Tuesday, October 4, 2022

A Brief History of the British Pound's Decline

Click here to read the original Cautious Optimism Facebook post with comments

One liter Coca-Cola bottles on special for £1

4 MIN READ - The Cautious Optimism Correspondent for Economic Affairs (and Other Egghead Stuff) has been perusing through news stories on UK inflation and keeps seeing photos of shoppers at British grocery stores.

What stands out is all the giant promotional “sale” signs hawking customers to buy “£1” specials, not unlike $1 specials in the USA.

In the attached photo you can buy what looks like a one liter bottle of Coca-Cola for £1.

Which brings forefront to the Correspondent’s mind: Does anyone know the origins of the British pound?

Here's a hint. Some Brits still refer to it as “pound sterling” or “sterling.”

Yes the “pound,” when it was introduced in the 8th century, was literally one pound of sterling silver, although the weight unit used back then was the troy pound (349.9 grams or about 12.3 ounces today).

Since there was no central bank or printing press in medieval times, monarchs who needed price inflation to renege on their debts more commonly juggled currency standards of weight. In 1158 King Henry II reduced the “pound” from 349.9 grams to 323.7 grams, inflating the number of “pounds” that could be produced from the same quantity of silver and raising his pound-denominated tax revenues.

Edward III further reduced the pound sterling to 258.9 grams in 1351.

And on and on it went. Whenever a monarch got over his head in debt, he either defaulted or the “pound” was adjusted to a lower unit weight of silver, but never higher.

By 1717 Britain was accidentally converted to a gold standard by way of Gresham’s Law, and the pound became equivalent to a little under one-quarter ounce of gold (0.235). Given the world market price of silver at the time that translated to 111 grams of silver, down 68.2% from 349.9 grams during the pound sterling’s introduction.

The pound actually held up quite well through two centuries of the gold standard era. Even in 1931 when the Bank of England suspended the gold-exchange standard, the pound was still just under one-quarter ounce of gold.

But after World War II the British government resumed a series of devaluations, the pound falling to about $2.50 by the end of the Bretton-Woods international monetary standard in 1971.

Given that the US dollar was pegged at $35/oz. at the time, the pound had declined to 7/100ths of an ounce of gold, down from about one-quarter in 1931. In the London market it went for roughly £16/oz. of gold, or the pound buying closer to 6/100ths of an ounce.

But centuries of debasements were nothing compared to post-1971 when the pound floated on a purely fiat standard, subject to whatever inflation British Parliament and the Bank of England saw fit to impose on the public.

Since 1971 the pound sterling has lost another 91.1% of its value, depreciating at a rate far outpacing any of the devaluations that occurred in the preceding twelve centuries.

With all the transitions back and forth between gold, silver, and fiat, the Economics Correspondent estimates the pound sterling has lost about 99.5% of its value since its introduction in medieval times, the proceeds of metallic debasement and the printing press being divided as a free gift to debtors—a long list of British monarchs and parliamentary governments being the largest among them.

And that’s reflected in the current price of silver. Today you have to pay 17.34 pounds to buy one ounce of silver. 

Paying “17.34 pounds of sterling” to own “one ounce of sterling silver” has a bizarre ring to it—which simply reflects how much government inflation has distorted the original definition of the pound sterling.

But wait, we’re not quite done yet. 

The pound’s ability to purchase physical silver has also been boosted over many years by outside factors such as: 

1) The western world’s demonetization of silver during the 1870’s transition to the gold standard which pummeled demand for the metal. Silver's world market value fell by over 50% in just a few short years.

2) Centuries of improvements in silver mining/refining efficiencies, lowering unit production costs and accelerating the growth of silver supplies.

So the Economics Correspondent’s calculation of the pound’s purchasing power over the centuries is too generous, something confirmed by the Bank of England’s own inflation calculator.

Although it only goes back to 1209, the central bank officially estimates the pound has lost not 99.5%, but 99.94% of its value since 1209.

Or what would have cost you £1 in 1209 would cost £1,570 today.

Put in less shocking terms that better translate into many present-day people’s lifetimes, what cost £1 in 1971 would cost £11.29 today.

And going back to the end of the British classical gold standard in 1914, what cost £1 in 1914 would cost £88.94 today, a near one-hundred fold increase in prices in a little over a century.

That decline beats the Fed-debased dollar. What cost $1 in 1914 would cost “only” $28 today.

In contrast to all this inflationary debasement, during the two centuries-long British classical gold standard period what cost £1 in 1710 would cost £1.38 in 1900, nearly 200 years later.

Finally, ditching all these calculations and returning to the simpler analogy using physical silver, the average British consumer can more easily understand the effects of inflation with a simple question.

Q. The pound will buy you a one-liter bottle of Coca-Cola on sale. How many bottles of Coca-Cola do you think you could buy with one troy pound of silver?

ps. UK Labour Party apologists might pin blame for needing what used to be a pound of silver to buy a bottle of Coca-Cola on new conservative Prime Minister Liz Truss’ recent exchange-rate sapping budget proposal. 

Sorry guys, the photo was taken in 2020.

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