§5. The Imaginary "Figs" Example

Not only may the rate of interest conceivably be zero; it may conceivably be negative. Suppose our sailors were left not with a stock of hard-tack, but with a stock of figs which, like the hard-tack, can be used at any time as desired, but which, unlike the hard-tack, will deteriorate. The deterioration will be, let us say, at a fixed and foreknown rate of 50 per cent per annum. In this case (assuming that there is no other option available, such as preserving the figs) the rate of interest in terms of figs would be necessarily minus 50 per cent per annum, as may be shown by the same reasoning that established the zero rate in the hard-tack case.

More generally, this would be true if there were a world in which the only provisioning of the future consisted in carrying over initial stocks of perishable food, clothing, and so forth and if every unit so carried over Edition: current; Page: [192] into the future were predestined to melt way each year by 50 per cent.

One reason why we do not encounter such cases, with negative rates of return over cost, negative rates of interest, and negative rates of time preference is that we have other income available for the future besides what can be carried over from present stocks. Future figs will come into being from fig trees and even existing stocks of figs and other perishables may be carried over for future use by canning, cold storage, preservation and similar processes. Yet we do, even in our real world, occasionally have cases such as of spoiling strawberries, where, the rate of interest reckoned in terms of the strawberries is occasionally negative.

We see, then, that there 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. The fact that we seldom see an example of zero or negative interest is because of the accident that we happen to live in an environment so entirely different from that of the ship-wrecked sailors.