their income

13:30

is precisely an income representing the agio

13:32

of present as compared to future goods.

13:35

This interest income then is not derived from

13:37

the concrete heterogeneous capital goods, but from the

13:39

generalized investment of time. And

13:41

this is the essence of the Austrian

13:44

time preference theory of interest, in

13:46

that it's not the productivity of goods which gives the

13:49

interest income. The interest income is the

13:51

discounting of the future. And so by

13:53

forgoing the present in order to receive

13:56

a repayment

13:58

in the future, And

18:00

so therefore, they're always going to find a way

18:02

because it's mutually beneficial for both parties to get

18:04

into it. Now, what

18:07

does it mean when we say that

18:09

interest rates are determined by time preference? But we

18:11

know, and Professor Oppa

18:13

describes it also in Democracy with

18:16

God that Tales, we know interest

18:18

rates historically have been declining. What does

18:20

that mean? As

18:22

Professor Oppa says, it's a

18:24

tendency toward falling interest rate

18:26

characterizes mankind's super-secular trend

18:28

of development. Whereas

18:30

high or rising minimum interest rates

18:33

indicate periods of generally low or

18:35

declining living standards, the

18:38

overriding opposite tendency toward low and

18:40

falling interest rates reflects mankind's overall

18:42

progress, its advance

18:44

from barbarism to civilization. Historically,

18:47

we see that time preference

18:50

declines in periods of declining,

18:52

of increasing prosperity. People's time

18:54

preference declines, so they save

18:57

more because we save more,

18:59

capital becomes more abundant, because we have

19:01

more capital, we're able to invest more,

19:03

productivity goes up, our ability to provide

19:05

for the future increases, and

19:07

that all reduces our time preference.

19:10

So prosperity and civilization,

19:13

as Professor Oppa describes

19:15

it, is what initiates the process of,

19:18

sorry, declining time preference is what initiates

19:21

the process of civilization. We can think

19:23

of civilization as the decline in time

19:25

preference. So then, the question

19:28

also raised in Democracy with God

19:31

that Failed, with this

19:33

historical backdrop and in accordance with economic

19:35

theory then, it should be

19:37

expected that 20th century interest rates would

19:39

be still lower than 19th century interest

19:41

rates. But

19:43

that is not the case. Interest rates

19:45

were the lowest in history recorded at

19:48

the beginning of the 20th century, around 2.5%. That

19:52

was the interest rate at the Bank of

19:54

England. So this was the lowest interest rate that

19:56

humanity had ever seen at 2.5%. And

20:00

if civilizational progress had continued in

20:02

the 20th century, you

20:04

would have expected that rate to decline. Now

20:06

it did not. And as

20:09

Professor Hoppe says, you can

20:12

only explain that by saying the character of

20:14

the population must have changed. People on the

20:16

average must have lost in moral and intellectual

20:19

strength and become more

20:21

present oriented. Indeed, this appears

20:23

to be the case. I think anybody who's been

20:25

familiar with the 20th century would argue

20:27

that there must have been some element of rise

20:30

in time preference. And I think

20:32

that's reflected in the interest rates. And

20:35

Professor Hoppe focuses on the role of

20:37

democracy on that. And I think that's

20:39

a very good point. And

20:41

I like to focus on the role of

20:43

fiat money and the value on the money that is

20:45

constantly being devalued because the money is declining in its

20:47

value. It doesn't

20:51

provide people a good mechanism for saving

20:53

for the future. So people's ability to

20:55

provide for their future becomes more difficult.

20:57

So the future becomes more uncertain. So

20:59

people start discounting the future more. I

21:03

think this and democracy are, of

21:05

course, related explanations because it was democracy

21:08

that gave us fiat money. And it's

21:10

fiat money that gave us democracy. It's a

21:12

chicken and egg problem. But

21:15

the end result of

21:17

this is there's been

21:19

a rise in time preference. The time preference

21:21

has been rising. So

21:24

this introduces a very interesting question.

21:27

What would happen if time preference continued to

21:29

decline from the beginning of the 20th century

21:31

until today? What would happen if time preference

21:33

had continued to decline? Imagine if we hadn't

21:36

had the horrible things of the 20th

21:38

century happen. It's a

21:40

very interesting question. It's so interesting that it

21:42

is actually my next book, The

21:45

Gold Standard. It's an

21:47

economic fictional book written at

21:50

the end of the 20th century in which

21:52

fiat money dies in 1915. And

21:54

the world goes back to the gold

21:56

standard throughout the 20th century. So

21:59

to try and imagine what would happen if time because

26:00

over time, money is the scarcest

26:02

good. It's the good that's being produced in the lowest quantities.

26:06

And therefore, it's the good that is going to

26:08

be appreciating most

26:10

over time. So simply holding onto money

26:13

provides you an appreciation. But

26:16

holding onto money also involves a cost

26:18

of storage and risk of damage

26:21

or theft or loss. So

26:24

lending the money allows you to reap the

26:26

benefit from its appreciation. If you get it

26:28

back at 0%, you reap the benefit from

26:30

the appreciation, but you don't

26:33

pay the cost of the storage of money. So

26:37

this would mean a nominal 0%

26:39

interest rate. And

26:41

one way of thinking of it is that

26:44

if capital is abundant, if capital is very

26:46

abundant, then zero is the ultimate end price

26:48

for capital. So the price approaches zero, doesn't

26:50

quite get to zero because time preference is

26:52

never zero, time preference

26:55

is always positive. But

26:57

it approaches zero, and then because the cost

26:59

of storing money is larger than zero, then

27:01

it doesn't really need to go to zero,

27:04

because the nominal interest rate will just still

27:06

be zero, and

27:10

the real rate will be positive.

27:13

So if time preference is very low for

27:15

everyone, then there

27:17

is no market in time valuation. So

27:20

if you understand the economic argument for interest,

27:22

it is that there is a differential in

27:24

time preference, and it's the differential in time

27:26

preference that creates the market

27:28

in interest, which is the market in valuation

27:31

of time. But if everybody's

27:33

time preference is so low that their

27:35

original interest is lower than the cost

27:37

of holding capital, then there's

27:40

no market to be had in valuations of

27:42

time. Everybody has a very, very

27:44

low time preference, and so the

27:48

distinctions in time preference are very

27:51

tiny, that the lending just happens at the 0%

27:53

rate, because

27:56

it's better than the cost of

27:58

holding capital. I

36:00

think where the market interest rates, I

36:02

guess how they might have behaved differently. So

36:06

I think it's very difficult to

36:09

pass judgment on interest rates

36:11

in a fiat environment because

36:14

they are the products of central planning. So

36:16

central banks basically decide the interest

36:18

rate because they buy and sell bonds

36:21

in a way that brings about the interest rate that

36:23

they want. And of course

36:25

they have a monopoly on the creation of the money or

36:27

at least they have a monopoly on the creation of the

36:30

money. So they can control

36:33

the money supply, they can control the price of money

36:36

and so they can impose an interest

36:38

rate on society effectively like situation

36:40

of price controls. So it's a

36:42

bit like trying to guess what

36:44

would be the price of potatoes

36:46

in a situation where you have a

36:49

central planning board for potatoes. It's

36:51

difficult to tell because if the central planning

36:53

board wasn't there then the entire potato industry

36:55

would be quite different. So the

36:58

answer that I would say is I wouldn't

37:03

have clear answers to

37:05

specific short term interest

37:07

rates. I wouldn't be able

37:09

to tell you that in the year 2000

37:11

interest rates should have been at

37:13

6% but they were actually at 3% or something of

37:16

the sort. I don't think you can

37:18

make something like that because it's a constantly

37:20

shifting policy that the central

37:22

bank follows. But I would imagine that

37:24

if there hadn't been a central bank

37:26

then you would have hard money so

37:28

you wouldn't have inflation and so people

37:31

would have a lot lower time preference

37:33

and so interest rates would likely decline

37:35

over time. And I

37:37

mean it depends on when in

37:39

your hypothetical you want to not have

37:42

the central banks. We just not

37:44

have central banks from day one or

37:46

we got rid of them last week. So

37:49

it depends but the longer we've

37:51

had without central banks then I

37:53

would imagine the lower

37:55

interest rate would go I think.

38:00

for Saif Diin. So

38:03

you are saying that in the process of

38:05

civilization the social time

38:07

preference rate falls and

38:11

at some point it reaches or

38:13

the nominal interest rate reaches a level where

38:15

it's equals the costs of

38:17

money storage and the risk of losing it.

38:21

But what about the risk premium and

38:24

the nominal interest rate? Would that not

38:27

prevent ever falling the nominal interest

38:29

rate to the level of

38:31

the cost of holding money? I

38:37

think there is a risk premium on lending

38:40

the money. There's also a risk premium on

38:42

keeping the money. So it's entirely

38:44

conceivable that the risk also declines.

38:47

So there's the cost of holding the money and the risk

38:50

of holding the money and then there's a

38:52

cost of lending it. Now with time and

38:54

as time preference drops you would

38:56

expect that the risk of default and the risk of

39:01

taking the money and running away would also

39:03

keep declining over time because people are lower

39:05

time preference more and more and more likely to

39:07

commit to their contracts. So

39:10

I'd still think the

39:12

more we lower our time preference

39:15

eventually the time preference needs

39:17

to go below the cost of storage.

39:19

Thank you. Something more to add to

39:21

the interest question. If you look at

39:23

the components of nominal interest and low

39:26

time preference and hard money certainly will

39:28

lead to the disappearance of the purchasing

39:30

power premium. Maybe not

39:32

so sure the terms of trade premium that

39:34

Rothbard came up with and one

39:36

thing that will not disappear is the

39:38

risk premium if you see it as

39:41

the perceived risk of not being paid

39:43

back. So I think there's not only

39:45

low time preference and hard

39:47

money needed but also trust. I

39:51

think you have to add trust

39:53

in the picture societal trust to

39:55

get that component to zero and

39:57

I would suggest that Guido's theory

39:59

of is there probably

40:01

a bit of a better fit? Guido's

40:06

theory of origin interest, because you gave

40:08

the example of giving a zero interest

40:10

loan to family and friends. And

40:13

I don't think that's only explainable or easy

40:16

or best explainable by low time preference.

40:18

I think Guido's suggestion that it may

40:20

be due to less

40:22

of a spread between means and ends, meaning

40:25

that it can be an end in

40:27

itself for you to provide family and

40:29

friends without the premium is

40:31

a better measure, better explanation for that.

40:33

So I would try to take that

40:35

into account when figuring out how it

40:37

could drop to zero. And I

40:40

think there was a trust place again, an

40:42

important role. I

40:48

would say, yes, I think that's a good

40:50

point to include the trust component. But I

40:52

would say it's also proxied

40:55

if you want to buy time preference,

40:57

because the lower time preference, the

41:00

more trustworthy people are. And

41:03

I would say

41:06

that ultimately,

41:10

the more you accumulate cash balances,

41:12

the more the utility of a

41:14

cash balance diminishes. I

41:17

should have perhaps specified this in detail. But

41:19

the utility of money is the thing that

41:22

has the least diminishing marginal utility, because

41:25

you can exchange it easier for everything else. But

41:28

utility still diminishes. Your

41:30

first dollar is not as valuable as when you go

41:33

from 100 million dollars to 100 million dollars in one

41:35

dollar. So

41:37

the first dollar is obviously much more valuable. So the

41:39

marginal utility of money diminishes. And

41:42

after a while, the more money you accumulate, you

41:46

see the benefit from diversification away from

41:48

holding the money yourself, because then if

41:50

your money gets compromised or stolen, all

41:53

of it gets compromised or stolen. But

41:55

you could diversify by lending to others. So

41:59

you would see that. how

42:01

the marginal utility of lending

42:03

can be positive for the case that you mentioned,

42:05

which is that you get

42:08

some value from lending to others at

42:10

no interest, but also to diversify from

42:12

having all of your money in one

42:14

place.