For most of this volume the price of time has been a positive thing — the future worth less than the present, the lender paid for his patience, the rate a number above zero. This plate descends to the floor of the rate, and asks what lies beneath it. It was long held that the nominal rate could fall no lower than zero, and for a plain reason: that money itself, held as cash, yields zero, and no one would accept less than zero on a loan while he might hold cash instead. Zero was a floor, and a cruel one — for it is exactly in the deep slump, when the natural rate sinks below zero, that the central bank most wishes to cut its rate and finds it cannot, the old liquidity trap made real. This plate will tell how the zero bound ties the sovereign's hand; how, when it bound, the central banks reached for unconventional tools; how, to the world's surprise, the rate then went below zero after all, the floor proving no floor; and how the volume's question fares when the price of time turns negative — when the lender pays the borrower, the saver is charged for his thrift, and the future comes to be worth more than the present, a thing the earned theories of interest cannot explain and the saver feels as a theft.
Begin with the floor, and why it was thought a floor. The nominal rate, recall, is the rate in money — and money, in the form of cash, has a peculiar property: it yields exactly zero, and cannot yield less. A hundred-dollar bill is worth a hundred dollars today and a hundred dollars next year; it pays no interest, but it loses none. So suppose a bank were to offer a negative rate — to charge you, say, one per cent a year for the keeping of your money. You would not accept it; you would withdraw your money and hold it as cash, earning zero, which is better than losing one per cent. The existence of zero-yielding cash thus sets a floor beneath the nominal rate at zero: no one will lend at less than zero while he may hold cash instead. And this floor is no mere curiosity, for it cripples the central bank exactly when its help is most wanted. In a deep slump — as the natural-rate plate warned — the rate that would balance saving and investment can fall very low, even below zero, when the fearful save far more than anyone wishes to invest. To restore full employment the bank would need to push the market rate down to that negative natural rate; but the zero floor forbids it. The bank cuts to zero and can cut no more, and the economy languishes below full employment with its usual remedy exhausted. This is Keynes's liquidity trap, met in an earlier plate as a possibility; at the zero bound it becomes the defining predicament of modern monetary policy.
When the rate struck zero — as it did across the developed world after the crisis of 2008, and in Japan a decade before — the central banks did not simply surrender. Unable to cut the short rate further, they reached for tools they had rarely used, all aimed at supplying stimulus by other roads. They tried forward guidance, as the yield-curve plate described, promising to hold the short rate at zero far into the future, so as to drag down the long rates that are built of expected short rates. They tried quantitative easing, buying long-term bonds by the trillion, bidding up their prices and forcing down their yields, compressing the term premium directly when the short rate could fall no more. The aim throughout was to ease conditions at the long end of the curve when the short end was pinned at zero — to do by purchase and promise what could no longer be done by the policy rate. Whether these tools worked, and how well, is debated still; but they marked the banks' refusal to take the zero bound as the limit of their power. And beyond them lay a more radical thought, long dismissed and now entertained in earnest: that the floor itself might be broken, and the rate sent below zero.
Beyond purchase and promise lay a more radical thought, long dismissed and now entertained in earnest: that the floor itself might be broken, and the rate sent below zero.
And so, in the middle years of the last decade, it was broken. The European Central Bank, the Bank of Japan, the central banks of Switzerland and Denmark and Sweden, pushed their policy rates below zero — to minus a half of one per cent, and lower — and trillions of dollars of government bonds came to trade at negative yields, promising the holder less at maturity than he paid. How was this possible, if cash sets a floor at zero? Because holding cash is not, in fact, costless. To hold great sums in physical notes is to need vaults, guards, insurance, transport; to bear the risk of fire and theft; to forgo the convenience of money that moves at the touch of a key. A bank will pay a small fee to the central bank — accept a slightly negative rate — rather than incur the greater bother of hoarding banknotes. And so the floor proved no floor, but a soft floor only, set not at nothing but a little way below it, at the cost of holding cash. Schemes were even revived to push it lower: the old proposal of Silvio Gesell, praised by Keynes and urged by Fisher in the Depression, for a "stamped money" that would lose value unless periodically taxed, so that cash itself should rot and offer no refuge; and the modern proposal to abolish paper money altogether, and with it the floor it sets. None of these has been fully tried. But the lesson stood: zero was never quite the bottom.
And below zero the price of time turns strange, and every intuition the volume has built inverts. The lender now pays the borrower: he hands over a hundred and is promised ninety-nine. The saver is charged for his saving, the holder of the safe bond guaranteed a loss. And time itself acquires a negative price — for to accept less tomorrow than one gives today is to value the future above the present, the exact reverse of the discounting with which this volume began, and of the impatience that the second plate made the demand-side ground of all interest. Why would any man prefer future money to present money, when he might at least hold the present money unspent? Only under a kind of duress: when there is nowhere safe to store value without cost, when prices are expected to fall so that money will buy more later, when the alternative to the small certain loss of the negative bond is the larger feared loss of everything else. The negative rate has, in this, the very flavour of the unnatural that Aristotle pinned on usury — only now it is not the breeding of barren money that offends the intuition but its opposite, money that shrinks in the holding, a price of time that runs backward. It even inverts the rule of the mine: where an earlier volume's plate found the owner of an ore leaving it in the ground to ripen at interest, a negative rate bids him take it all today, for the future will pay less, not more, and nothing is gained by waiting.
Who, then, is wronged, and who is served? To the saver the answer is plain: the negative rate is a theft, a tax laid upon thrift itself, a penalty for the very prudence the earlier plates counted a virtue. The careful household, the pensioner living off the interest of a lifetime's saving, the insurer and the fund that must hold safe bonds — all are made to pay for holding wealth, and to pay, in effect, the borrower and the state. It is hard to call just a price that punishes the patient and rewards the impatient, that turns the saver's virtue into a standing fee. But the central bank's defence is not nothing, and the volume must weigh it. The negative rate, it says, is not laid upon the saver for its own sake but to break a ruinous hoarding — to drive idle money out of its hiding and into spending and lending and investment, and so to lift an economy sunk below full employment, in which the saver himself, were the slump to drag on, would suffer far more than the small toll the negative rate exacts. It is the lesser evil, the medicine of a broken machine; and it comes, besides, with its own limit, for economists have come to suspect a "reversal rate" below which cutting further does more harm than good, as the squeeze on the banks that must lend chokes off the lending the cut was meant to spur. The negative rate is thus no free instrument, but a desperate one, hedged with danger on every side.
To the saver it is plainly a theft; to the sovereign it is the lesser evil — a small toll on idle money, to spare the economy a longer ruin.
What, then, does the negative rate say to the volume's question — earned, or extracted? It says, most honestly, neither — and in that it is the volume's purest case of a third thing. The earned theories of interest, traced across these plates, all predict a positive rate: capital is productive, so its use commands a return; men are impatient, so they must be paid to wait. None of them can justify a rate below zero, at which capital's use is charged for and patience penalised; the negative rate is precisely the sign that the earned reward of waiting has, for the time, vanished. And the saver's charge of extraction, though it has real force, does not quite fit either, for the central bank takes from him not to enrich itself or any private lord but to mend a stalled economy from which he too would suffer. The negative rate is, rather, the clearest instance in the whole volume of a rate that is administered — set by the sovereign, against the grain of impatience, to repair a machine that the market alone cannot. It is what the price of time becomes when the natural reward of waiting falls away and only the policymaker's hand remains to set it: not the earned wage of patience, for patience earns nothing now; not quite the extracted toll of a rentier, for no rentier gains; but the deliberate, defensible, dangerous creation of an authority steering a sinking economy by the last lever it has. The volume's question, here, hangs suspended over a rate that answers it with a third word the question did not foresee.
So the price of time, having had its level and its shape and its truth and its long trial at the bar of conscience, is here pressed to its limit, and through it. Zero was thought its floor, and zero proved no floor; below zero it inverts, and the lender pays, and the future outweighs the present, and the earned theories fall silent. What remains, when the natural reward of waiting is gone, is the administered rate — the sovereign's hand alone, setting the price of time below nothing to fight a slump it can reach by no other road, and defending the act as the lesser of the evils before it. This is a creature of the depths, of the slump and only the slump; in the ordinary weather of the economy the price of time climbs back, gratefully, above zero, and the earned reward of patience returns. That weather — the great alternation of boom and slump in which the negative rate is a thing of the trough — belongs to a later volume, on the cycle. And the question the negative rate forced, of whether a future that will not pay is a future worth keeping for, the next plate must take up, carrying the price of time out of the trading day and into the fate of generations. Through all of it, as the table says of every price, the argument remains open.