In 1958, the Suffolk Nansemond Festival (Festival) was held in Suffolk, Virginia. The marketing material showed the dates “1608-1958.” The earlier date was when John Smith sailed up the Nansemond River. Festivals in the 1950s in the south usually included a parade, food and much hoopla; this one was not an exception. While I did not attend the Festival, all my grandparents lived in Suffolk, and they did attend. They told me about the festivities.
One of the marketing tools used by the Festival was a wooden nickel. There are examples of wooden nickels that were issued long before the one produced by the Festival. The front of the Festival’s wooden nickel is the picture for this blog. What was interesting to me as a child was that the back of the coin said, “GOOD IN TRADE AT ANY CO-OPERATIVE BUSINESS OR REDEEMABLE AT FACE VALUE AT ANY SUFFOLK BANK ON OR BEFORE MAY 12, 1958.”
The coin I have was given to me by my grandfather. He was the executive vice president of one of the major banks in Suffolk. The bank, which no longer exists, was called the American Bank and Trust Company.
I queried my grandfather about the nature of the coin. What I really wanted to know was if I could use the nickel to buy candy in downtown Suffolk. Even though a child, I realized that this was not United States currency. I did not want to get in trouble trying to pass a bogus coin. I had already had trouble using some specially minted United States half dollars that he had given me. The problem with the half dollars was that when I tried to use them, they thought they were counterfeit since they had never seen one. They had no faith in the coins. You cannot imagine how difficult it was as a child trying to convince the drugstore owner in Suffolk that the coins were United States currency.
My grandfather told me that the Festival coin was not good in downtown Suffolk because we were three weeks passed May 12th. I could not buy candy; I was very disappointed. He went on to explain to me that the value of the coin had been based on the faith that people had in the banks’ willingness to stand behind the coins. He felt people had the right faith. He also said something about the full faith and credit of the government and how it related to governmental debt, but at the time, this did not register.
This wooden nickel has a direct bearing on one of the major financial issues the world faces today. That issue is negative interest rates.
The amount of debt that carries a negative interest rate worldwide has risen dramatically. Estimates of how much debt is tied to negative interest rates vary. The lowest estimate I found was $12 trillion. The highest was $17 trillion. Regardless of the estimate, many agree that negative interest rates are not good for the world economy.
While there are numerous reasons why negative interest rates are viewed as bad, I will cite just four that are frequently espoused.
- Instead of making money on deposits with a bank, consumers must pay banks to hold their money. This is a major problem for people on fixed incomes, like retirees.
- Once a central government bank makes interest rates negative, it has lost much of its leverage to manage a country’s economy.
- Negative interest rates mean that banks have a difficult time making a profit. While some decry big banks making money, the last thing we need is for big banks to fail. Lehman Brothers is still a painful memory.
- Several practical examples illustrate that negative interest rates are not effective. Japan is one of the examples.
The problem is not that negative interest rates are inherently bad or good. Before my email account is inundated with hate mail from economists or the White House’s Council of Economic Advisers starts tweeting about me, let me explain. In the first blog I posted, I talked about Charles Kettering, who was a thought leader for General Motors. In 1942, he wrote an article for the March 28th edition of the Saturday Evening Post, which sold for a nickel. In summary, he said great researchers are not enamored with a problem. Instead, they are enamored with looking for the cause, which sometimes is very obscure, that produces the problem.
The real challenge is not negative interest rates. The real challenge is the “wrong” type of faith that is embraced today. The real problem is the cause that is producing negative interest rates.
Consumers who are willing to tolerate negative interest rates do so because they believe that they are better off getting less money back; i.e., they are willing to pay to let a bank keep their money because they believe they are facing a deflationary outlook. They “have no” faith in the economy, or you could say they “have faith” that the economy will take a significant downturn. This type of attitude can produce exactly what is feared.
To provide a simple example, assume a consumer has $100. The consumer can buy an item (you pick a product) that costs a hundred dollars or put their money in the bank and get $97 dollars in one year. If the consumer believes that the cost of the product will be $94 in one year, they may be better off waiting. They pay three dollars of negative interest, but the product will cost six dollars less in twelve months. I often have wondered why people do not put their money in a safe at home rather than a bank where they pay negative interest, but their reticence is easily explained by the word safety.
What always concerns me is the root cause; in this case, the wrong type of faith. Central banks, the commercial financial system, regulatory agencies, and legislative bodies should work to focus on the lack of faith rather than the effect of negative interest rates.
People will automatically scoff. How can governments improve faith? Perhaps if all segments of a country’s government worked cooperatively, there would be an improvement in the attitude of consumers. However, I am forced to concede that expecting components of government to work together for the good of all is asking a lot, maybe too much.
If you have not signed up to be notified when there is a new post, please go to the bottom of the home page and use the “subscribe button” to be added to the mailing list. Also, click the “like button” if you enjoyed this blog. Thank you.
Please contact me directly if you want to comment on this post. There is a “contact button” at the top of the home page.
Picture by C. C. Lilly.
