From: Michael Swaby, Hainton Avenue, Grimsby.
A CENTURY ago, Europe was drifting towards the catastrophe that was to become the First World War. Understandably, given the huge human sacrifice and cost, there is considerable media coverage, exploring family histories and the political causes and consequences of the conflict.
Given that today’s problems appear to have a strong economic basis, it is worth recalling a particular important event, one that has all but disappeared into the small print of history.
The Bank of England is one of the world’s most respected financial institutions. One hundred years ago, no living person could recall a time when even a slight doubt existed about its integrity. “As safe as the Bank of England” was the ultimate accolade.
Something very strange then occurred. Around the country, small numbers of people started to visit their local banks, bearing pound notes, “fivers”, and “ten bob” notes. However, they were not asking for these amounts to be credited to their accounts. Bank of England notes were and remain IOUs, and some particularly cautious folk had come to the conclusion that, whilst the promise to pay one pound was good, the pound itself in the form of a sovereign was even better.
During the hours immediately prior to the British declaration of war, the number of people redeeming their notes increased somewhat, with small queues forming at the Bank of England in London. However, at no point was there any hint of panic. It transpired that this somewhat low-key event was to be the end of the gold standard in its proper form in this country.
While the difference between a gold coin and a piece of paper is obvious enough, the extent of the change involved is even greater than may be thought.
Cynics suggest that, over time, the true value of fiat money will always revert to its intrinsic value (zero).
But the question of purchasing power is only a part of the story.
Gold has a positive value, and will always be an asset to the owner.
Arguably, paper money is the opposite, being a debt that remains a liability of the issuer.
The question of debt and its role in the current crisis is a continuing debate.
I have long felt that the so-called “savings glut” is an accident waiting to recur, because of a widespread balance sheet weakness which appears to be inherent in the existing global non-system.