When I was a kid, my parents helped me open my first savings account. I don’t remember precisely, but I think the interest rate I was given for savings was around 2 percent. My mother explained to me: The banks take the money we deposit and loan it out to businesses and people to help them do things they want to do. They charge those people interest for using the money and they pass some of that money back to use, because they are effectively borrowing the money from us.
That made a lot of sense to me. Fast forward many years, and we now live in an age where even if you have a bank account that pays you interest, it’s likely it’s minuscule an gets eaten up by whatever fees the bank charges.
Central bank work a bit differently, but essentially they use the interest rate they charge pay banks to store funds�as a way to control the velocity of money. Higher interest rates are a brake on money flow as banks will want to keep their money with the central bank, and lower interest rates are an accelerator as banks will want to loan the money out to make more money through loans. Low interest rates are a way for central banks to encourage lending by banks.
In the age where we have zero central bank interest rates and the government printing more and more money as a way to stimulate the economy, this model seems to be broken. The banks don’t lend the money, they don’t deposit it with the central bank. They just sit on it.
Now many central banks have already instituted negative interest rates, where they charge the banks to deposit money.
This is not a healthy way to run an economy, and is unlikely to return the economy to health. It’s a stopgap measure to stop the bleeding, but don’t address at all the underlying problems with the economy, which is the printing-press and inflationary mindset of the people in charge.
We need a better kind of money. One with a fixed supply; one that does not require a trusted third party, governmental or institutional, to administer, and one that lets individuals take back control of there finances.
Fortunately, there is such a currency. It is young and still developing, and it has had a lot of growing pains. But, it is strong and resilient and paving the way for a revolution in finance and government.