The textbook ( Cecchetti and Redish ) started out with "The Time Value of Money". [Update: or did it call it "The Value of Time"? Curses! I left the text in my office.][Update2: it actually says: "The first principle of money and banking is that time has value." I think that's a bit confusing, because it sounds like it's talking about wages, not interest rates.] Here is Wikipedia on the subject . Here is Investopedia .

Strangely, because I've always been a macro/money guy, and have been teaching economics for 30+ years, I'm currently teaching the intermediate-level "Monetary and Financial Institutions" (aka "Money and Banking") course for the first time ever. (20 years ago I did teach a crash course in Finance to Marxist-trained Cubans, which was fun, and forced me to explain the very fundamentals, like why compound interest wasn't the mystification of mystification.)

Suppose you ask students: "Which is worth more: $100 now; or $100 one year from now?"

The answer you will probably get is: "Since inflation is usually 2%, $100 next year will usually be worth 2% less than $100 this year".

But that's not what we are talking about. We aren't talking about inflation.

Suppose instead you ask students: "Which would you prefer: I give you $100 now; or I give you $100 one year from now?"

The answer you will probably get is: "Since I might want to spend it now, and I could always keep the $100 if I didn't want to spend it now, I prefer $100 now."

But that's not what we are talking about either. We aren't talking about option theory.

In order to get the answer we are looking for, we need to ask a very leading question, like: "Suppose you could lend or borrow money at 10% interest risk-free. Which would you prefer: I give you $100 now; or I give you $100 one year from now?"

See for example this Khan Academy video.

Finally, the students will see what you are getting at. But only because you have already told them the answer you are looking for.

When you say that the interest rate is 10%, you are saying that a promise to pay $100 now is worth the same as a promise to pay $110 one year from now. That's what "10% interest" means.

It's like if you said: "Suppose one apple is worth two bananas. Which is worth more: one apple or one banana?"

The students would think you are either insulting their intelligence, or asking a trick question.

Positive interest rates do not cause or explain a positive time value of money. They are the very same thing. If we want to explain why there is a positive time value of money, saying that interest rates are positive is not an explanation. It's just repeating the question. We need to explain why interest rates are positive.

And, from my little reading of "finance" literature, that literature is usually silent on the subject. It usually gives no explanation whatsoever of what it says is the most important principle in finance. It may explain interest rate differentials, due to risk or liquidity, but it does not explain why interest rates are positive. (Am I wrong?)

The first question in finance is: "Why are interest rates positive?"

A macroeconomist will immediately want to make the distinction between nominal and real interest rates, and write down the Fisher equation in which expected inflation makes nominal interest rates higher than real interest rates.

A macroeconomist will next want to talk about the Zero Lower Bound on nominal interest rates. And will want to make the point that the ZLB is an artefact of the practical difficulties of paying either positive or negative interest on paper currency. If the Bank of Canada issued only electronic money instead of electronic money plus paper notes, there would be no problem in paying negative nominal interest rates.

A macroeconomist will next want to talk about the fundamental determinants of real interest rates. Things like: time-preference proper; time preference at the margin due to consumption growing or declining over time; the marginal rate of transformation between present and future consumption. Draw an Irving Fisher diagram showing the tangency between an intertemporal Production Possibilities Frontier and an intertemporal indifference curve. Or draw a saving and investment diagram. Or an ISLM diagram. Or something. Any macroeconomist will know at least one theory of what determines real interest rates. And nominal interest rates too.

And then say that real interest rates don't have to be positive, and won't be positive under all conditions. (Just like they are negative right now, on risk-free loans.)

And then say that even nominal interest rates might be negative in future, if paper currency disappears.

The Time Value of Money might not exist. It might be negative. And it's not really about "money" anyway. What it really means is that we are not indifferent about the timing of the delivery of goods. Including money.

In short: macro roolz finance.