§9. Can Interest Disappear?

One use of this graphic method is to help us form a more complete picture of the problem as to whether the rate of interest may ever be zero or negative.

Just as there is a prevalent idea among the economically Edition: current; Page: [283] illiterate that all interest should be zero—should be abolished—so among the economically literate there is a prevalent idea that the rate of interest could under no imaginable conditions ever be zero or below. Let us then see, under the assumption of the second approximation, what are the conditions, if any, which will permit of a zero or negative rate of interest.

A zero rate of interest means, in our chart, that PQ has an inclination of 45°, that is, a slope of 100 per cent. Our question, therefore, is: must PQ necessarily be steeper than 45°. The slope of PQ depends entirely on the conformation of the O curve and the W curves of each person in the loan market. The less steep these curves are, the less steep will be the Market lines. We have seen that toward the southeast parts of the map the W curves are flatter than 45°, that is, a man with a relatively large income this year and a relatively small one next year would be willing, if he had to, to trade more than $100 today to get only $100 next year. Probably this is potentially true of everyone. It is also true that seldom if ever are actual income situations (Q's) located in this southeast region.

We turn now to the O line. For the average man in a progressive country and age, like America today, this will be steeper than in a retrograde country or in a decadent age—a country or an age in which the natural resources are becoming exhausted. But if we go sufficiently to the northwest, it will always be flatter than 45°, that is, if any investment opportunity be exploited far enough it will yield less future return than its immediate cost. This is not only true of land cultivation and extractive industries generally but of all industries. Everywhere, in the end, any law of increasing returns will give place to a law Edition: current; Page: [284] of decreasing returns. And if we keep pursuing these decreasing returns far enough there will always come a point where additional investment would be worse than useless or where the rate of return over cost is less than nothing. Even in such cases of extraordinary returns as the example of the Bell Telephone Company, to have tried to push the development faster than new construction could be built or than the public, even with every device of the advertiser, could absorb, would have been sheer waste.15

Thus the charts depict regions in which the O curve of each individual is less steep than 45° and regions in which his W curves are likewise less steep than 45°. But that fact does not itself prove that the resultant market rate of interest may ever actually be zero. For the flatter parts of the W curves are to the southeast, as shown in Charts 31 and 34, while the flatter parts of the O curve are to the northwest, as shown in Chart 35. If this relative position of the flatter W and O lines were peculiar only to a few individuals, negative interest might well exist. The P of such an individual might be in the northwestern part of the map and the Q in the southeastern, the Market line PQ sloping less steeply than 45° and being tangent at P to the O line and at Q to a W line. He would thus be a borrower, and there would be plenty of lenders.

But if, as is the truth, practically everybody else has Edition: current; Page: [285] the same sort of map, that is, with the parts of the O and W curves which are flatter than 45° located northwest and southeast respectively; and if we should draw everybody else's PQ at the same slope as above, we would have only borrowers and no lenders at interest rates pictured by such slopes. Everyone would be glad to borrow at negative rates of interest. But a rate of interest at which there is no lending would necesarily rise. It could not clear the market. It could remain negative only if a sufficient number of people had maps on which the W lines were flatter than 45° even in the northwest and O lines flatter than 45° even in the southeast. Otherwise the center of gravity of the P's and Q's could not coincide. But there is nothing inconceivable in having such a layout overlapping the flatter-than-45° regions. In other words, if enough persons in the market were sufficiently miserly, or their income opportunities were sufficiently unpromising, or both, then the rate of interest could be zero or below.

To meet these conditions would require either a change in average human nature as to impatience under given income situations, or a change in the future prospects of production and investment opportunity, due, say, to impending exhaustion of natural resources or retrogression generally, instead of progress, in the industrial arts.

Finally, the Opportunity line can never get very much flatter than the 45° inclination, if as flat as that, so long as among our opportunities there are even the present possibilities of preserving food and other goods, that is postponing their uses. We can scarcely expect a time to come when we cannot do at least as well for the future as the shipwrecked sailors with their hard-tack. That is, as long as such an alternative exists as being able to Edition: current; Page: [286] postpone much of our present income by preserving the goods which yield it, the real rate of interest can scarcely get below zero.16

Our conclusion is that negative interest is theoretically possible, though in practice the necessary conditions never occur.