A Look Back at the Negative Interest Rate Era

Silvio Gesell was an early 20th-century economist who was described by John Maynard Keynes as “a strange, unduly neglected prophet.” To stimulate demand, Gesell recommended measures that would make it costly to save. He suggested paper money with an expiration date, allowing extensions only if a fee was paid. Gesell’s ideas were deemed polemical back then; they didn’t even get a fair hearing during the Great Depression.

Nearly a century later, Gesell’s work provided the theoretical basis for an extended period of negative interest rates in many countries. Earlier this month, that era came to a close, inviting retrospection.

During economic downturns, central banks lower rates to revive growth. But in the aftermath of the 2008 financial crisis, even very low rates weren’t enough to boost activity in many markets. So, some central banks tried to extend their efforts by breaking the zero lower bound.

The concept is simple: If savers have to pay to store their money, instead of being paid, they will be more likely to spend. Negative borrowing rates should boost capital investment by businesses. Negative yields on sovereign bonds should also mean less demand for both a country’s debt and also its currency, which improves its terms of trade. All of these things can help economic growth.

Policy Rates and Global Total of Negative-Yielding Debt