One of the many transformations that capitalism has brought about is in our subjective experience of time. To our ancestors, time was measured in the steady cyclical rhythms of agrarian society, punctuated by occasional catastrophes like war, famine or plague. We moderns experience it as progressive and open-ended; dependent on the market and its capricious outcomes, we have to wager on a radically uncertain future. As individuals, this is said to make us both anxious and optimistic. Over the last generation, however, capitalism has settled into a deep stagnation that has drained optimism from large swathes of our societies. Signs of it are all around—from median incomes and productivity growth to the recycling of Marvel movies.footnote1 Mainstream economists like Robert Gordon, Thomas Piketty and Larry Summers have been sounding the tocsin about capitalism’s lack of dynamism for some time now. What has gone wrong?
A series of objective relations that manage time under capitalism might plausibly explain our current malaise. The rate of profit on productive capital has received the lion’s share of attention on the left, perhaps second only to the length of the working day. But another relation is just as important: the rate of interest. Unlike profits, whose tendency to decline is debatable—bogged down in difficult arguments about how to calculate it and largely unobservable outside the recent advanced world—interest rates can be read directly off the historical record and, as we shall see, their long-run tendency to fall is incontestable. Interest rates are also central to the way that modern states manage the rhythms of their macroeconomies. Over the course of the business cycle, central banks adjust interest rates to stabilize aggregate demand. Faced with recession, governments cut rates to revive private investment; confronted with inflation, governments hike rates to cut it off. Our collective economic ups and downs are closely linked to the rate of interest.footnote2
Recent near-zero interest-rate policies (zirps) are both an index and a cause of capitalism’s contradictory political condition today. In a typical postwar recession, the Fed lowered short-term rates by just over 5 percentage points. But after the global financial crisis those rates were stuck near zero and could not go lower, blunting their stabilizing force. Without this tool to fight recession, capitalism muddled through the stagnant 2010s and survived the coronavirus shutdowns only with the help of massive fiscal and monetary stimulus. Until March 2022, the Fed had its policy rate pinned to the floor at zero yet again, and though it has risen over the last eighteen months, it seems unlikely that today’s higher rates will last; current models have them trending down again in 2024 and 2025. But it is not just the short rate that has recently been malfunctioning perilously close to zero: ten-year us Treasuries tanked to barely 0.54 per cent in 2020. Other parts of the world have experienced even more advanced states of decline, with negative rates out to even longer maturities. Japan is an especially harrowing case: its short-term bills have been stuck at the zero-lower bound on and off since the 1990s, its ten-year bond playing footsie with the zero-lower bound since 2016. Interest rate management has less room to perform its assigned stabilization tasks in the face of recession than in previous eras.
The interest-rate declines after 2008 and 2020 were justified as a response to the business cycle, just as the current hikes are justified as a response to inflation. But it is the initial, already-low position of interest rates prior to the global crises that must be explained, since across these cycles there has been an unambiguous secular decline. Indeed, American interest rates were falling across the maturity spectrum for nearly two generations (Figure 1).
To understand our current malaise, however, a longer time horizon is needed. A fascinating recent dataset constructed by Paul Schmelzing at the Bank of England, which traces real interest rates from the early 14th century, shows a slow downward trend persisting over 700 years—through different tax regimes, monetary policies, social systems, cultural revolutions and international contexts (Figure 2, below).footnote3 It is impossible to explain this finding by reference to any concurrent policy change or a complex of policy choices; the trend is too long and too persistent.footnote4 Sophisticated statistical tests looking for breaks or changes in trend can find only two: the devastating Black Death of 1346–53, the plague estimated to have killed over 30 per cent of the European population, and the sovereign defaults by France, Spain and the Netherlands in 1557.footnote5 The downward trend has worked slowly but consistently since the birth of public debt in the high middle ages. It may therefore be rooted in the structural dynamics of the expanding capitalist world-system itself—which means that the problems posed by today’s zero-lower bounds are unlikely to be temporary.
Understanding the causes of this long-term trend requires critical engagement with recent scholarship on finance and its history. Because the interest rate does a substantial amount of work in regulating the dynamics of capitalism, there are also many processes operating on different time scales at work in its determination. Although the chronicle of interest rates comes down to us as a series in empty, homogeneous time, it is possible to decompose the different frequencies at which it fluctuates to analyse them separately.footnote6 In the following, I will proceed from the longest time scale necessary for understanding today’s low rates—as it turns out, all 700 years of public debt’s history—down to the shortest, the capitalist business cycle. The various timescales each overlay one another, giving the line on the chart an uneven and combined character, which nevertheless has a clear and rationally comprehensible directionality. This paper will discuss the birth, spread and consolidation of safe assets, before examining the major transformations that have operated to push rates down over the past century or so—and what they may mean for our political future. But first it may be helpful to set down some more general considerations about what it is that we are measuring and trying to theorize when we speak of interest rates.
All economic actors need stores of value. Workers planning their retirement, corporations managing cash flow, banks posting collateral or central banks holding currency with which to stabilize forex markets—all need legal assets to transmit value through time.footnote7 The so-called ‘safe rates of interest’ determine how easily that’s done—the higher the safe rates, the easier it is for individuals to transmit value to the future, shielded against erosion by inflation or default. Some assets—like the us government’s debts—stand out for their low default risk, easy tradability and the fact that their value is relatively uncorrelated with other major risks, all of which make them useful for hedging. These assets are the benchmark unit against which others are valued; corporate securities, for example, are priced by adding a ‘risk premium’ over government debt with equivalent maturity.footnote8 Safe assets may also circulate as a medium of exchange, as was the case with bills of exchange in the early-modern period, or us Treasuries flying back and forth in global repo markets today. In short, when an asset is truly safe, it acts like money.