Many blame Brexit for the current economic malaise the U.K. finds itself in and that if we elect a new party, Labour, to power that they will be able to turn things around. Unfortunately, things are not as simple and my point here is not to pick a party over another but to look at what, in my opinion, are the root causes the current economic depression permeating through British society. On the surface things don’t look that bad, one might argue, as GDP growth was only slightly negative in the third quarter of 2023 and inflation, as measured by the CPI, dropped below 4% in November. What we will now look at are the macro problems looming over the economy.
The major problem, in my opinion, is our monetary system which has been one solely based on a debt-based currency since the outbreak of World War I in 1914. Prior to the Great War, the monetary system had a solid anchor of gold which made sure credit creation and government spending were kept in check. From 1821, when Britain went back to the gold standard after the end of the Napoleonic Wars until 1914, inflation as measured by CPI averaged -0.1% per annum which meant the currency was stable. A stable currency encouraged savings and investment which created a virtues circle whereby industrialisation boomed, new jobs were created and where an increasing standard of living led to more savings and so on. The gold standard also limited the amount government could borrow and spend. Taxation was also kept low as raising taxes during peacetime is never popular.
So what happened after 1914 and why have we been going down the road to ruin ever since? I would say that the major culprit is the fact that Britain, with the exception of the period between 1925 and 1931, never went back to a sound money system or gold standard. During the Napoleonic Wars Britain did go off gold via the Bank Restriction Act of 1797 but in 1821 gold convertibility of the currency was readopted and that was the reason why inflation was non-existent until 1914. The fiat currency regime that the UK has been under since 1914 has led to an explosion in inflation, government spending, debt and also inequality. According to the Bank of England CPI or Inflation calculator inflation has averaged 4.2% per annum since 1914 (the number is probably higher as ONS changed the methodology for CPI going back to 1949 in May of 2022).
This century-plus of inflation has made sure the national debt has ballooned and it has also made it easier for government to inflate away the debt at the expense of regular workers, savers and pensioners. Prior to the Great War, government spending rarely reached 10 percent of GDP while since the 1950s it has always been over 30 percent and at present is over 50 percent! The last fifteen years, or in the years following The Crisis of 2008, have accentuated this trend as the government and the Bank of England have ramped up government spending and the creation of fiat currency and credit and it is one of the major reason why, in my opinion, we are now seeing the cost of living crisis, social unrest, increasing wealth inequality and the deterioration of the economy in general. Brexit or party politics are just distractions to the greater problem of inflation. Inflation always hurts the most vulnerable, like the poor, pensioners and young people the most, as they are last in line to the funny money created by government and the Central Bank.
The other problem with inflation and big government is not just about big business benefiting from big government contracts but also the many that have become dependent on a bloated Welfare State. In order to placate the masses, the current system of politics keeps rotating from a the “business friendly” Tories to the “social welfare friendly” Labour and with access to easy money the system just keeps getting bigger, while those in the middle or middle class, keep getting squeezed. This system has become so entrenched that if one tries to change it by either cutting the cozy relationship between big business and government or the cozy relationship between government and the Welfare State, we would see major social unrest. Both big business and welfare recipients expect Peter to pay Paul so to speak.
The current problems have been brewing for many years and while we get a change of political tack every ten to fifteen years or so, it seems that the economy keeps getting mired in a cycle of ups and downs and barely ever produces the growth in prosperity needed to make sure people become better off and that wealth inequality shrinks. So how do we as a nation get out of this economic predicament? I would like to say that my proposal does not guarantee utopia as I think humans are imperfect and so we always face difficulties, but I think that after over a century of inflation and big government the opposite – no inflation and small government, could be the first step to a more prosperous economy.
So how would this change be implemented? Politically it seems to me that it is almost an impossibility, and it is because as the old saying goes – turkeys would never vote for Christmas. I would say there are two other ways. The first one is more gradual and it is the route of making people aware or educating them about what I have just written above, while the second way would be a more sudden and harsher denouement in the shape of a total currency and economic collapse which hopefully would wake people up to the fact that, as Frederic Bastiat once said: “the state is the great fictitious entity by which everyone seeks to live at the expense of everyone else.”