Wörgl bank note with stamps. Public Domain.

Cash for negative interest rates

The problem with cash

Negative interest rates may be here to stay. Interest rates are the result of supply and demand for money and capital in financial markets. The factors that have caused interest rates to go down are still in place and may not go away. And so it may be better to allow interest rates to go down further and into negative territory. For that reason, we may need a holding fee on central bank money.

Most money is in bank accounts. It is loaned to banks by depositors. Central bank money is different. It is not a loan. The central bank money we all know is cash. But banks have accounts at the central bank. The balances in those accounts are central bank money too. So, if the central bank sets the interest rate, it is the interest rate on central bank accounts.

Cash comes with an interest rate of zero. Cash can be an attractive investment when interest rates on bank accounts are negative. Depositors may take their money from the bank and put their savings in cash. In Switzerland, where interest rates are the most negative, bank notes of 1,000 francs and safe deposit boxes are in short supply. Hence, interest rates can’t go further down as long as cash remains the way it is.

When people stop lending money and take their money from the bank, the economy runs into trouble. With a holding fee on central bank money of 10% per year, it can be attractive to lend out money at negative interest rates like -2% because you don’t pay the holding fee on money lent. That includes money in bank accounts. And so you may keep your money in the bank even when interest rates are negative.

Cash as a loan to the government

Only, a holding fee of 10% per year would make cash unattractive. And in Wörgl people had to buy stamps and glue them to the banknotes to keep them valid. This is cumersome. If the interest rate on cash would be a bit lower than interest rates on bank accounts, that might be enough to stop people from hoarding cash. And if we do not have to glue stamps on banknotes, cash would remain practical to use.

So if cash is a loan to the government rather than central bank money, the interest rate on short term loans to the government could be applied. That rate would be much better than the holding fee, for example -3%. There would be an exchange rate between cash and central bank money. The value of cash could gradually decrease at a rate of 3% per year so you don’t have to glue stamps on bank notes to keep them valid.

Human psychology

Negative interest rates reduce the balance in your account while inflation is stealthy. Wage changes are more visible than price changes as some prices go down while others go up. Even when negative interest rates and deflation are a better deal, people might not opt for it. Psychologists have found that for most people the pain of a loss outstrips the pleasure of a similar gain, which makes them risk-averse.

When interest rates are negative, money disappears so inflation will probably be lower. There might even be deflation, which means that prices on average go down. That could be a better deal than printing money to produce inflation as this money usually ends up in the hands of the rich while everyone else pays for the inflation. But most people simply do not like see their account balance go down because of a negative interest rate.

They prefer the illusion of a small gain that amounts to a loss in reality to the illusion of a small loss that is a gain in reality. And there is a risk that the expected benefits from negative interest rates do not materialise. It is not rational but human psychology is the way it is. There may be a fix for that by hiding negative interest rates and make them look like inflation. To explain how, we have to look at the characteristics of Natural Money:

  • Central bank money carries a holding fee of approximately 10% per year. If you own central bank currency then € 1,00 turns into € 0,88 after a year. This can make lending at negative interest rates attractive.
  • Interest rates on bank accounts might be around -2% per year in terms of central bank money, so people don’t pay the holding fee but the interest rate banks offer.
  • Cash is a short-term loan to the government and carries the interest rate of short-term government loans, which might be -3%.
  • Central bank money and cash are separate currencies. They have an exchange rate. Cash gradually loses value relative to central bank money.

Making cash the money in people’s mind

If balances of bank accounts are expressed in cash rather than central bank money, negative interest becomes hidden from the public. The interest rate on short-term government loans is one of the lowest. Banks must be able to offer at least this interest rate so people won’t see their money disappear because of negative interest. And if prices in shops are expressed in cash, cash will become the currency in people’s minds.

If the interest rate on cash is -3%, the value of cash goes down by 3% per year in terms of central bank money. So if a bank offers an interest rate of -2%, and the account is settled in cash, it appears as if the interest on the bank account is +1%. And if the deflation rate is 1%, prices go down by 1%. Meanwhile cash goes down 3% in value so that it appears there is an inflation rate of 2% as cash prices go up by 2%.

It is a trick to prevent people from acting against their best interest. Nowadays the interest rate on bank accounts is 0% and inflation is 2% so you would lose 2% in purchasing power per year by holding money in a bank account. In the example above the loss is 1%, which is a better deal. Natural Money can be a better deal for account holders. The economy is expected to do better so real interest rates can be higher.

Critics might argue that we could be fooled by this scheme, just like we were fooled before by inflation. We won’t notice the negative interest rate, just like we didn’t notice inflation previously. But separating cash from central bank money and expressing prices and the value of bank accounts in cash can clear the psychological barrier that stands in the way of adopting negative interest by the public.

Central bank money should remain the accounting unit in the financial system. Bank accounts should be accounted in central bank money, just like debts and interest rates as well as prices of financial assets like stocks and bonds. A similar situation existed in Europe between 1999 and 2002 when the digital euro was already introduced while cash was still the national currency.

The assembly of the canton Glarus

Swiss democracy

In the interest of the people

For a society to function, it needs an order only a government can provide. Over time more and more people came to believe that a government should work in the interest of its citizens. That is quite a leap. Traditionally governments were often a kind of crime syndicate providing a protection racket. Citizens paid taxes to a lord or a king who provided them with security against other lords, kings and ordinary criminals.

Even today many governments work in the interest of their elites while officials take bribes. Except for Northwest Europe, Canada and New Zealand, governments range from a bit corrupt to highly corrupt. Even when a government isn’t corrupt, it might be incompetent. If a business provides poor service you often can go to a competitor. Poor quality governments are harder to avoid as it often involves relocation.

corruption per country (flaxen = most clean, crimson = most corrupt)

The above graph from Transparency International gives an indication of corruption in each country. Poverty is a cause of corruption but corruption is also a cause of poverty. If a government is corrupt, money is transferred to unproductive people. Investors will be wary of making investments so interest rates need to be higher to attract capital. This makes fewer investments profitable so the country will be poorer.

Non-corrupt high quality government isn’t easy to come by. And democracy doesn’t guarantee that a government does its job well. But if a government already is of good quality, democracy can make it more responsive to the interests of its citizens. But democracy can undermine the effectiveness of a government if citizens allow their narrow personal interests to prevail over the general good.

Main features

The Swiss have the most trust in their government.1 That may be because of the unique features of Swiss democracy. Switzerland is also a wealthy country, partly because Swiss banks have been a safe haven for criminals, tax evaders and dictators all around the world. For instance, Switzerland has been important for Nazi Germany’s war effort by facilitating trade with the outside world.

These issues shouldn’t cloud the evaluation of the Swiss political system. The Swiss have a unique combination of representative and direct democracy. The government and parliament administrate the country but if citizens feel the need to take matters in their own hand, this is possible.

Switzerland uses direct democracy in the form of referendums more than any other country in the world. These referendums are binding. The government must respect the outcome.2 The Swiss use the following types of referendums:

  • mandatory referendums on changes in the federal constitution
  • optional referendums on other federal laws that will be held when 50,000 eligible voters demand for it
  • similar rules exist on the state and communal levels, but the constitutions of the states deal with the specifics
  • citizens can propose a change in the constitution via a popular initiative, and the electorate can decide whether to accept the initiative, an alternative proposal from the government or parliament, or to keep things unchanged

Switzerland is a federation of 26 member states called cantons. The member states have a large degree of independence. The Swiss constitution promotes making decisions at the lowest possible level and delegating power to a higher level if that is deemed beneficial.

The citizens of the Swiss states elect the Council of States (Senate) by majority vote. They can cast as many votes as there are vacant seats. Voters can propose representatives and influence the fractions of different political parties.

The Swiss elect their National Council (Congress) every four years by proportional representation. The people vote for a political party. Optionally they can vote for a specific person on the candidate list of the party.

Executive power has been distributed in Switzerland. The daily affairs of government are performed by the Federal Council consisting of seven members. It is customary that all major political parties are represented in the Federal Council.

Constitutional changes need a double majority, which means that majority of the electorate as well as a majority of the cantons must support it.

Most Swiss communities use direct democracy to make decisions. In a few small cantons people can vote directly by the show of hands.


The use of representatives in combination with referendums means that citizens aren’t burdened with the daily affairs of government but still are in full control as they can vote on any issue if they feel that is needed. Direct democracy allows for a more fine-grained alignment of government decisions with the wishes of the citizenry as on some issues the majority might be liberal and on some others it might be conservative.

Before laws are introduced, interest groups such as state governments, political parties and non-governmental organisations are consulted, and their concerns are taken into account. As referendums tend to come down to yes or no questions, this consulting is important.

Proportional representation allows for multiple political parties that more closely match the preference of voters. New parties can emerge more easily. It also means that small shifts in voter preferences tend to have little effect on the political landscape.

Swiss voters can influence the make up of the political fractions of multiple political parties, which means that the people who are elected in parliament for one party are more likely to be acceptable to voters of other parties as well.

All major political parties work together in the Federal Council as there is little room to forward political agendas. That is because citizens can always call for a referendum. In this way referendums can contribute to political stability even when parliament consists of several smaller parties.

The use of direct democracy in Switzerland makes it less relevant who is in government so that political discussions tend to focus on issues and content rather than people and rhetoric. The Swiss tend to be well-informed about the issues that are at stake.

Proportional representation as opposed to win or lose elections foster cooperation as individual political parties don’t have a majority and need to work with other parties to achieve their political objectives.

Proportional representation reduces the need to spend large amounts of money on political campaigns and other manipulations like gerrymandering, voter fraud and vote suppression as the effects of these actions tend to be limited. In the United States a small margin in a swing state might decide who becomes President.

Many countries have strict limits to political donations and campaign spending. Switzerland does not have them. This is not as harmful as it might be without proportional representation and referendums.

Direct democracy undermines the work of lobbyists for a law doesn’t pass if it is not supported by a majority of the voters. And so interest groups need to convince the citizenry rather than politicians.

In Switzerland the Congress represents the nation as a whole while the Senate represents the states. A decision needs the consent of a majority of the parliament of the nation as well as a majority of the cantons.

Most countries have a Congress and a Senate but they aren’t federations like Switzerland. In unitary states the role of a Senate varies. For example, it can focus on protecting the constitution against laws that violate it.

Switzerland doesn’t have a Constitutional Court or a Senate to protect the Constitution. There is no good safeguard of human rights. The majority can vote for stripping the rights of minorities. Switzerland is bound to the treaties it signed but safeguards to protect human rights could be an improvement.


The Swiss are satisfied with their political system. Even though it has a few weak points, there is good reason to believe that other countries can benefit from implementing a similar political system in which the citizens have the final say. Yet, different nations might opt for somewhat different versions of direct democracy.

Some people think that a better political system is possible. There are many ideas but few of them have been tested thoroughly. The Swiss political system has proven to work in practice. It allows citizens to vote on proposals to alter and improve the political system. So even if a better system is possible, the Swiss political system may be the way to get there.

To make direct democracy work, there are conditions that need to be met. The citizens must be informed, reasonably educated and willing to engage in rational discussions. Laws must be thoughtfully crafted with extensive consultations as referendums often boil down to simple yes or no decisions. Mistakes can be made, but they can be learning opportunities as people need to deal with the consequences of their choices.

The Swiss federation can be a model for the European Union and the United States. By delegating responsibilities to the state level it might be possible to reduce bureaucracy in the federation while increasing the legitimacy of the centralised institutions. Swiss democracy might also be a model for a world government if that ever comes to pass.

The Swiss political system promotes a political culture of compromise and cooperation. It is built into their system and therefore their political system is a strong design. For those who are accustomed to divisional politics or politics centred around people rather than issues, it may be difficult to understand that a completely different way of doing politics is possible and that it can work out better.

Featured image: The assembly of the canton Glarus. Democracy International (2014). [copyright info]

1. Government at a Glance Fact Sheet OECD. (2013). [link]
2. Switzerland’s Direct Democracy. http://direct-democracy.geschichte-schweiz.ch/ [link]

Painting of Piet Mondriaan

Most viewed posts

Over the last three years more than 70 posts were published on The Plan For The Future. That is an average of one post every fifteen days. And 65 WordPress users started following this blog. Some posts have been viewed more often than others. This is the top 5 of posts based on page views.

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During the great depression of the 1930s a local currency in the small Austrian town of Wörgl produced an economic miracle. It demonstrated that the economy can do well without more debt if the existing money keeps circulating. This may be the key to keeping the economy afloat without more debt.

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The direction of history is towards a single integrated world order. The world is becoming one intellectually, economically and politically. The world is now run by a global elite of business people, politicians, bureaucrats, engineers, journalists, scientists, opinion makers, writers and artists.

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In 1914 Archduke Franz Ferdinand was assassinated in his car in Sarajevo. This triggered World War I. The car had licence plate number A III 118, a possible reference to the Armistice of 11 November 1918  ending the war. So could history be script? And could there be a plan for the future?

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Feature image: Piet Mondriaan painting (1921). Public Domain.

Origins of Political Order cover

From human nature to a state

Survival of the fittest

Evolution theory can explain how biological organisms evolve over time. Genes determine their nature, which means how organisms behave and what they look like. Genes mutate randomly and this causes variation. It is a reason why humans differ in size, behaviour and skin colour. Mutations are passed on to the organisms’ offspring. These mutations alter the features of organisms. Those that are better suited for their environment are more likely to survive and procreate. This is natural selection or survival of the fittest.

The basic principles of evolution, variation and selection, apply to human societies as well. There has been a lot of variation in political institutions throughout history. Societies that succeeded in adapting to new circumstances usually survived the ones that didn’t. The development of societies can therefore be seen as social and economic evolution. Political institutions are an important part of society. And even though institutions are planned or designed deliberately, while biological variation is random, social evolution looks like natural selection because of competition.

As a consequence later civilisations were wealthier and more powerful than earlier ones. For instance, industrial societies are more powerful than agricultural societies. But social evolution isn’t straightforward. Remnants of earlier phases of development continue to exist once a society moved to the next stage. So, after a society has entered the industrial phase, many farmers still farmed the land in a traditional way without machines. And some modern democratic countries still have a king or a nobility.

Family groups

The earliest humans were hunter-gatherers who didn’t know of property. They lived like chimpanzees in family groups consisting of a few dozen individuals. These groups were self-sufficient. If another family group invaded their territory hunter gatherers could move on as population density was low and there was no property to defend.

Family groups were egalitarian. Social differences were based on age and gender. They had no permanent leader and there was no hierarchy. Leaders were elected based on group consensus. Usually women married outside their group to live in the group of their husbands. Marriage was a means of managing relations with neighbouring groups.

After the invention of agriculture population density increased dramatically and people came into contact with each other more often. Struggles became more intense as farmers invested in the land they cultivated. Harvests had to be protected against thieves. This required a different form of social organisation that included property.

From families to tribes

People became organised in tribes. A tribe consists of a number of related family groups who share common ancestors. Usually descent in a tribe is traced through the male family line. A common ancestor of a tribe might well be a mythical person. In this way it is possible to have large tribes. Tribes are often egalitarian. The family groups of the tribe usually remain independent but they can join their forces for war.

War is the main reason for organising in tribes. A tribe can muster more men for war than a family group. Property rights in tribes usually were related to the family groups rather than individuals. Land remained with the family group and couldn’t be bought or sold. The leader of a tribe usually had no authority over the tribespeople and couldn’t force them to obey. And so there was no rule of law. People had to enforce their rights themselves and blood feuds were common.

Religion plays an important role in organising large scale action. The question whether religion created the social order or that religion was invented to justify the social order is never answered. Most likely the causal relationship went both ways. Tribal organisation isn’t natural so people won’t revert to it once the social order fails. Tribal organisation is sustained by religious beliefs, which are often about common ancestors.

Tribes can develop into chiefdoms. A chiefdom has a lord who has armed vassals. It is the most basic form of political organisation. This type of political organisation came to dominate human history and it still exists today in the form of warlords, militia, drug cartels and street gangs. Chiefdoms have power to coerce people that didn’t exist in group based societies. Chiefdoms already have some features of states.

From tribe to state

Liberal social contract theories assume that states emerged when citizens agreed to subject to a state in exchange for safety and other public services. But tribespeople only temporarily gave up their freedoms to meet an external threat like an invasion. And so the reason for the first states to emerge appears to have been violence or the threat of violence, not the desire for a social contract. States differ from tribes in the following ways:

  • States are the highest authority and have a centralised hierarchy.
  • The state has a monopoly on the use of legal coercive force.
  • The authority of the state is based on territory rather than kinship.
  • States have a justification based on religion or political philosophy.

Population growth and increased population density have been important causes of technological improvements like irrigation works. This allowed for a division of labour and the emergence of elites, which promoted state creation. If the population density is low, conflicts about land and access to resources can be solved by relocation, but this option disappears once population density increases or when physical borders fence in the population. The factors that allowed for the first states to emerge were:

  • There must be a surplus of means of existence to support a state.
  • Society must be large enough to allow for a division of labour.
  • Natural borders must fence in the population so people can’t escape when they are oppressed.
  • Tribespeople must subject themselves to a higher authority either because of an external threat or the charismatic leadership of a leader.

The first states may have emerged when one tribe subjected another. In order to rule the other tribe, the victorious tribe may have introduced centralised repressive institutions and established itself as the ruling class. The threat of being subjected may have induced other tribes to develop more permanent and centralised authoritarian structures. Still many tribes just assimilated conquered tribes and states never emerged.

It seems likely that religious ideas played a major role in the formation of early states as religion can provide sufficient legitimation for the loss of freedom coming from the subjugation to a leader or a hierarchical structure. Religious authority can make it easier to create a large military to subjugate rebellious tribes and to create peace and stability on the home front, which in its turn strengthens the religious authority of the leader.

Certain conditions had to be met for the first states to emerge but there are too many interacting factors to produce a strong theory on how the first states emerged. It may not be important to have such a theory as states nowadays are well-established. States now innovate and copy each other’s institutions because they are in a competitive struggle with each other.

Featured image: Cover of The Origins of Political Order

From: The Origins of Political Order: From Prehuman Times to the French Revolution of Francis Fukuyama.

A goldsmith in his shop. Peter Christus (1449).

How the financial system came to be

A goldsmith’s tale

Once upon a time goldsmiths fabricated gold coins of standardised weight and purity. This made them a trusted source of gold coins. The goldsmiths also owned a safe where they stored their own gold. Other people wanted to store their gold there too because those safes were well-guarded. And so the goldsmiths began to rent out safe storage. People storing their gold with the goldsmith received a voucher certifying the amount of gold they brought in.

At first these vouchers could only be collected by the original depositor. Later on any holder of the voucher could collect the deposit. Another innovation was making standard vouchers representing 1, 2, 5 or 10 units. From then on people began to use them as money as paper money is more convenient than gold coin. And so depositors rarely came to collect their gold and it remained inside the vaults of the goldsmiths.

Modern banking

Some goldsmiths also lent out their own gold at interest. As depositors rarely came in to collect their gold, they soon discovered they could also lend out the gold of the depositors. When the depositors found out about this, they demanded interest on their deposits too. At this point modern banking took off and paper money became known as bank notes.

Credit note's holder, Stockholm's Banco sub no. 312
Credit note’s holder, Stockholm’s Banco sub no. 312

Borrowers preferred paper money too so the goldsmiths, who had become bankers, found out that they could lend out more money than they had gold in their vaults. They began to create money out of thin air. This is called fractional reserve banking as not all deposits were backed by gold reserves. The new money was spent on new businesses that hired new people so the economy boomed.

When depositors discovered that there were more bank notes circulating than there was gold in the vaults of the bank, the scheme could run into trouble if all depositors came in at the same time to demand their gold, but this rarely happened. Depositors received interest so they kept their deposits in the bank. They trusted their bank as long as they believed that debtors were paying back their loans.

Bank runs

But sometimes people began to doubt that the bank was safe and worried depositors would come to the bank to exchange their bank notes and deposits for gold coin. This is called a bank run. If too many people came in at the same time the bank could run out of gold and close down because not all the gold was there. As a result the bank’s notes and deposits could become worthless.

Bank run
Crowd at New York’s American Union Bank during a bank run in the Great Depression

People who lost their money had less money to spend. This could hurt sales so businesses could run into trouble and default on their debts. As a consequence depositors at other banks might fear that their bank could go bankrupt too, leading to more bank runs. This could escalate into a financial crisis and an economic depression. This happened in the United States during the Great Depression of the 1930s.

Regulations and central banks

To forestall financial crises and to deal with them if they occur, banks were required to have a minimum amount of gold available in order to pay back depositors. Central banks were created to support banks by supplying additional gold if too many depositors came in to collect their gold at the same time. Central banks could still run out of gold but this was solved by ending the gold backing of currencies. Nowadays central banks can print new dollars or euros to cope with any shortfall. Regulations limit the amount of loans banks make and therefore the amount of money that exists.

But everyone can lend to everyone. There are ways to circumvent the regulations imposed on banks. For example, corporations can issue bonds or use crowd funding. And a lot of lending nowadays happens outside the official banking sector in institutions that are not subject to these regulations. Human imagination is the only limit to the amount of debt that can exist. And as long as people expect that those debts will be repaid, even if it is with new debts, there can be trust in these debts. But the financial crisis of 2008 demonstrated that this trust can disappear very suddenly.

Featured image: A goldsmith in his shop. Peter Christus (1449). Metropolitan Museum of Art. Wikimedia Commons. Public Domain.