A dollar today is worth more than a dollar tomorrow. Everyone knows it, though few ask why; and the whole of finance is built on the difference. To prefer the present dollar is not mere greed or shortsightedness — tomorrow is uncertain, wants press now, and a dollar in hand can be put to work in the interval. The interest rate is the exact measure of this preference: the price at which a sum now exchanges for a larger sum later, the rate at which the future is discounted into the present. Lend a dollar at five percent and you are paid five cents for the year's waiting; value a promise of a dollar next year and it is worth, today, a little less than a dollar. The rate is the price of time, and time, it turns out, is never free.
Why should the future trade below par at all? The reasons are three, and they reinforce one another. The first is uncertainty: a dollar promised for next year may never come — the borrower may fail, the venture may collapse, the world may not be as expected — and a sure dollar in hand is plainly worth more than an unsure one in prospect. The second is impatience: human beings prefer their satisfactions now, and the prospect of a distant enjoyment moves them less than the same enjoyment close at hand. The third is productivity: a dollar held today need not lie idle but can be put to work — lent, invested, set to earning — so that by the time next year's dollar merely arrives, today's will have become a dollar and more. Each of these alone would be enough to make the present dollar the dearer; together they make the discount on the future not a quirk but a near-certainty, overdetermined by risk, by desire, and by opportunity at once.
The interest rate is the instrument that turns this preference into a number, and the number into a universal converter between present and future. Given a rate, any sum payable in the future can be discounted to its worth today, and any sum held today compounded to its worth in the future. A dollar due a year hence, at five percent, is worth about ninety-five cents now; one due in a decade, appreciably less; one due in a century, almost nothing at all. This single operation is the engine of all financial valuation. A bond is nothing but its future coupons discounted to the present; a company, nothing but its expected profits discounted; an investment is worth undertaking only when the discounted value of what it will return exceeds the cost of making it. Irving Fisher built his whole theory of interest upon this idea, defining the value of any piece of capital as the stream of income it promises, brought back to the present by the rate. Discounting is to finance what the lever is to mechanics: the device by which a distant magnitude is made to register here and now.
And the preference the rate measures is no local or modern peculiarity; it is among the most universal facts that economics knows. Every society that has lent has charged something for the lending, however the charge was disguised or condemned; every person who has ever chosen a smaller reward now over a larger one later has revealed, in the choosing, a rate at which he discounts the future; and the laboratory finds the same preference in animals, who discount delayed rewards more steeply than any banker would dare. The inclination toward the present is woven so deeply into appetite and mind that the price of time begins to look less like a human arrangement than a feature of the universe — as objective, and as little open to argument, as the plain fact that tomorrow is less certain than today. It is this very air of natural law, and not the concept itself, that the rest of the plate is concerned to weigh.
For the air of natural law does not survive a second look. If the price of time were a fact of nature, it would be one number; and it is not. There is no single rate of interest but a whole structure of rates, fanned out by risk, by term, by the standing of the borrower, by the temper of the moment — the rate on a government's three-month bill and the rate on a cornered man's loan separated by a chasm, though both are prices of the same year's waiting. Nor is the rate around which this structure arranges itself simply discovered. The short-term rate that anchors all the others is set — by the meeting of lenders and borrowers in the market, and, at the center of every modern economy, by a central bank that raises and lowers it deliberately, by vote, to cool a boom or to revive a slump. The future does shrink as it recedes; but the rate at which it shrinks is not told to us by nature. It is fixed, in the end, by people — and that single fact changes what kind of thing the price of time is.
Once the rate is seen to be set rather than found, the most natural-seeming of all prices reveals its real character. A price is a verdict on a hidden contest, mistaken for a fact of nature; and the discount on the future, which feels as plain and as objective as the difference between a certain today and an uncertain tomorrow, is in truth the visible settlement of a contest — over how heavily the future shall weigh against the present, and over who shall command resources now and who shall be made to wait for them. For the same rate is not one thing but two, according to which side of the loan one stands. To the lender with a surplus he need not spend, five percent is the mild reward of patience, a yield on doing nothing but wait. To the borrower without reserves, the same five percent is the tribute he must pay for needing in the present what he cannot yet afford — a charge that climbs, not with any law of nature, but with the urgency of his need and the narrowness of his choices. The single figure the textbooks name "the price of time" records, in one number, the terms on which the patient and the pressed have settled; and where that number falls is decided, not given.
The objection to all this is serious and must be met at its strongest. Surely, it runs, the discount rests on facts as hard as any in the science. That tomorrow is less certain than today is not a contest but a truth about the world. That resources invested now will yield more later is a technical fact about production, owing nothing to anyone's will. And that men are impatient — that they prefer the near to the far — is a universal of the mind, found in every culture that has been studied and in creatures that have no culture at all. A rate built upon these three is anchored to reality, not floating free for power to set as it pleases; and the proof is that a central bank which fixed the rate far from what saving, investment, and expectation could bear would be punished within months, its defiance answered by a surge of inflation or a flight of capital. The price of time, on this account, is as close to a natural price as economics possesses: discovered in the structure of uncertainty, productivity, and desire, and only nudged, never authored, by the policy that sets its short end.
Every step of this is correct, and not one step of it reaches the point. Grant that uncertainty, productivity, and impatience are real and that they ground the discount: what they ground is that the rate is positive rather than zero — that there is some discount at all. They do not fix its level, and it is the level, not the bare existence, that settles who gains and who loses. Between the lowest rate the real forces will bear and the highest lies a wide band, and where within that band the rate comes to rest is a matter of the supply of patient capital against the demand of the pressed, of the law that enforces or forgives a debt, and of the deliberate choice of a central bank — none of these a fact of nature. And the "real" grounds are themselves not neutral between the parties. Impatience, in particular, is no evenly distributed taste: it bears hardest on those who can least afford to wait, so that the poor discount the future most steeply precisely because their future is most precarious — and are then charged the most for borrowing against it. The rate, far from recording a free preference, compounds a disadvantage. The future's shrinkage is real, as the objection insists; but the rate of that shrinkage is a verdict, and it falls heaviest on those whose impatience is not a luxury but a need.
The price of time is the most natural-seeming of all prices, and for that very reason the most quietly consequential. A price is a verdict on a hidden contest, mistaken for a fact of nature; and the discount on the future, which wears the look of a simple truth — that tomorrow is worth less than today — is the visible face of a settlement over who shall command the present, and how dearly the future shall be charged for the lateness of its arrival. To discount is to decide how much the future shall count; to set the rate is to decide it for a whole economy at a stroke. The concept could not be dispensed with: without it no future income could be valued, no investment weighed, no promise priced. But indispensable is not the same as natural. A converter on which the entire apparatus of finance depends is, for all that, still a number — fixed somewhere, by someone, at which tomorrow is made to shrink into today. The rate is the price of time; and the price of time, it turns out, is not read from the clock but settled between the parties who must live by it.
A dollar tomorrow is worth less than a dollar today. By how much is arithmetic; the rate that fixes it is a verdict.
This plate has set out the price of time — why the future trades below par, how the single act of discounting converts it into the present, and why the converter that looks like a law of nature is, on inspection, a number that someone sets. What the volume pursues from here are the grounds and the stakes of that number: the abstinence by which the classics justified the reward of the patient, the impatience and the productivity by which Fisher and Böhm-Bawerk explained it, the liquidity by which Keynes unsettled them all, and the lever by which a central bank now moves the whole structure at will. But the question this plate has only opened is the one the next must answer. The discount is real, and the future does shrink; what remains to ask is who decides by how much — and whether, in deciding, they do justice or merely hold power. The argument remains open.