In modern states, demand for currency comes from the ongoing self-imposed liability for the currency. There is no need to pay savers in order for them to desire to hold the currency (interest on sovereign bonds issued for “deficit spending”). Any justification for doing so must rest on some other perceived benefit of paying savers.
Internationally, besides forex speculation, the fundamental reason there is demand for a currency is because entities from outside of that currency area desire to purchase something from within it.
There is no reason for states to pay interest on the state’s currency in order to entice others’ demand for it unless an argument is made that increasing demand through paying holders of the currency beyond the desire to purchase goods within the area is somehow a useful and sustainable thing to do.
In both instances, this payment to holders of the currency is structured as interest payments.
Note that much of the complexity of financial practices, domestic and international, in some way or other is related to interest rates, directly and in the immensely complex financial instruments that build on the practice.
The web of production and distribution, regulation, infrastructure, and the politics inherent in these constitute an immensely complex system. Indeed, the primary “problem” for a people is to organize a social structure capable of governance – the attempt to minimize violence, maximize material wellbeing, in what is considered an efficient, just way. The monetary system a society creates is the primary organizing tool for achieving these ends.
The immense complexity within a state is increased greatly once again when many states with their monetary systems interact.
As noted, the additional layer of interest payments to savers of a currency is gratuitous as far as the domestic goal of demand for the currency and, at the international level, for there to be demand for a currency. There is no necessary reason to pay people to hold a currency to create demand in either case. Any decision to do so must be justified on some other clear benefit to society.
However, given that the unpredictable, often erratic nature of complex systems is already the greatest challenge facing a society, any additional layer of complexity that makes managing or understanding our social systems exponentially more difficult is detrimental.
Organization that increases productive capacity, fair distribution, gains from trade etc. are useful. Additional financial complexity beyond what facilitates these, however, is the attempt to gain on paper beyond what real resources and productive capacity can actually achieve. More importantly, in rendering an already hyper-complex system an order of magnitude more complex still, they decrease the potential for good governance.
The real-economy factors of technology, wage structures and – for FDI – quality of infrastructure, workforce, legal environment etc. are the targets that work and are improvable through good governance. An attempted financial fix to these that renders governance impossible is a huge step backwards. Paying savers of a currency is a vestigial practice that has no logic in modern monetary systems. The supposed benefits of doing so are assumed, with little evidence provided supporting them. The detrimental effect on good governance are plain to see yet seldom holistically examined.
A strange game.
The only winning move is not to play.