Roger Bootle
Telegraph
December 8, 2008
What now? I think that interest rates around the world should be cut to zero – and what’s more, I think they just about will be. But why stop at zero? Why not send interest rates negative? The answer gets to the root of a monetary economy and hints at why deflation is so dangerous. The answer is cash – i.e notes. They do not carry interest, positive or negative. This imposes a limit on what can be done with bank deposits.
- A d v e r t i s e m e n t
If banks, under leadership from the central bank, tried to impose negative interest rates on bank deposits, people would withdraw money and hold hoards of cash on which no negative interest rate was incurred. There might plausibly be some reluctance to hold large amounts of cash for convenience or security reasons, and accordingly banks might be able to levy a small negative interest rate on deposits without prompting a stampede to cash.
But it could only be small, not least because it would be open to other banks, or indeed completely new banks, to start a new business simply taking in cash to look after for safekeeping in return for a small fee.
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