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When borrowers are scarce, it helps if money (like potatoes) rots
DENMARK S Maritime Museum in Elsinore includes one particularly unappetising
exhibit: the world s oldest ship s biscuit, from a voyage in 1852. Known as
hardtack, such biscuits were prized for their long shelf lives, making them a
vital source of sustenance for sailors far from shore. They were also
appreciated by a great economist, Irving Fisher, as a useful economic metaphor.
Imagine, Fisher wrote in The Theory of Interest in 1930, a group of sailors
shipwrecked on a barren island with only their stores of hardtack to sustain
them. On what terms would sailors borrow and lend biscuits among themselves? In
this forlorn economy, what rate of interest would prevail?
One might think the answer depends on the character of the unfortunate sailors.
Interest, in many people s minds, is a reward for deferring gratification. That
is one reason why low interest rates are widely perceived as unjust. If an
abstemious sailor were prepared to lend a biscuit to his crewmate rather than
eating it immediately himself, he would deserve more than one biscuit in
repayment. The rate of interest should be positive and the sharper the hunger
of the sailors, the more positive it would be.
In fact, Fisher pointed out, the interest rate on his imagined island could
only be zero. If it were positive, any sailor who borrowed an extra biscuit to
eat would have to use more than one biscuit in the future to repay the loan.
But no sailor would accept those terms because he could instead eat one more
piece from his own supply, thereby reducing his future consumption by one, and
only one, piece. (A sailor who had already depleted his supplies, leaving him
with no additional hardtack of his own to eat today, would be in no position to
repay borrowed biscuits either.)
That was bad news for thrifty seafarers. But worse scenarios were possible. If
the sailors had washed ashore with perishable figs rather than imperishable
hardtack, the rate of interest would have been steeply negative. [T]here is no
absolutely necessary reason inherent in the nature of man or things why the
rate of interest in terms of any commodity standard should be positive rather
than negative, Fisher concluded.
Two years ago, when the Bank of Japan (BoJ) began charging financial
institutions for adding to their reserves at the central bank, its
negative-rate policy was harshly criticised for unsettling thrifty households,
jeopardising bank profitability and killing growth with monetary voodoo .
Behind this fear and criticism was perhaps a gut conviction that negative rates
upended the natural order of things. Why should people pay to save money they
had already earned? Earlier cuts below zero in Switzerland, Denmark, Sweden and
the euro area were scarcely more popular.
But these monetary innovations would have struck some earlier economic thinkers
as entirely natural. Indeed, The Natural Economic Order was the title that
Silvio Gesell gave to his 1916 treatise in favour of negative interest rates on
money. In it, he span his own shipwreck parable, in which a lone Robinson
Crusoe tries to save three years worth of provisions to tide him over while he
devotes his energies to digging a canal. In Gesell s story, unlike Fisher s,
storing wealth requires considerable effort and ingenuity. Meat must be cured.
Wheat must be covered and buried. The buckskin that will clothe him in the
future must be protected from moths with the stink-glands of a skunk. Saving
the fruits of Crusoe s labour entails considerable labour in its own right.
Too many Crusoes
Even after this care and attention, Crusoe is doomed to earn a negative return
on his saving. Mildew contaminates his wheat. Mice gnaw at his buckskin. Rust,
decay, breakage dry-rot, ants, keep up a never-ending attack on his other
assets.
Salvation for Crusoe arrives in the form of a similarly shipwrecked stranger .
The newcomer asks to borrow Crusoe s food, leather and equipment while he
cultivates a farm of his own. Once he is up and running, the stranger promises
to repay Crusoe with freshly harvested grain and newly stitched clothing.
Crusoe realises that such a loan would serve as an unusually perfect
preservative. By lending his belongings, he can, in effect, transport them
without expense, labour, loss or vexation into the future, thereby eluding
the thousand destructive forces of nature . He is, ultimately, happy to pay the
stranger for this valuable service, lending him ten sacks of grain now in
return for eight at the end of the year. That is a negative interest rate of
-20%.
If the island had been full of such strangers, perhaps Crusoe could have driven
a harder bargain, demanding a positive interest rate on his loan. But in the
parable, Crusoe is as dependent on the lone stranger, and his willingness to
borrow and invest, as the stranger is on him.
In Japan, too, borrowers are scarce. Private non-financial companies, which
ought to play the role, have instead been lending to the rest of the economy
(see chart), acquiring more financial claims each quarter than they incur. At
the end of September 2017 they held 259trn ($2.4trn) in currency and deposits.
Gesell worried that hoarding money in this way perverted the natural economic
order. It let savers preserve their purchasing power without any of the care
required to prevent resources eroding or any of the ingenuity and
entrepreneurialism required to make them grow. Our goods rot, decay, break,
rust, he wrote, and workers lose a portion of their principal asset the hours
of labour they could sell with every beat of the pendulum . Only if money
depreciated at a similar pace would people be as anxious to spend it as
suppliers were to sell their perishable commodities. To keep the economy
moving, he wanted a money that rots like potatoes and rusts like iron .
The BoJ shuns such language (and, in the past, has at times seemed determined
to keep the yen as hard as a ship s biscuit). But in imposing a negative
interest rate in 2016 and setting an inflation target three years before, it is
in effect pursuing Gesell s dream of a currency that rots and rusts, albeit by
only 2% a year.
This article appeared in the Finance and economics section of the print edition
under the headline "Negative justice"