This volume has taken the price of time apart — into its discount and its causes, its level and its curve, its real value and its long moral trial, its strange descent below zero and its reach into the fate of generations. This final plate gathers the pieces back into one. For in the modern world there is, in a sense, a single number that anchors the whole price of time: the short rate the central bank sets — the overnight rate it fixes by decree at each of its meetings, from which the entire architecture of interest rates, and much of the economy besides, depends. This plate will tell how that one number is chosen, under what mandate and by what rule; how it propagates outward, from the committee's table through the money markets and up the curve to touch every loan and every life; how, in setting it, the bank tries to track the unobservable natural rate the volume has chased; and how, in this single administered figure, the volume's long question — earned, or extracted? — comes to its modern rest. For the price of time, at the last, proves neither the pure reward the market alone would set nor the rentier's toll the moralists feared, but a number anchored by a public authority, for the public good, at the value the real economy is judged to warrant.
Begin with the number itself. Among the countless interest rates in an economy — the mortgage rate, the bond yield, the rate on a credit card or a Treasury bill — there is one that the others follow, and it is the one the central bank sets directly: the policy rate, the overnight rate at which the banks lend their reserves to one another, which the bank pins where it wishes by its command over those reserves. This rate the bank does not forecast or observe but decides — a committee of a dozen people, meeting some eight times a year, choosing a number and announcing it to the world. It is the shortest of all rates, the price of money for a single night; and it is, in itself, almost trivial, for few but banks borrow overnight. Yet from this one short rate the whole structure of the price of time depends, for reasons the volume has already laid bare. The single number is the foundation-stone; the architecture rises from it.
How does a single overnight rate govern the price of time across all horizons? Through the curve, and the expectations that build it. Recall that a long rate is, at bottom, the average of the short rates the market expects across its life: so the ten-year rate depends not on today's overnight rate alone but on the whole path the overnight rate is expected to follow over the decade. The central bank, then, moves the long rates not only by setting today's short rate but by shaping the expected path of it — by its forward guidance, its stated intentions, the credibility of its word. Set the short rate, and the money-market rates move with it within the day; shape the expected path, and the whole curve bends; and from the curve hang the mortgage and the corporate bond and the government's cost of borrowing, and from those hang spending and investment and the price of every asset, and from those, in their turn, hang output and employment and, in the end, the rate of inflation itself. This is the transmission, the long chain by which the committee's single number reaches the farthest corners of the economy. The architecture the volume has anatomized — the curve, the real rate, the term premium — is the very structure through which one short rate is made to govern the price of time entire.
A dozen people, meeting eight times a year, choose a single number; and from that number the price of time for a whole economy hangs.
By what principle does the committee choose? Not by whim, but under a mandate and by something like a rule. The mandate, for most central banks, is price stability — a low and steady rate of inflation, commonly a target of two per cent — and, for some, the additional charge of full employment, the famous dual mandate. The rule, made familiar by the economist whose name it bears, is in essence this: raise the rate when inflation runs above its target or the economy above its capacity, lower it when they fall below. And behind the rule stands the Wicksellian idea the volume has met: that there is a natural rate, the rate that would hold the economy in balance, neither stoking inflation nor breeding slump, and that the bank's task is to set its policy rate to track that natural rate — above it to cool an overheating economy, below it to warm a cold one, level with it to hold the economy steady. The single number, rightly set, is the market rate made to chase the natural rate; and the whole apparatus of inflation targets and policy rules is the modern machinery for doing what Wicksell described — keeping the price of money at the value the real economy warrants, so that prices hold steady and the gap that silently redistributes between creditor and debtor does not open.
Yet the volume's scruples must not be forgotten in the finale, for the single number is set under two great difficulties. The first the natural-rate plate named: the rate the bank is meant to track cannot be seen. The natural rate is unobservable, a magnitude to be estimated and guessed, forever drifting; and so the committee, however scrupulous, is steering toward a mark hidden behind cloud, and may set its number too high and bring on a needless slump, or too low and let inflation loose — and either error, the volume has shown, works a silent transfer between creditor and debtor that no one voted. The second difficulty the volume has only implied: that the hand which sets the single number is, in most countries, unelected. A committee of appointed officials, deliberately insulated from the ballot, sets the most consequential price in the economy — a price that reaches every borrower and saver, every mortgage and pension, the value of every asset and the level of every wage. The insulation is defended, and ably: that the power to set the rate, left to elected hands, would be abused for short-run advantage, inflated away before each election, and that an independent central bank, bound to its mandate, sets the number more honestly than a politician would — a case the evidence has on the whole supported. But it remains a vast and lightly-checked power, lodged in few hands and exercised over all; and the price of time, in the modern world, is anchored by an authority that answers to its mandate more than to the public whose price it sets.
And so to the volume's question, gathered now for the last time: is the price of time earned, or extracted? The volume's long answer can at last be stated whole, and it is that the question offered too few words. At its core, the price of time is earned — for beneath the policy rate lies the natural rate, and the natural rate is the work of the real forces the early plates set out: the productivity of capital lent to a roundabout venture, which makes money lent genuinely fruitful; the impatience of those who would rather consume now than later, which makes waiting a real sacrifice; the risk the lender bears, which deserves its wage. These generate a real price of time, the natural rate, as earned as any price in the table — the honest reward of productiveness and patience and courage. At its margins, the price of time is liable to extraction — for the moralists of usury were not wrong that the loan can batten on desperation, nor the Georgists wrong that a position can collect without contributing, nor the analysts of inflation wrong that the unexpected erosion of money transfers wealth by a tax no one votes. And at its surface, in the modern world, the price of time is neither simply earned nor simply extracted but administered — set, or anchored, by the central bank's single number, the market rate made to chase the natural, a public authority's standing attempt to hold the price of money at the value the real economy warrants, for the good of all. The three answers are not rivals but layers: the price of time is earned in what generates it, administered in what sets it, and extracted only where the vigilance of the mandate and the law fails.
The price of time is earned in what generates it, administered in what sets it, and extracted only where the vigilance of the mandate and the law fails.
One thing more the single number reveals, and it carries the volume to its border. For the rate the central bank sets is not only the price of time; it is the chief lever of money itself — the instrument by which the bank governs not merely the cost of borrowing but the value of the currency, the level of prices, the very worth of money. The single number is where the price of time and the value of money meet: to set the rate is to act upon money, and to act upon money is to set the rate. And so this volume, which has anatomized the price of time, arrives at the threshold of another primitive entirely — money, the thing whose price the rate in part is, whose value the rate in part governs, and whose nature the table must take up under its own name. The natural rate the bank chases, the inflation it targets, the curve it bends, the zero bound it strikes — all of these are as much facts about money as about time. The price of time, followed to its modern source, runs into the question of money; and there this volume hands the argument on.
So the third volume of the table closes. The price of time, which began as the discount of a single loan — the plain fact that a sum today outweighs the same sum tomorrow — has been followed through its twelve aspects: the impatience and the productiveness that cause it; the loanable funds and the liquidity preference that set it; the natural rate that would steady it and the curve that stretches it across the years; the real rate that is its truth and the usury that was its long indictment; the zero bound where it turns strange and the far future where it weighs the unborn; and, here at the last, the single number by which a public authority anchors it for an entire economy. And the question the volume carried throughout — whether the price of time is the just reward of a real service or the toll of a position of power — has found not a closure but a resolution: that it is earned in its core, administered in its setting, and extractable at its margins; a real price that the real economy generates, that a public hand now sets, and that the law and the mandate must forever guard against its abuse. The rent of every position, the wage of every labour, and now the price of all waiting lie set down in the table; three of its volumes stand whole, and the prices continue — the premium of risk and the spread of the middleman still to come. As the masthead says of every ordinary price, so of the price of time: it is a verdict on a hidden contest, commonly mistaken for a fact of nature. And as the table says of every price, first to last: the argument remains open.