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A Short History of British Bankruptcy |
by Adrian Ash
BullionVault
Wednesday, 28 October 2009
"If we manage to escape national
bankruptcy, we have set up a slavery far more oppressive than any
previous form of bondage..."
BRITAIN'S BANKRUPTCY has been a long
time coming.
"By our political folly we have a put a large
part, probably the greater part, of the nation in possession of rights
to draw from the public purse," wrote Ernest J.P. Benn in his hilarious
Account Rendered of 1930.
How hilarious? Forced to live with the "smudge
readers" at passport control, policemen demanding to see one's driving
license down at the station, and Whitehall drones obsessed with how many
pencil sharpeners their department controlled, Britain's moneyed classes
knew the lower orders could only travel, drive and wear white-collared
shirts if kill-joy regulations applied to the gentry and their staff
alike.
But modern liberty, with its motor cars and
mortgages, offered to keep Bolshevism out of Britain. Along with homes
"fit for heroes" and the basic state pension, however, regulating it all
added to the government's annual expense – equal at the start of the
Thirties to barely one-quarter of the economy.
That was already too great for the Pound
Sterling to bear...
"Whether those [state-funded] rights take the
form of relief, dole, pension, official salary, subsidy or interest on
public debt, they all constitute heavy claims on our total production,"
wrote Benn.
"If happily, we manage to escape national
bankruptcy, we have set up a slavery for the minority, the producers,
far more oppressive than any previous form of bondage..."
Roll on 35 years, and even with Ernest's young
socialist nephew – Anthony Wedgwood – grandstanding against reducing
expenses, Britain just about avoided bankruptcy once more. Yet again,
however, the other option – of defaulting in fact, if not in name – was
too good to resist.
Just as the state defaulted in 1931, quitting
the Gold Standard and offering to pay only more paper in return for
Pounds, so the UK has long serviced and repaid its debts in devalued
notes.
Prior to abandoning the
Gold Standard eight decades ago, only Charles II had reneged on his
debts, ordering a "stop of the Exchequer" in 1672 that
halted payment of interest on any debt without a specific tax
revenue ear-marked to cover it. Whereas across the Channel, in contrast,
the French monarchy defaulted in part or in total four times in the 17th
century, and then again in 1714, 1721, 1759, 1770 and finally in 1788 –
one year before the Revolution.
By 1797, the new government also found itself
unable to service or settle its debt, writing off two-thirds of the
entire national debt. Hence the higher rates of interest paid on French
debt, reckoned by Niall Ferguson to be "of the order of one or two
percentage points" between 1745 and 1780, and wilder still – according
to his charts at least – during and immediately after Madame Guillotine
set about the rentiers.
"These differentials were based on past
experience of which bonds were most likely to be defaulted upon," writes
the Oxford (now Harvard) scholar in The Cash Nexus (2001). Higher
interest rates were a form of "prepaid repudiation" as another historian
has called it. And short of a deep and long-lived deflation in prices,
that pre-payment is entirely absent today.
"Plenty of commentators see the risks that
arise from not getting a handle on excessive spending...not getting
control of the deficit," says Philip Hammond, Conservative spokesman on
Treasury matters.
Given what the 2010 election might mean for
the Pound – or rather, what the market might take it to mean – it's
worth heeding just what Hammond told
Bloomberg this week.
"We believe that what's got Britain through
the recession so far has been the activist monetary policy of the Bank
of England – keeping interest rates low, supporting the economy through
quantitative easing – and we think it is essential that in the
recovery we are able to continue to keep monetary policy relatively
loose.
"We will only be able to do that if we have
got the deficit under control, and sent a clear signal to the markets
that we intend to execute a plan, and in order to do that we need to get
started.
"Nobody's talking about slashing [public
spending] in 2010, but we need to make a start. The [Labour]
government's planning a £30 billion increase...We think that's too much.
We would scale that back."
As we've long suspected here at BullionVault,
in short, David Cameron's "New Tories" can grasp the financial case for
reduced public spending. So could my five-year old...and my cat, come to
that. But unlike the last Conservative party to stand on the brink of
wresting public finance away from an economically illiterate Labour
administration, the British Tories daren't make or even conceive the
ideological case for reducing the size of the state today, let alone its
expense.
A return to Thatcher? We should be so lucky.
And after 10 years when gold prices rose on the back of surging
government deficits, record-low interest rates, and an avowed policy of
currency devaluation, gilt-owners might want to consider the size of
Britain's public debt, and the zero-rate policy its likely government
wants to retain.
Adrian Ash
BullionVault
Gold price
chart, no delay |
Gold in 2009 |
