Time is Money28th April 2013

Having an hour to burn in the City last week I headed off to the Bank of England, to find out what they have been doing to our money since 1694. Plenty of opportunity to do things right, and wrong, over that time.

The Bank of England Museum is well worth a visit. Try to lift a gold bar; learn about the evolution of the site to the current curtain-walled edifice; how a sewer-worker proved to the bank’s Directors that he could access their bullion vaults whenever he wanted; and a remarkably frank demonstration of how the £’s purchase value has declined despite many good words on “Sound Money”. To the amused visitor it is fun, and probably rather reassuring, but to those with a little knowledge and willingness to think “outside the box” it has an air of complacency, for the principles of sound money were thrown out the window a long time ago.

The week passed off with much news on Reinhart & Rogoff, two eminent Harvard professors, one dealing in the international financial system, the other in public economic policy. Their 2010 book “This Time is Different: Eight centuries of Financial Folly”, goes back to medieval times in its examination of government defaults, bank panics, inflation and currency debasement across the world. From external and domestic debt problems to bank crises, it concludes perfectly sensibly that too much debt means the economy can’t grow. The book has since become a standard-bearer for those claiming that state debt must be controlled, and the source of the magic “debt must not exceed 90% of GDP” mantra.

Reinhart & Rogoff shared their academic research, and recently suffered a pasting when two rival professors discovered and published a spreadsheet error along with questions over the statistical techniques used. A detailed response from R&R ought to have calmed it all down, but of course those with a point to prove are now claiming that these two are personally responsible for the pain endured by many “victims of austerity”.

It really is rather sad and pathetic that representatives of both extremes of the political debate should seek to twist and use academic study to their own ends. It is also a warning that arithmetical analysis only gets one so far, and an application of common sense is always a worthwhile substitute … after all, another favourite economic term is “all things being equal”, and invariably they never are.

Wandering around the Bank of England Museum one is reminded how national debt has evolved. I’ve studied the figures since my visit, and in 1694 it was around 17% of GDP, or just £1 per head of the population. The wars against the French culminated in 1815 with the Battle of Waterloo, by which time debt:GDP was a massive 225%, and just under £40 per head, as we bankrolled all the nations fighting Napoleon, including the Austrians, Prussians and Russians.

Over the next 99 years the Industrial Revolution saw debt being repaid, until just before the outbreak of WW1 debt:GDP was just 25%, at £14 per head, and the total national debt was even lower than 99 years previously!

Move on another century and whilst the population has grown a mere 42%, debt has exploded by a multiple of 1,800 times … and that excludes all the unfunded future promises made to voters! If that seems enormous it is, but it is achieved by borrowing just 7.8% more each year! Just do the maths.

I do hope that Mr. Carney, when arriving as Governor of the Bank of England in June, isn’t proposing, along with HM Treasury, to achieve the same for our children and grandchildren over the next century.

Small figures, over time, have a huge impact.