Free Markets Do Not Need Negative Interest Rates

by Louis Rouanet

Martin Wolf, associate editor and chief economics commentator at the Financial Times, seems to have forgotten the nature of interest rates and their coordinating role. According to him, central banks are not to blame in the persistence of low or negative interest rates. He writes: “We must regard ultralow rates as symptoms of our disease, not its cause.”

Wolf then goes on to claim that “negative interest rates are not the fault of central banks.” It’s difficult to see how Wolf can justify this claim. Never under the gold standard, never under free banking systems, and never in a free market economy have interest rates been negative. Indeed, the interest rate on the unhampered market reflects the social rate of time preference, it is the “price of time.” And as it is a universal law of human action that time preference must always be positive, interest rates cannot possibly be negative on the free market.

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