by Nathan Lewis
(Editor’s Note: The British Empire rose on the power of the gold standard, and the British pound was the world reserve currency. Then in the early 20th Century, Britain decoupled their money from gold and declared paper currency to be legal tender. After that, Britain lost its world pre-eminence. Sound familiar?
The chart in the article shows a period of relative stability in gold-standard money of about 200 years. And instability occurred when England left the gold standard. What does that tell you?
Would you like to see generation after generation experience sound money? Secede from the Union, establish precious metals-backed money and don’t ever leave “the gold standard.” How hard is this to understand?)
Oddly dressed luminaries two centuries ago created the kind of financial stability that today’s central bankers couldn’t possibly conceive.
During the 17th century Britain was a financial backwater. The currency was prone to periodic currency devaluations by the king, who typically wanted to escape the burden of his past obligations. As a result, credit was almost nonexistent. Interest rates for business borrowers were typically in the 13% to 18% range, typical of countries today with low-quality currencies.
The financial center of the world in those days was Amsterdam, which had used a gold standard for a century. Interest rates in Amsterdam were around 3.5% for the government and 4.5% for commercial borrowers, typical of gold-linked debt throughout history.
In 1689, with the Glorious Revolution, William of Orange became King of England. William was Dutch, but he had married Mary Stuart of the British royal family. Perhaps William, upon his arrival in London from Amsterdam, found the English financial system a little backward. He was aided by philosopher John Locke, who had fled to Amsterdam in 1683. Locke returned to England with William in 1688.
Locke argued that the English financial system could be set right if the relationships between lenders and borrowers was protected, by fixing the currency to gold. The currency would be stable in value – as stable as humanly possible. After generations of a floating currency in Britain, this was a revolutionary idea. Was such a thing even possible? Locke’s argument swayed England’s Parliament, and in 1698 England effectively began its long allegiance to the gold standard.
If there is one picture that sums up England’s 216-year (1698–1914) experience with the gold standard, it is a chart of the market yield of Consol bonds during that time. The Consol was an unusual government bond in that it never matured. These were the longest of long-term interest rates.
Copyright © 2011 Forbes