What, fiscally, do Greece and the UK have in common? It is that in 1932 the governments of both countries defaulted on their loans.
The UK default was a technical one. The £2 Billion 1917 War Bond debt servicing was costing the the Exchequer 40 per cent of all the money raised in income tax. This was a time when the need for the government to balance the books had forced the resignation of Ramsay MacDonald’s Labour government and the formation of a Conservative-dominated coalition. Labour had walked away from government when its ideology could not handle a global economic crisis. It took the rise of Nazism for Labour to get back in government. Clement Attlee may owe his prime ministership to Adolf Hitler. But I digress.
Someone in the Treasury had a great idea. The 1917 bond was due to mature no later than 1947, which meant that even more money would be needed. The plan was to convert the 1917 5 per cent bond, maturing at the latest in 1947, into a 3.5 per cent bond that would never mature. It is clear what the attraction would be. There was a massive advertising campaign. Just as in 1917, when it was everyone’s patriotic duty to subscribe to the 5 per cent loan, so it was everyone’s patriotic duty to convert. Some institutions resisted but were strong-armed by the Bank of England. At the time, an injecting of liquidity into the economy, triggered by a sterling crisis, mean that interest rates were at 2 per cent. So 3.5 per cent seemed a good deal.
I first read about this loan conversion in John Train’s excellent book Famous Financial Fiascos, which also introduced me to the Ponzi Scheme, as used by Bernie Madoff. So how was this a fiasco? I leave you with Train’s own words:
“92 percent of the holders converted into the new 3-1/2 per cent bonds, which by the terms of their issue need never–and doubtless never will–be paid off. Since then, under more usual money market conditions, interest rates have risen and risen and the 3-1/2 per cent bonds have declined and declined. So at the end of the day what happened to the 92 percent of War Loan holders who accepted the conversion? The calculation is fairly complicated, but in real terms they lost about 99 percent of their money.”
Train’s book was published in 1985. In 2014, the loan was completely paid off. Of course, with inflation, £2 Billion is not what it was in 1917. It was Keynes who stated that “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” Successive governments certainly did that to the folk who bought these increasingly worthless bonds. George Osborne was easily able to pay off Lloyd George’s debts with inflated pounds which are now worth a sixty-fourth of what they were in 1917.
For all this, including the technical default, the amount of public anger has been relatively muted, well non-existent. But this may be because the damage was spread over a century and governments were punished at elections for a variety of misdeeds but not stealthy wealth confiscation. Hold that thought.
Communist dictatorships like the USSR also have to have a fiscal policy. It may seem strange that a group that has absolute control over the economics of an entire country needs to manage its finances. But it is not possible even in a closed economy to fully tame the ‘invisible hand of the market’. Too much or too incompetent state control and people naturally set up unofficial commercial relationships. The USSR was in fact extraordinarily corrupt, with a parallel black economy, functioning on theft, bribes, and barter, that rivalled the one strait-jacketed by the Politburo.
In 1957, the comrades discovered that paying out on the savings bonds everyone was forced to buy out of their wages was costing too much. It was not a simple matter of printing more roubles to plug the hole in state finances. Even in a communist country that would be inflationary, and this was meant to be a Marxist utopia, so economic blundering had to be minimised. The solution was simple. Nikita Khrushchev appeared at a workers’ meeting and announced that the government had decided to postpone interest payments and redemption of outstanding Russian bonds for at least 20 years. This was the third consecutive repudiation of payment since the original bonds were issued In 1928 at the time of the first five-year plan.
A news report at the time stated that “people have accepted their government’s decision with applause and enthusiasm,’’ One item quoting Mr Khrushchev reported that “the universal acceptance of bond payment deferment by the Russian people would be especially puzzling to the capitalists of the West, who could never understand this patriotic spirit of our people.”
Oh. There it is again. Patriotic. Of course there may be other reasons why there was applause instead of apoplexy. Demonstrators in the workers’ and peasants’ paradise had a habit of being machine-gunned where they stood, as the protesters of Novocherkassk found out five years later. Keep holding that thought.
And now we come to our third default. Except it isn’t one. And it does not involve a national government, but a private company and its former owner. Since the collapse of BHS, Sir Philip Green has been the target of massive opprobrium by politicians, the media and the public. The main issue has been the pension fund, which was under-resourced. This week, it has been announced that Sir Philip will be providing over £350 million to ensure that pensioners will not experience a 10 per cent shortfall in their pensions. This has not stopped the criticism, which included a threat to strip this businessman of his knighthood. This is despite the fact that he has not driven a bank to ruin needing a state bailout, spied for the USSR or indeed been dictator of Romania or Zimbabwe.
What people do not notice is that capitalism worked.
Sir Philip had promised to ‘sort things out’. Things were sorted out.
And yet this man has to endure attacks and harassment of kind not experienced by British and Soviet politicians who confiscated and destroyed the savings of millions of trusting citizens. Private enterprise solved the problem. It was not straightforward. It was not clean. There were open complaints. But Frank Field MP, who led the complaints, is the same person who sat in the Commons and did not properly scrutinise the government’s ‘Green Deal’, that squandered £240 million. No-one has been directly blamed for that fiasco. No camera crews have followed around the civil servants and former ministers who added nearly a quarter of a billion pounds to the national debt, whose servicing will mean less money for schools, hospitals and, yes, pensioners. You may unhold that thought.
Some humility from politicians whose governments have secretly confiscated wealth through inflation, or have squandered taxpayers’ money on trendy schemes, is called for. Sir Philip stepped up. Capitalism fixed a problem it created. When governments can do that without destroying the wealth of generations, then they may attack the wealth-creators. Until that time, wealth-creators do deserve our respect. And their knighthoods.
(Image: Jeremy Segrott)