The elephant in the room: debasement of our purchasing power

Language was created spontaneously and needed no act of creation or sanction by the state – it is owned by each and every one of us. Money was also created this way, but today we have government ownership of the supply of money. This has been devastating for its purchasing power.

There are many stories in history of wicked monarchs who, to fund their various despotic regimes or lifestyles, would call in the coinage of the realm, extract a small percentage of gold – a “clip” – and then add an impurity before giving the coins back to the public; this is debasing of the monetary unit. This embezzlement was unlawful for the minter in the private sector and many people over the ages have been executed for stealing from money owners. Yet it is not unlawful for the state to do it.

Before World War I, money was gold. This was the commodity over time that freely consenting adults had chosen. This was the most marketable commodity that allowed us to move from barter to indirect exchange.

One ounce of gold today is £766. So if a pound sterling pre-WWI was just a name in the UK for 1/4 of an ounce of gold, it would imply that the pre-WWI purchasing price was 1/4 of £766 or £191.50. Compared with gold, the pound sterling has therefore lost 99.5% of its purchasing power in 100 years. One pound should buy something like a good week’s food shop for a family of four and not just one daily newspaper like it does now.

The government will raise an estimated £498bn and spend £666bn this year. In the last 20 years, the economy has grown at about 2% on average. Even with the 3% Treasury growth forecast, we will have a £1.5 trillion debt at best by 2014. On the whole, quantitative easing – i.e. creating money out of nothing or debasement of our purchasing power – has “paid for this”. With no political will to cut public spending, there is a serious danger we will be faced with further debasement and eventual currency collapse. This is the elephant in the room during this election campaign.


For more on these issues see Ludwig von Mises – A Primer.

23 thoughts on “The elephant in the room: debasement of our purchasing power”

  1. Posted 29/04/2010 at 13:52 | Permalink

    Libertarian Party has plumped for Free Banking while retaining Sterling, which will be operated under Sound Money principles. Free Banking in itself will assist in enforcing Sound Money.

  2. Posted 29/04/2010 at 14:31 | Permalink

    @Tim Carpenter – What is LPUK’s position on legal tender laws?

  3. Posted 29/04/2010 at 15:24 | Permalink

    Surely it is the ‘National Debt’ (some version of it) that may be £1.5 trillion by 2014? The ‘deficit’ is the annual excess of government spending over government revenues (mainly taxation). It is the cumulative deficits of £100 billion a year or more that will increase the National Debt to such a large amount.

    It was interesting that Mrs. Duffy, the Rochdale woman with whom the Prime Minister held a conversation yesterday, was asking him firstly about the National Debt. I don’t remember the media being very interested either in her question on that subject, or in his answer.

    When the interest rate on new UK borrowings increases sharply, as it has for Greece, we’ll really be in trouble.

  4. Posted 29/04/2010 at 15:55 | Permalink


    We would abolish the Legal Tender laws that inhibit Free Banking, plus any prohibitions against gold or metals, ending any taxes on the exchange of precious metals etc. which also would inhibit alternate currency models.

  5. Posted 29/04/2010 at 16:39 | Permalink

    @D.R. Myddelton – Thanks for pointing out this mistake. It has now been corrected in the text.

  6. Posted 29/04/2010 at 22:01 | Permalink

    This is economically illiterate.

    Gold is by nature a metal which has industrial and decorative uses alternative to its use as money. A quantity of gold in circulation represents an opportunity cost in terms of use to make satellite components, compact discs, electrical contacts etc.

    Paper money issued by the sovereign power under legislative authority has no opportunity costs attached to its use in circulation, and therefore no value save that impressed on its face and supported by its acceptance in payment of taxes, like King Henry’s tally sticks.

  7. Posted 30/04/2010 at 09:11 | Permalink

    Michael – why does your observation make the post economically illiterate?

  8. Posted 30/04/2010 at 11:59 | Permalink

    Michael, why is that a bad thing? The fact that bringing gold into circulation has costs (the direct costs of digging it out of the ground + the opportunity costs you mention) would ensure that the quantity of gold in circulation as money could not grow at a high rate. Sounds desirable to me.

  9. Posted 30/04/2010 at 12:57 | Permalink

    I’ll try to answer Philip and Chris with the same answer.

    The purpose of money is to eliminate as far as possible the costs and inconvenience of barter. By eliminating the need for there to be a douuble coincidence of wants before commodities can be traded, it enables trade to take place where otherwise it would not. Also, the nature of industrial and agricultural production – that it can take place only through time – means that the revenue needed to finance the purchase of inputs will usually not be available until after the product has been produced and delivered for sale. Hence the need for credit – not the same thing as money, but closely related.


  10. Posted 30/04/2010 at 13:04 | Permalink


    The cost of digging gold out of the ground whether for monetary or industrial use is reckoned in terms of the alternative use of the labour, energy and digging equipment. A printing press – or more appositely an Act of Parliament – can provide the monetary commodity at near-zero cost. It is therefore economically more efficient that gold. Further, it is vastly more flexible. Gold may have been plentiful enough at the time of Christ, when there were only 300 million people on earth and no powered machine technology and energy sources to drive economic growth. It is not likely to be plentiful enough to provide money for today’s population, industry or no industry.

  11. Posted 30/04/2010 at 13:30 | Permalink

    Mike – this does not make the post illiterate; you have just found a cost that might offset the benefit of using gold (the benefit being people not being robbed of their savings or booms and busts etc). However, the poster does not even argue for a return to gold. He is arguing against government control of money. The private sector might be able to find much more efficient ways of protecting the purchasing power of money than using gold to back the privately issued money. But, on the other hand, people might be willing to pay for the confidence that arises from gold. Without a market we do not know.

  12. Posted 30/04/2010 at 15:34 | Permalink

    If people are willing to pay for the confidence that arises from gold, then nothing is stopping them from buying some to hold out of circulation as an investment, or to buy silver, other precious metals, real estate and any other store of value you can convert cash into.

    The defining characteristic of money is the commonality of its use as the means of exchange within a community. This determines its utility as money and is accompanied by a locking-in effect in that the more people already use it in exchange, the greater the likelihood that other people will do so as well. Try putting gold or some other privately-created money into circulation, and see how far you’d get.


  13. Posted 30/04/2010 at 15:44 | Permalink


    What drives people to accept a particular commodity as money? King Henry I discovered the game-changer. He issued his famous wooden tally sticks into circulation as money and decreed that they should be receivable in payment of royal taxes. This ensured a built-in demand for them, as those who were liable to pay taxes had an incentive to demand payment in them. (So do accumulated private debts). All governments must levy at least some taxes to be able to operate at all, and must specify liability in terms of the kind and quantity of the tax tender.

    The point is that, once they do this, they confer a privilege on whomever originates and emits the monetary commodity.

  14. Posted 30/04/2010 at 19:54 | Permalink

    The last point regarding the money that the government choses to use is true. But it is not true that there is a natural monopoly that inevitably leads to one money. The experience of many countries, including countries at borders even in Europe, shows that people are quite adept at using more than one money – and that is for personal use, it is even more the case with business use. The legal tender privileges, lender of last resort provisions and so on are not necessary but do create huge network advantages for state money at the expense of the taxpayer in general (in terms of inflaton risk and the risk that LOLR loans go bad).

  15. Posted 01/05/2010 at 06:28 | Permalink

    I agree with Philip up to a point, and from experience. When I was a student I spent a year in Konstanz, Germany, which is on the Swiss border. I used to spend German money when I crossed the border to do some shopping on Saturdays when the shops in Germany were closed, and you could spend Swiss money on the German side of the border. You can even spend British money in Mirpur, where 70 per cent of British Pakistanis originate from. Legal tender privileges aren’t necessary. All you have to do is establish a currency as tax tender, and if enough of the population are liable to pay taxation, then its use will be generalised.

  16. Posted 02/05/2010 at 13:46 | Permalink

    For Tim Carpenter in the Libertarian Party: I would like to show you this link, . Here I explain why free banking, should you be proposing fractional reserve free banking, can only work if a grant of legal privilege is given by the state. Thus I could not support it being a consistent liberal. If you mean 100% reserve free banking, then I am with you.

  17. Posted 02/05/2010 at 13:54 | Permalink

    For Michael Petek and Philip, I think if the De Soto Banking reform proposal was adopted, see this link, we could then have a paper currency with a constitutional amendment stopping over provision. Following that, one could then argue that we could 100% remove the money of the people away from any state control and let the discovery process of the market sort out what type of money people want. Absent legal tender laws early on and we will see the emergence of what the market wants. I would strongly suspect gold would have a role to play as I believe the Regression Theorem would hold , see here

  18. Posted 02/05/2010 at 17:43 | Permalink

    Toby, you still haven’t grasped it. The type of money that people want is the type they can pay their accumulated debts and taxes with. Your theory could work only in the complete absence of debts and taxes.

  19. Posted 03/05/2010 at 07:12 | Permalink

    Morning Michael,

    I clearly do not grasp what you say.
    I say , “let the people decide what the people want as money.” You say, “you still haven’t grasped it. The type of money that people want is the type they can pay their accumulated debts and taxes with.” So if the people are allowed via a discovery process to define and use their money, then it will be money they can settle their debts and taxes in. Nothing in what I say in the above contradicts that.

  20. Posted 03/05/2010 at 10:52 | Permalink

    Toby, you write as though the decision as to what to use as money were similar to the decision as to what to buy for tomorrow’s breakfast. It isn’t. The characteristic of money is that it is a common means of exchange. As long as it’s made of durable and portable material and the tokens have numbers and a pound-sign on it, then it can be used as money. For that matter so can a paper or electronic ledger with numbers, sign and owner’s identity. There’s not much to choose between one or another.

    The other thing is that people don’t usually ‘choose’ money. They are socialised into using it and can become emotionally attached to it, as is demonstrated by the slogan ‘Keep the Pound’.


  21. Posted 03/05/2010 at 10:55 | Permalink


    For example, my paternal grandmother was a Hungarian married to a Slovenian, and both were born and lived in what was then the Kingdom of Hungary. When my father was born the place had become part of the Kingdom of the Serbs, Croats and Slovenes.

    When my grandmother handled the new money, she could never get her brain around the fact that she was handling dinars. She kept referring to them as pengo.

  22. Posted 03/05/2010 at 16:07 | Permalink

    Still do not understand what you say I do not understand as I agree with what you have just said. If we abolished legal tender and had no Central Bank, the people would choose what money or monies they needed to facilitate exchange.

  23. Posted 04/05/2010 at 05:44 | Permalink

    Legal tender is anything which cannot lawfully be refused in settlement of a debt. If you revoked legal tender laws, and left in place only the principle that Sterling is to be received in payment of public taxes, you’d guarantee the general acceptance of Sterling as the means of exchange.

    The question is, how much Sterling is there in circulation, is there enough of it for everyone to be able to trade, and who controls its emission?

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