“Negative” Interest Rates and the War on Cash

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Prof Richard Werner has written an interesting article on negative interest rates and the idea that “cash is a barbarous relic and needs to be abolished” which is being disseminated recently in the mainstream media. While there are parts of this article we disagree with, some good points are made about the dangers of negative interest rates.

Here’s a short extract:

The main reason advanced by the Bank of England for wanting to abolish cash is that it wishes to stimulate the UK economy, and to do so it wants to use interest rates. Since rates are already zero, it is now only reasonable to lower them into negative territory. However, to make such a policy effective, the possibility to move from electronic money into cash needs to be taken away. If cash is abolished, we can then enjoy the benefits of negative interest rates – or so the official narrative goes.

This story is so full of holes that it is hard to know where to start. Let’s begin by reminding ourselves that it has been the Bank of England that has since 2009 argued that interest rate policy is not a good tool to stimulate the economy, and instead it wanted to use what it (misleadingly) called ‘Quantitative Easing’. So if that is true, why now suddenly switch back from the quantity to the price of money? What is it that should make ‘price easing’ now more effective than an emphasis on quantities? Wouldn’t it be better to instead introduce true quantitative easing, which expands purchasing power in the productive economy, such as in the hands of SMEs?

Secondly, let us consider the proposal of introducing negative interest rates in an effort to stimulate the economy. As we know, the proclaimed transmission mechanism of lower rates is via cheaper borrowing costs. In countries where a negative interest rate policy has been introduced, such as Denmark or Switzerland, the empirical finding is that it is not effective in stimulating the economy. Quite the opposite.

Here you can read the article in full.


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  • Vince Richardson

    ” And this fits into the Bank of England’s surprising recent discovery
    that the money supply is created by banks through their action of
    granting loans: by supporting monetary reformers, the Bank of England
    may further increase its own power and accelerate the drive to
    concentrate the banking system if bank credit creation was abolished and
    there was only one true bank left – the Bank of England. This would not
    only get us back to the old monopoly situation imposed in 1694 when the
    Bank of England was founded as a for-profit enterprise by private

    Wow,I mean really wow.Is this a real threat ?Does the BoE plan to steal our thunder(us money reformers)and go back to being the only issuer of money but on a private basis,if so that is quite some accusation.

    • PJM

      Vince, the sentence that follows on from your quotation of Prof. Werner’s words is:

      “It would also further the project to increase control over and monitoring of the population: with both cash and bank credit alternatives abolished, all transactions, money creation and allocation would be implemented by the Bank of England.”

      I am absolutely staggered that Prof. Werner should speculate that that is what the BoE intends. It is certainly not what Positive Money is advocating for — namely that ALL new money should be created by the BoE and gifted, interest free and debt free, to the government for spending according to its democratic mandate. Banks would be forced to stop being money creators and would be reduced to being mere moneylenders — taking in money from savers, aggregating it, and lending it to borrowers. All banks would have to earn an honest profit from the margins between the interest rates that they charge borrowers and the interest rates that they pay savers. The days of huge bankers’ bonuses would be well and truly over. Ordinary people would not even notice that anything had changed in the way banks function.

      • Vince Richardson

        Yes that second sentence stirs even more alarm.This is really not helpful as I believe the BoE is actually making progress on being more open than it ever has…..still room for improvement though.It is an extreme position Prof Werner is backing himself into,for me he risks his crediblity on this,which is a huge shame.

        Ben Dyson,to his credit has opted to work with BoE policy in moving forward.I think that a better route.Monitering the population is a tad too Orwellian and is as far from the BoE duties as one can imagine.Fair enough, the state would love to abolish cash but that is an entirely understandable position re tax evasion.Besides most of the younger generation are quite happy to live in a world of debit card payments, so we are almost there anyway.

  • http://www.jamesmurraylaw.com/about/who-is-jim-murray/ James Murray

    I am going to the Local Banking Conference this Saturday when Prof Werner will be speaking in the morning.
    I also read the full article on the link given above and it paints a disturbing, almost a banking dystopian picture of the economy to come.
    He says that the policies of heading down towards a cashless society and towards negative interest rates are geared to benefit the big private banks by strangling the local, not-for-profit banks.
    He posits that the BoE may then go even further and have us all ‘chipped’ so that every financial transaction is known to the Government….

    If all this is possible, then the only weapon we have is our democracy and the ability to force our elected politicians to change the direction things are going.
    This makes Positive Money even more important as a pressure group against the big banks.
    It is all very depressing….

    • Vince Richardson

      Personally I think he being a tad alarmist and he needs to be a bit more careful.As the PM blog says this is “interesting” and I would leave it there.We do not want to appear too alarmist about the state surveillance part of all this either,currently the state has plenty access to our records via the internet,mobile phones and current bank records.So saying this will be made worse is silly.

  • Lorenzo Sleakes

    To me the negative interest rate on holding of money is a tax on money or interest and goes hand in hand with the proposals of positive money. assuming the tax is collected by the public. The government or public can be thought of as not only spending electronic money into creation (debt free) but essentially loaning it out at interest..a Gesellian tax that would be far preferable to intrusive and regressive transaction taxes. see http://natrights.blogspot.com/#cash

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