Inflation, the King’s thief

The Government sets an annual inflation target of 2%, meaning that £10,000-worth of goods and services today is planned to cost £200 more in a year’s time. https://www.bankofengland.co.uk/monetary-policy/inflation/ Our Halifax savings account pays interest at 0.01%, so that a £10,000 deposit for the same period will earn one single pound. The intentional debasement of the currency should be seen for what it is: a royal assault on personal wealth.

Private property is the foundation of liberty and a defence against tyrants such as King John. Needing additional money to prosecute his wars, John levied taxes at will, fined and seized the estates of nobles who he alleged had transgressed, and forced women to marry his cronies to get hold of their dowries; Magna Carta aimed to correct these abuses and set up the Great Council that would become known as Parliament. https://www.history.com/topics/british-history/british-parliamentTo this day, all law, directly or indirectly, still flows from the monarch’s will and assent but now the ruler, instead of simply grabbing our cash, must ask nicely for it via our representatives.

Except there is a way round: rob the whole country by corrupting the means of exchange.

That is something that even King John did not do, but in 1544 Henry VIII started to issue coinage with a lower content of precious metals; by 1551 under Edward VI the silver in a penny, at a time when labourers were paid pennies, had fallen by 83% (this was reversed by Elizabeth I in 1560. https://link.springer.com/chapter/10.1057/9780230118249_4Inflation continued anyway, at least partly because of the ongoing influx of gold and silver from the New World treasure fleets. https://en.wikipedia.org/wiki/Price_revolution)

Even so, inflation was accidental rather than deliberate; and in general, slow. For the three centuries from 1209 up to the accession of Henry VIII, the BoE estimates that the average rate of inflation was only 0.1% per year; for the next four centuries to 1909, 0.6% p.a. https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator

The high inflation we regard as normal is really a twentieth century phenomenon, and as in the earlier instances given they can be related to war, not only the two World Wars but the 1970s oil price shock in the context of the West’s involvement in the Arab-Israeli conflict. Between 1914 and 2014 £100 would need to have grown to £10,306 to maintain its value.

It is less than thirty years since the UK actually began targeting a positive value for inflation. https://en.wikipedia.org/wiki/Inflation_targeting#New_Zealand,_Canada,_United_KingdomThe Bank of England justifies it in this way: https://www.bankofengland.co.uk/monetary-policy/inflation

‘… if inflation is too low, or negative, then some people may put off spending because they expect prices to fall. Although lower prices sounds like a good thing, if everybody reduced their spending then companies could fail and people might lose their jobs.’

That is all very well, but if the current situation of 2% inflation and 0.01% savings interest continues indefinitely, then over the average Briton’s lifetime a bank deposit of £10,000 will shrivel to c. £2,000 in real terms. Somebody is getting the benefit, and it’s not us, though we can see some who are – ‘Private Eye’ reported this week (issue 1554, p.7) that hundreds of bankers at HSBC ‘will trouser seven-figure sums’ in bonuses, thanks to Chancellor Rishi’s pandemic lending boost.

It is not reasonable to force ordinary citizens to become speculators in order to preserve the value of their savings. Enron shares, rogues like Bernie Madoff and the halving of the FTSE – twice – since the year 2000 give us ample reasons to be cautious. Some American financial commentators I read think the stock markets are once again wildly overvalued.

Even the banks are not safe – it was the 2007 Northern Rock debacle that prompted the FSCS to raise the ceiling for bank deposit protection https://www.fscs.org.uk/globalassets/press-releases/20170908-fscs-northern-rock-release_final3.pdfto the equivalent of €100,000; in the Cyprus bank crisis of 2012-13 depositors lost nearly half the balance above that limit.  https://en.wikipedia.org/wiki/2012%E2%80%932013_Cypriot_financial_crisis

There was a time when governments thought it their duty to protect the consumer. International economies are more interlinked these days but even so, in the midst of the OPEC oil shock Parliament noted the destruction of retirees’ nest-eggs by inflation, and in 1975 the Government introduced NS&I Index-Linked Savings Certificates for them, later extending their availability to others.

What a disappointment it was to see the incoming coalition government of 2010 stop the issue of these plans! Also, a couple of years ago, the Treasury hit those lucky enough to own some, switching the index used from RPI to CPI, with a view to cutting the return to savers by something like 0.6% per year. https://www.hl.co.uk/news/articles/archive/ns-and-i-index-linked-savings-certificates-should-you-renew-them

Paper money is backed by nothing, most money is in the form of electrons, and the State can invent as much of it as it likes, so in a sense it doesn’t need to listen to the people any more. What price our liberty?