A nominal zero rate is just unit consistency
A positive nominal rate is just an alternative to changing other policy variables.
For a modern fiat issuing country, it is possible to use nominal interest rate increases, in order to increase the real rate of return on government issued securities. But this only happens because policy and law fix nominal variables. So raising the nominal rate on money, is just uniformly lowering other policy variables like minimum wage, public servant salaries, benefit levels, tax brackets, etc, and critically, the “present value” of outstanding treasury bonds.
As such, a nominal rate increase, is directly and intentionally instigating inflation, intended to stabilize the currency as a savings vehicle(in new bonds and interest bearing bank accounts), by diluting other the purchasing power of other interests. Some cryptocurrencies, do something similar. Specifically, “proof of stake” coins, use a positive nominal rate to offer a reward for holders of currency to participate in ledger verification. With proof of stake, coin holders take turns verifying proper ordering of transactions, the assumption being that overall coin holders will not damage the integrity of the network by improper verification, as that would undermine their interests as currency holders.
Crypto and Democracy Rely on Different Consensus Mechanisms
Because the coin holders take turns verifying ledger blocks, over the long run, the blockchain is signed by a bunch of different currency holders. While it would be possible for a subset of coin holders to dissent and improperly verify block, the assumption is that the majority of stakeholders will not deliberately undermine the integrity of the network, and so a long running chain of randomly selected currency holders can be trusted to properly very blocks and block order.
Proof of work uses a different mechanism to verify block order, and that is rather than randomly selecting currency holders to sign block verification, anyone can verify blocks by giving proof of performing a long calculation. Because the blocks must be signed in order, the long chain of blocks each providing evidence of calculation or computing work, establishes the temporal well ordering a single authoritative ledger.
You could think of proof of work as building a giant pyramid, with the new transactions written on the side of the stone blocks, to prove that the ledger was written in the proper order. Because the blocks on bottom can’t be moved without moving the higher blocks, we know those transactions happened first. And because we are building this giant and prominent monolithic ledger, we can see that a lot of people and resources were invested in this effort.
So there are 3 ledger consensus mechanisms:
Proof of stake is keeping a ledger of who owns what, and then owners take turns signing blocks to verify them. The owners trust each other to do verification properly, and are free to observe the ledger changes in real time to independently verify proper block order
Proof of work is building a monolithic ledger in layers engraved in stone, so that the transactions lower down cannot be modified
Democracy is allowing everyone to gather in a way to poll public agreement, so that actions against group norms or interests can be suppressed in a publicly recognized way.
Ledger Keeping is Scorekeeping
For both crypto and democratic accounting, all you are doing is establishing a system of scorekeeping for actions.
In Basketball, a freethrow is worth 1 point, a regular basket is worth 2 points, and a long range basket is worth 3 points. In American football, a touchdown is worth 6 points, a field goal is worth 3 points, a safety is worth 2 points, a extra point kick is worth 1 point, and a 2 point conversion is worth 2 points.
Rate Increases Increase Saved Points, To Encourage Stockpiling Points
Because we have awarded lots of points out into the economy, if everyone tried to redeem all their points at the same time, there would be a huge bottleneck. The response we have come up with is to sometimes offer different rewards so that people will try to stockpile points and not spend them.
There are two important things to note about this. If you give out points to people with points, then you decrease the relative value of new points awarded. For example, if at half time in a football game, we doubled all the current point totals, then a touch down in the first half would be worth 12 points at the end of the game, but a touchdown in the second half would only be worth 6. So it offers a greater reward to people who earned points earlier in the game, and relatively decreases the value of points earned later.
Increasing the value of old points, can mean that people are less willing to earn new points, but because the market economy recirculates existing points, they are then free to focus more on earning the existing points already in the system. And by demonstrating a continuous point increase, this further makes people more willing to wait to spend their points.
But at the same time, giving out more points over time means that people have more points to spend. So even if they don’t spend them all at once, they still now have more total points to spend. So there are pretty serious tradeoffs and limitations.
If we started doubling everyone’s points every quarter, or 3 times a quarter, or 10 times a quarter, then all of a sudden people are getting tons and tons of new points all the time, but not doing any new work. If you get 1000x more points, then even if you only decide to spend 10% of your points, that is still 10x as many points being spent as what you started with.
So that is why interest can only work in very small amounts and should only be used very carefully for acute short term inflation, not for addressing long term inflation.
If people decide they don’t want points anymore, giving them more and more points is not a sustainable or direct way to fix any underlying problems, and moreover it penalizes the newcomers ready and willing to earn more points.