The Price of Time by Edward Chancellor

Central Banks have a mandate to maintain stable prices. One problem is that there is no theory of inflation that does not rest upon unobservable data (monetarists rely on real money demand, Keynesians have the output gap, fiscal theory has future budget surpluses), and not everyone is swayed by statistical estimation at social science levels of rigor.

Another problem is that central banks are part of the political landscape, ie. the independence of a central bank is an ideal never to be realized. When politicians start sacrificing stability for other goals, central bankers are fired until a more compliant person is found.

Altogether, central banks can be expected to policy drift over time with the prevailing political winds. nb. fiscal policy is the 800-lb gorilla and monetary policy can only correct so much damage.

"The highly abnormal is becoming uncomfortably normal." Claudio Borio, 2014

Ultimately, the less the Fed acts like a central bank, the more we individually need to act like one.

Boehm-Bawerk declared that the cultural level of a nation is mirrored by its rate of interest. In the ancient world, interest rates charted the course of great civilizations. In Babylon, Greece and Rome interest rates followed a U-shaped curve over the centuries; declining as each civilization became estab lished and prospered, and rising sharply during periods of decline and fall. Very low interest rates appear to have been the calm before the storm. In the early Neo-Babylonian period (700-630 BC) rates on silver loans fell to a low of 8.33 per cent. By early fifth century BC, after Babylonia fell to the Persians, they spiked above 40 per cent.58 In similar fashion, interest rates in eighteenth-century Holland reached a nadir shortly before the Dutch Republic was overrun by Revolutionary France. Given the extraordinarily low interest rates of the early twenty-first century, this is not a comforting thought.

A century after Thornton, the Swedish economist Knut Wicksell discussed the potential for market rates of interest to diverge from the natural rate (i.e. the return on real capital) in his influential book Prices and Interest. Wicksell concluded that any discrepancy between market rates and the natural rate would be revealed by changes in the general price level: if interest rates were set too low there would be inflation, and if too high then deflation.

Equally remarkable is the fact that this convicted murderer should later earn a place in the pantheon of great economists. 'He worked out the economics of his projects," enthuses Schumpeter, 'with a brilliance and, yes, profundity, which places him in the front rank of monetary theorists of all times.' Law has been called the original monetarist - an eighteenth-century forerunner of Milton Friedman. His monetary policy prescriptions form the basis for modern central banking.

Law himself was besieged, noted Saint-Simon, 'by suppliants and flatterers [seeking an allocation of shares]; his door was forced, people entered by the windows from his garden, and fell down the chimney into his study. The talk was all of millions.' The world was turned upside down. Servants, sent to execute their masters' trades in the rue Quincampoix, speculated on their own account. The insolence of these lackeys was insufferable, wrote the Regent's mother, Elizabeth Charlotte, known at Court as Madame. An edict had to be issued in late 1719 forbidding liveried servants from wearing velvet sleeves, silk shirts, large silver buttons and golden cloth. It became a moot point whether speculating nobles should lose rank for engaging in commercial activities. The degradation of the aristocracy was epitomized by the case of the young Count d'Horn who was involved in a botched robbery of share certificates that ended in the death of a stockbroker, and in turn was sentenced to be broken on the wheel.

Women of various ranks were among the most eager Mississippians. Madame de Tencin, a former nun turned saloniste, and later mother to the philosophe D'Alembert, opened a bureau boursier.

When leading Mississippians, led by the Prince of Conti, started to realize - another neologism thrown up by bubble, meaning to convert 'ideal property into something real' - their profits, exchanging banknotes and shares for 'other things more solid than paper', Law responded by banning the possession of precious metals. His dictatorial bent is revealed in a pamphlet of March 1720 in which he railed against the hoarding of money. Government should not allow capital to 'become a bolt-hole or port in a storm'. Law later added that since money was intended to circulate wealth 'you are not allowed to use it for other purposes'. Law's tyrannical and sometimes whimsical measures only served to undermine confidence in the new paper currency.

The Manchester banker John Mills commented perceptively that 'as a rule, panics do not destroy capital; they merely reveal the extent to which it has previously been destroyed by its betrayal into hopelessly unproductive works.'

The Fed was so successful in this respect that Treasury Secretary Andrew Mellon went so far as to hail an end to the cycle of boom and bust. 'We are no longer the victims of the vagaries of business cycles. The Federal Reserve System is the antidote for money contraction and credit shortage,' Mellon declared a year after the Long Island meeting. By taming the business cycle, however, the Fed inadvertently encouraged speculative behaviour. As economist Perry Mehrling writes: 'Intervention to stabilize seasonal and cyclical fluctuations produced low and stable money rates of interest, which supported the investment boom that fueled the Roaring Twenties but also produced an unsustainable asset price bubble.'