That Debt from 1720? Britain’s Payment Is Coming | Hacker News Reader

That Debt from 1720? Britain’s Payment Is Coming

nytimes.com

183 pointsbenbreen132 comments

In 1720 an ounce of gold in London cost about £4.31 [1] and today it costs £768. So the effective interest rate for gold over that period has been about 1.8% per year, while the gilts paid 2.5 - 4% according to the NY times article.

So despite the huge depreciation of the UK pound over almost 300 years, buying UK bonds in 1720 was a much better investment than gold.

And yet buying a property in London probably would have been an even better investment - a 'barrel store' in Picadilly cost about £2,500 [2]. Today it might be worth 10,000 times as much, giving a compound return of 3.2% per year plus a significant rental income.

[1] http://www.measuringworth.com/

[2] http://www.independent.co.uk/arts-entertainment/books/review...

I assume you calculated the effective growth rate for gold ("effective interest rate for gold") from 1720 to 2014 assuming annual compounding. This does indeed give a rate of roughly 1.78% per annum, compounded annually. (Also known as CAGR)

However, this rate cannot be directly compared with a bond coupon rate. Bond coupons are cash flows that are not automatically reinvested/compounded.

Even if one were to reinvest them, one would have to reinvest at the prevailing yields at the time the cash flows were received, a somewhat more involved calculation. So that 2.5%-4.0% coupon rate does not represent an annually-compounded rate and thus is not directly comparable to a CAGR.

Apples and oranges, so to speak.

To add context to this, I ran a calculation of simple interest and compound interest you'd receive for an initial investment of £4.31 over the 294 years from 1720 to today. I assumed a 3% return.

Simple interest, not reinvested: £42.32 Compount interest: £25,622.49

As the parent poster pointed out, the actual return for a bond bought in 1720 depends on what the holder did with the returns.

Whereas with gold, merely holding £4.31 worth of gold from 1720 would yield £768 of gold today.

I found this calculation interesting in that it demonstrates the true power of compound interest if maintained. Of course, such a return is actually very hard to maintain over a 300 century timespan.

> Of course, such a return is actually very hard to maintain over a 300 century timespan.

You mean 3 century timespan, or 300 years. (Although it would be spectacularly difficult over a 300 century timespan.)

Sure, but in this case wouldn't the 'prevailing rate at the time the cash flows were received' generally have been higher than the original coupon? Presumably the reason UK government waited 294 years is because the interest rate on UK gilts has never dipped significantly below the original coupon rate until now.

Yes, I believe your original point that bonds would have been a better investment than gold still holds.

But the way to compare that would have been to look at the "total return", i.e. assuming coupons had been reinvested, etc. (For example, there is an S&P 500 total return index whose growth reflects the theoretical reinvestment of all received dividends) I don't know if there is such a metric for these gilts, but if there is, then that total return rate would be more or less directly comparable to the CAGR for gold.

(Side note: Total return may not always apply in the real world, as the cash flows received may not be sufficient for reinvestment. Simple example: A bond with a face value of $1,000, coupon of 5%, payable each year. Assume that new bonds are issued each year with the same face value and that the face value is also the minimum purchase amount. Your yearly coupon of $50 from the original bond is not enough to buy new bonds and so it remains uninvested. Things like mutual funds/bond funds/bond ETFs attempt to solve this problem by allowing you to reinvest small amounts, albeit at the expense of charging you a management fee.)

Except the UK Treasury fixed the price of gold at £3.17s10.5d in 1717 and the price didn't change for ~200 years until the UK left the gold standard in 1931. So, zero compounding for 211 years.

The fixed price was set by Newton, btw.

Is property tax waived for residents?

Residents pay council tax, it's a banded tax and doesn't get very high even for the most expensive properties.

UK has never quite had US-style property tax, as that would be incredibly unpopular with hereditary landowners. Instead we have "rates", based on imputed rental value and paid by the occupier of a property. There is also stamp duty at time of sale, and capital gains tax (which is waived for principle residence).

After a disastrous attempt at a poll tax, the system was renamed "council tax" for residential property. It's banded, so very high value property is under taxed. e.g. http://www.theguardian.com/money/2012/mar/09/council-tax-in-...

"Under" taxed in what sense? These taxes pay for things like street lighting and street sweeping, which is the same on every street. It should be the same fixed amount for everyone.

Actually most council tax revenues (usually 40 to 50%) go to the local police.

That's plainly not true. Even if we accept the notion that taxation occurs on a pay-for-direct-utility model (which isn't true in the general case for any western nation afaik), larger homes with more land will clearly require more lighting and sweeping per person than an apartment block.

Pretty sure that the local council doesn't sweep or light peoples private property, dude.

You do realise that the street outside a large property is typically substantially longer per person than that of an apartment block, right?

>It should be the same fixed amount for everyone.

We tried that. It didn't work.

Yeah... That's the dirty little secret of poll tax. It was fair and the people who protested were the ones who don't pay their fair share for local services.

Define "fair". You can't just s/equal/fair/. If you meant "equal", say it. Don't argue morals by wordplay.

I do, above.

It is patently absurd that, for example, the maximum council tax levied by The Royal Borough of Kensington and Chelsea is currently £2133.58.

You can own a £10m property in the borough, earning upwards of £1m per year in rental income and appreciation, and only have to pay £2k to the local council.

Meanwhile, those living in the absolute worst accommodation in the borough still have to pay £711.19.

That actually sounds about right. The logic of fleecing those who can more afford it may not have good moral foundation. Its tempting, but can you explain how the borough gives more benefits to the rich than the poor? Possibly just the opposite.

That is how the existing system is supposed to work, but the property valuations and bandings have become divorced from the current state of the property market.

Note that, in theory, a secondary function of the council tax should be to prevent habitable properties being left unoccupied for extended periods of time.

Unfortunately when the tax amounts to a rounding error on the ROI for a property, it is completely ineffectual. Hence the large number of empty 'investment' properties in London, further inflating an already overheated property market.

The rich have no moral right to real estate at all. Real estate was created by God or whatever you believe, not the sweat of ones brow. Property is a social construct; society sets the rules. Property tax is one way of smoothly implementing a lease concept (every century, the property must be repurchased from the government. This works out in both 99 year lease societies and in the common 1% annual tax rate societies).

Furthermore, there is no moral right to ineritance.

I guess we grew up in different societies then. Mine has definitely a strong moral right to property. Maybe you need to find one that works in your imaginary way.

If you're renting the place out, it's the residents that pay to the local council - so you don't pay a penny. However, you are paying income or corporation tax on the rent, and capital gains on the appreciation once realised.

Why should someone who's lived in a property for decades be taxed out of their house just because the area they live in has become a desirable area?

I mentioned the rental income more as an indicator of the 'utility' one derives from having use of the property during ownership. Alas, given how negligible the sum is in the scheme of things, it scarcely matters who assumes the burden.

To your actual point, to tax someone out of a £10m home in London today the council tax rate would have to be increased many thousands of times over. That is not a realistic danger.

This policy is seeing a resurgence of popular support in the form of the 'Mansion tax', but really all we need is a more equitable council tax.

NB: however there's also Inheritance Tax, which does upset some hereditary landowners; that's completely different to property tax, but including for completeness.

https://www.gov.uk/inheritance-tax/overview

That's completely optional tho'; Milliband didn't pay a penny on the £1.5M house his "socialist" father left him.

Besides what stygiansonic said:

The article does not claim that UK bonds have been paying 2.5~4% since 1720. That range refers to the current nominal rate for those bonds. Those bonds have been restructured/refinanced several times along the years. That is, the UK "soft-defaulted" a few times.

Sovereign bonds aren't risk-free, especially not in the very long term.

The fascinating part for me has always been the power of compounding : 1.032 ^ 300 = 12703, while 1.030 ^ 300 = 7098 ! i.e., a difference of 0.2% per annum makes a 5600-times difference in final wealth.

Related : in the finance industry, there's a term called basis points (written bps, pronounced "bips"). 1 bps = 1/100th of a percentage. So that 0.20% is actually 20 bps, a royal magnitude in this new perspective of compounding :-)

12703 / 7098 = 1.78965x.

So a 6.7% increase in intrest rate (3.2 vs 3.0) makes a 79% difference in return after 300 years.

> And yet buying a property in London probably would have been an even better investment

I believe you never really own a property in GB. I think you own it for 99 years and then it goes back to the crown.

Not true, there are properties sold on a lease, but freeholds are very common. I own the land my house stands on in perpetuity.

It seems, to me, that freehold is not as common in London as in other parts of the country.

"Never sell consols." - The Forsyte Saga

Britain still has some consols outstanding. They're perpetual bonds, paying interest at a fixed rate, forever. (Or at least as long as the UK lasts.) Some date back to the 18th century. It takes an act of Parliament to call them in and pay them off. That's finally happening, at least for the 4% consols.

mm part of me whishes' that I had brought some consols a couple of years back when they where at 65-70.

I think the 4% ones had gone to a premium (ie price had gone over 100 ) so it makes sense to redeem then.

What stops Britain from calling them all in and paying them off at current interest rates?

They don't need to. Saying that yields are low is the same as saying that bonds' prices are high. It would make more sense for the government to buy bonds when their prices are low (and yields high).

Except that they're not buying them on the open market; they're redeeming them for face value. At least that's my understanding. The only reason it hasn't been done previously is that there is significant administrative overhead in some cases to do so (up to and including an act of Parliament), and only recently have market interest rates fallen below their coupons.

You're right, they are redeemable. But even so, to make it worth repaying the 4% bond, they would need to believe that their interest rates would remain below that. If the rate at which the government borrows is higher, then it would be better to do something else with the money.

But that's a rather odd belief, isn't it? It's unlikely to happen except in the case that the BoE fails to relax the monetary policy that has been too tight for quite a while now (as evidenced by the current low rates). Isn't it a bit like betting on your own failure? I suspect there is more than economics to this.

Good point, although there may also be administrative overhead in just keeping these ancient bonds on the books, so the total cost may be higher than 4%.

As far as future interest rates, there is an argument that as a civilization matures, interest rates trend toward zero. The more mature the economy, the lower the perceived risk (on average), and so the lower the rates. Apparently in the later stages of the Roman Empire for instance, interest rates were very low. So it isn't a foregone conclusion that interest rates will ever return to the "normal" levels of the 20th century, at least until a new global paradigm comes along. (Nor that they won't, of course.)

> there is an argument that as a civilization matures, interest rates trend toward zero.

I'm inherently suspicious of any argument that is supposed to apply to "civilizations". Not that it doesn't matter, but there are usually much more simple explanations to be found elsewhere. For example, whatever we know about money in the Roman empire, we know far more about money in Britain, US, France, Germany, etc., in the last several centuries.

> So it isn't a foregone conclusion that interest rates will ever return to the "normal" levels of the 20th century, at least until a new global paradigm comes along.

The way I understand interest rates work, from conventional macroeconomics, is that some people have money to spend and invest, and some people want to borrow money and spend it on something that will make them more money. So when you look at the interest rates, you aren't really looking at the riskiness of a modern government (US is definitely risk-free, UK also probably), you are mostly looking at the "price" of the people's savings.

When lots of people want to save, interest rates --- the price others are going to pay to borrow --- will go down to balance the supply and demand of savings. So one way of looking at low interest rates is to see this as a situation where there is an excess of desired savings (i.e. the interest rate that would truly balance savings and investment is below the current rate, which is already almost zero in real terms). This explanation is incomplete (you need to introduce another constraint, and do more macroeconomics), but it's more conventional, and I think also more robust than most theories of civilization.

Finally the passage in Pride and Prejudice where Mr Collins says "one thousand pounds in the four per cents ..., is all that you may ever be entitled to" now makes sense.

For an interesting analysis of the economics in Jane Austen and other literary works from that era you could read Capital in the 21st Century.

Never a saver be.

About five years ago, the Greek government tried to slice 6% off every Greek bank account as a once only tax. There were riots and a change of government.

The UK, over a similar period ran inflation "just above" it's target of 2%. And so sliced 11% off everybody's bank accounts anyway, and 11% off what it owed us.

Governments never pay back the capital unless thy have to.

I'm hoping inflation will eat my mortgage capital away.

> Governments never pay back the capital unless thy have to.

Some do. See https://en.wikipedia.org/wiki/List_of_countries_by_public_de... as a starting point.

The list shows that debt is "ok" if creditors believe it'll be repaid eventually(USA,Japan). Some countries just cant afford the "cost of debt"(mostly Africa). Others are in a dire situation when creditors feel they wont get their money back(Greece).

I didn't know Japan was the country with the largest public debt.thanks.

Norway loos to be pretty interesting on that list too. As well as Finland.

Singapore, too. No natural resources, still no net public debt. (http://www.gov.sg/government/web/content/govsg/classic/factu...)

Wasn't that Cyprus, not Greece?

The effect of inflation eroding your funds can be eliminated by investing it effectively thought. Serious savers should be earning returns well in excess of 2%; my regular bank account pays more than inflation. Similarly competent lenders would have priced in margin on top of a 2% inflation expectation, so they'd be making a slightly smaller profit on their loan portfolios rather than a loss.

That's not the case when a governments freezes withdrawal of certain assets whilst proposing to give them a 6% haircut.

Happy to see someone makes this point. I think people assume I'm a little nuts when I try to explain that inflation is a tax.

Makes you wonder how long it will take - if ever - to pay off our current collective debts.

We're at a point where it's pretty obvious that the principal will never be repaid. The debt will continue to get serviced, which is all anybody really cares about.

I imagine most debt is owed in bonds, the principal of which are paid off any time someone cashes one in. But since (people are always buying|the government is always selling) more bonds, the nominal amount of the total debt rarely if ever decreases.

GB & Germany are getting closer to a balanced budget (Germany will probably get there next year). It's not impossible to pay off all debt, especially if inflation returns to healthy 3%.

A balanced budget doesn't mean you've paid off your debts.

I've noticed a lot of the media (in the UK) don't seem to understand this.

I find the entire concept to be unavoidably confusing. In accounting, to "balance the books" means to complete the process of double-entry bookkeeping. Once the books are balanced you can then determine whether you made a profit or a loss.

The political term "balance the budget" seems to be a corruption of the accounting term, and it means just for the state to break even. It seems likely to me that the coiner of this term had some misconception about double-entry bookkeeping - such as that you break even iff your books are balanced

It doesn't mean you've paid off your debts, but it does mean you are paying off your debts.

There is no need to pay off your student loans completely if the interest rate on them is low and you can do better things with your income. Making your payments is responsible. Paying them off (partially or entirely) means that you have nothing better to do with your income.

Refinancing your student loans from 4% to 2% is a fantastic idea, however (which is what the UK is doing)

It was my understanding that despite cutting their budget deficit spending has actually increased substantially in GB over recent years.

The situation in Japan is dire. Their debt is more than double gdp.

The situation in Japan is troubling, but it is not as simple as reducing it to a debt/GDP ratio. Great Britain had a debt/GDP ratio of > 250% in the 1820's.

Isn't most of the government debt held by the population of Japan? Presumably this deters the government from inflating it away.

That level of debt, even when most of it is internal, can't be maintained when Japan is on edge of demographic catastrophe. Whats worse - recent attempts at reducing budget deficit by raising VAT ended up with recession: http://en.wikipedia.org/wiki/Abenomics .

edit: A bit longer article: http://www.businessinsider.com/japan-economy-disaster-2013-5 - it might be a bit old but nothing really changed.

I'm not sure I'd call the demographic changes a catastrophe, that seems a little dramatic.

The VAT changes weren't very well handled, if you know the sales tax is going up substantially then you will bring forward any planned purchases.

What Japan really needs to do is modernise the workplace especially in terms of gender equality but also just moving away from so much paper.

I think the US gov has become too addicted, structurally and incentive-wise, to this hack which lets them spend more each year than they take in organically through taxes/fees/etc.

I can not realistically picture them ever paying the debt off or going back to a zero deficit. I bet the most likely endgame will be some kind of future war against The Bad Guys (which they'll make sure to do sufficient propaganda demonization against for the low-brow general public) and then they could use that situation to justify "retiring" (not honoring) the debt. There is historical precedent. And while there are many good and honest human beings working throughout the US gov it would be a naive mistake to think the most important decisions are made by "good" people. History suggests the opposite. In (almost) all countries. Throughout history. And again, ignore words. Any words that come out of a politician's mouth just ignore. Only weigh actions, results and tangibles. Looking at those, the weight of evidence suggests they'll never eliminate the yearly deficit or debt. Just keep increasing it until some huge "oopsie!" reset excuse is found. The kind that will likely involve much loss of blood by the working/labor/non-wealthy classes, world-wide

That's the historical record, reinforced many times over millenia.

We did it not that long ago. Not only did the Clinton administration balance the budget but drew a surplus from 1998-2001. [0]

Of course tax receipts were much higher as we were in a bull market and had very low unemployment. Since then, a tech bubble burst, we hopped in to numerous endless wars, and Wall St. sent half the world tumbling in to recession or depression and the housing market collapsed.

But it's not that far fetched that it could happen again.

[0] http://www.factcheck.org/2008/02/the-budget-and-deficit-unde...

Edit: this is speaking to zero deficit, not zero debt.

I'd go as far as to say that a zero debt situation is worrisome. It'd mean that we don't have anything (such as infrastructure) that we'd like to spend money on... It'd mean that the situation is bleak for everyone.

It wouldn't mean that; the gov't could always just plunk down cash on things like infrastructure development. If the cash on hand isn't available, then run a budget surplus in order to save up money.

But there are arguments to be made that, assuming a healthy economy, it's better to borrow and spend than it is to save and spend for anything that's worth the money.

Except you can't assume a healthy economy if no one has any savings to spend.

In a healthy economy, people save their surplus in expansions and spend it in recessions, or for larger purchases.

Interest on debt means that the return on investment for projects financed by debt must be positive even after the interest payments, or the debt cannot be paid off. What I often see is that municipalities will do something stupid, like pay for a new, oversized sewage treatment plant, using bonds, and then the very optimistic growth in the sewer system does not occur, and people end up paying $500/month water bills for a plant running at 10% of capacity.

You can't borrow if no one has anything to lend.

You can always borrow people's labor. That's all fiat money is.

Print some money, give it out, borrow it, pay idle people to work.

This only fails if everyone is already working but failing to save, because they are only generating subsistence value from their labor.

You are mistakenly believing that money exists like wool or oil or lumber or stone. It doesn't. Money is imaginary. It is simply an IOU to be exchanged for labor or services. It is subject to inflation if a society amasses too much, unlike durable goods which can be stockpiled until you have enough.

Agreed. Zero debt really doesn't make sense as a goal, and this British bond repayment illustrates the case that if all goes well, inflation eventually reduces a constant debt to irrelevance. (Although it may take a few centuries.) That said, of course debt reduction still certainly has value, as there is obviously such a thing as too much debt.

Debt for capital spending has a different character from debt for recurrent spending.

He balanced the budget and had a surplus for those years, but the problem is, we'd need to maintain the Clinton era surpluses for 90+ years to actually pay off our current debt.

I'd love to see it happen, but it doesn't seem likely.

I think it's much more likely we'll continue to do what we're doing now: printing money and reducing the value of existing debt via inflation.

> I can not realistically picture them ever paying the debt off or going back to a zero deficit

"Back" was a long, long time ago. Nevertheless it is probable the deficit will be subsumed by growth nin the immediate future.

> . I bet the most likely endgame will be some kind of future war against The Bad Guys (which they'll make sure to do sufficient propaganda demonization against for the low-brow general public) and then they could use that situation to justify "retiring" (not honoring) the debt.

There doesn't need to be any "endgame" or debt retirement: this is a fundamental misunderstanding. The government is continually paying off old debt and issuing new debt as the US economy grows and government revenues increase. There is no big pile of debt which is continually accumulating and never paid off: the debt is paid off every single time a bond is redeemed. (Nevermind the fact that inflation reduces the amount of debt in the first place! The national debt as a percentage of GDP exceeded its modern numbers in 1945, but it was inflated away.) People often speak of the debt being "called in": this fundamental truth also happens to explain why that can't happen. A bond comes due when it is due, not when you want your money back.

The situation is, indeed, entirely sustainable, unless you disbelieve the evidence of history and mainstream economics. Furthermore, the US government actually owes much of its debt it itself. The government owes itself 5 trillion dollars. This is pretty much just a silly accounting trick: the government could poof all that debt away and nobody would be the wiser so long as the government still funded the programs (such as Social Security) that bought those bonds. And since the government is the sole producer of US dollars, it should not find that too difficult.

There's also the present reality that not borrowing money at the present interest rates would be insane. Real interest rates on federal debt are near-zero and have actually gone negative at some points. People are literally paying the government to hold their money. [1]

You can go even more extreme and consider MMT. There is logic to it, though I suspect human psychology and the general terror of fiat currencies (especially of treating fiat currencies as if they were truly fiat currencies) would hamper any baldfaced implementation of MMT policies. Essentially, fiat currencies can be viewed as being created via government spending and destroyed via government taxation. The only worry the government need consider is the possibility of inflation, which is not (this is predicted by economics and demonstrated repeatedly, including by present experience, in which the Fed has increased the monetary base by 5x[3] while seeing inflation tick between 0-2%[4]) directly correlated only to the money supply and is relatively easily controlled. Governments issuing their own sovereign fiat currencies are working in this system whether they realize it or not.

tl;dr There is nothing to worry about, people don't understand how debt owed in a country's sovereign currency works; there will never be any "reset excuse" necessary unless a future Congress goes absolutely mad and decides to accumulate truly absurd levels of debt (100x GDP) during economic booms or something.

Sidenote: Government bonds provide a secondary, extremely valuable service. They are a safe, stable place to park your money. If the government stopped issuing bonds and only paid them off, there would be a tremendous outcry and people would start either keeping the money in bank accounts or under their mattress (where it does little good) or investing it into the stock market (riskier and probably increases the chances of a bubble.)

References: [1] http://www.treasury.gov/resource-center/data-chart-center/in...

[2] Debt owed to foreign countries, by amount. Japan will soon overtake China: http://www.treasury.gov/ticdata/Publish/mfh.txt

[3] http://research.stlouisfed.org/fred2/series/BASE

[4] http://www.usinflationcalculator.com/inflation/current-infla...

> There's also the present reality that not borrowing money at the present interest rates would be insane. Real interest rates on federal debt are near-zero and have actually gone negative at some points. People are literally paying the government to hold their money. [1]

Except since you're not ever reducing the debt burden, one day that debt will come due and you'll have to refinance it, and who knows what rate that will be. Having a large debt can be somewhat of a time bomb.

(although I agree with the other things you said - and especially the US is in a great situation where its debts are generally in USD which it controls)

Wasn't there an American president that paid off all the debt in the 19th century?

http://www.npr.org/blogs/money/2011/04/15/135423586/when-the...

This period of runaway debt will end.

It's fairly typical during wartime for countries to adopt out of control fiscal policies. We're somewhat unusual in that we've dumped trillions into other spending (ie Medicare Part D), while simultaneously having to spend federal budget dollars to pay for redeemed bonds held by Social Security.

A completely balanced budget would probably result in deflation. In the U.S., there are only two ways that I know of that money is created: 1) A bank making a loan and 2) the federal government spending money. Likewise, there are two ways that money is destroyed: loan repayments and taxes. But in the case of loan repayments, the total amount paid/destroyed is always greater than the initial loan due to interest. The extra money for the interest has to come from somewhere. And this is without even considering the effects of increases in GDP.

In the short term your right, but in the long term failed banks create actual currency loans are just bookkeeping.

Loan defaults also destroy money (monetary deflation).

Federal spending does not technically create money, as those dollars were collected by taxes or lent by bondholders.

However, the point of the Federal Reserve Bank is primarily to create money, or destroy it, to affect inflation, deflation, or unemployment.

That's how currency notes enter and leave circulation.

Money is created whenever someone provides a good or service that someone else wants to consume. The money value of the currency is the total value of money created by the productive sector of the economy, divided by the number of currency units, with some variation resulting from imperfect knowledge of the market.

The central bank attempts to increase the number of units of the currency faster than money is created, so that the value of an individual unit of currency will remain stable or decrease. If the value of a currency unit were to start increasing, people might be tempted to stop spending it, which would destroy some of the money value of the economy by discouraging trades.

This also has the insidious benefit of allowing the central bank to take some money value from the economy without trading for it, just by creating new currency out of thin air. When they spend the new currency, or loan it to a government that spends it, a fraction of the money value produced by other people suddenly teleports to their own pockets, and they can pretend to be generous and benevolent.

The interest issue is a big problem. Depending on the size and number of outstanding loans, if they were to be paid off, currency would be removed from circulation and the money price of the remaining currency would increase, making it harder to pay off the remaining loans. In order to ease the crunch, the currency-issuing bank would have to actually spend back into the economy without making loans, buying goods and services outright instead of just renting out paper.

The US public debt is 72.5% of GDP. This is roughly equivalent to a person owing a debt of 72.5% of their annual income. High, but not impossible to pay off by any means.

For a person net worth is a lot more meaningful than debt. I wonder if anyone has ever tried to calculate the net worth of the United States.

Wikipedia [1] says $123.8 trillion, or ~$391k per capita (for the 2013 population of 316M). That's 7.23 years of GDP. That's actually much higher than I would have thought!

[1] http://en.wikipedia.org/wiki/Financial_position_of_the_Unite...

This sentence leapt out at me: "That includes borrowing that may have been used to compensate slave owners when slavery was abolished."

You mean to tell me that after the horrors of slavery finally ceased, it was the slaveholders that got reparations?

> You mean to tell me that after the horrors of slavery finally ceased, it was the slaveholders that got reparations?

How would you have done things differently? The slave holders were powerful people. Even the Church of England apparently owned slaves. Compromise is a part of life. Yes, even difficult compromises like these...

Believe it or not, the alternative was much worse. In the US, the Civil War cost roughly $8 billion (in 1860 dollars) and 600,000 lives. There were roughly 4 million slaves in the US at that time and using the New Orleans auction prices of that time you get an estimate of $2.7-$3.7 billion for the entire slave population of the United States.

Basically, NOT compensating slaveholders cost more than twice as much and many more lives in the US.

http://www.washingtoncitypaper.com/articles/40820/straight-d...

Ah, but t'weren't t' North 'as started shootin':

Hostilities began on April 12, 1861, when Confederate forces fired upon Fort Sumter, a key fort held by Union troops in South Carolina.

http://en.wikipedia.org/wiki/American_Civil_War

Some transactions are more than strictly financial.

Sometimes the first bullet that flies is not the first shot of the war. Some scholars claim that the USA committed the first act of war well before the CSA opened fire on Ft. Sumter.

Obfuscating the adversarial acts that occurred before battle is joined is a choice made by historians. I recall my history teachers teaching about the Stamp Act and the Intolerable Acts prior to Lexington and Concord, but somehow Fort Sumter started the Civil War? That situation would be a lot like petitioning for divorce, getting the house in the settlement, and coming home that night to find that your ex-spouse was still living in the garden shed.

But I think it is safe to say that there were plenty of jerkfaces on both sides of the conflict, and they got a lot of good people killed, along with the bad. I can't say for certain what would have avoided the bloodshed, if anything, because we cannot A/B test history. I believe that war then was substantially similar to war now; it is usually a handful of people who stand to benefit, maneuvering other people into a false choice between losing and losing more. By the time the actual shooting starts, the bets have already been placed, and all that remains is to wait for the dice to stop rolling.

It's nice that slavery was abolished in the whole USA in the aftermath of the war, but on the whole, the UK way of doing it was much better. If the worst aftereffect they are feeling now is some outstanding 4% consols, that's hardly worrisome at all, compared to the lingering legacies of abolition in the US.

The deeper point is that the conflict wasn't strictly about property allocation, as was suggested by the comment I responded to. Instead it was a power play between two sets of states, not simply a matter of compensating former slave-owners. Which wasn't itself the nominal matter under discussion at the beginning of the Civil War in any regard (though the matter of slavery was in the offing, largely as pertained new states joining the Union).

I'm also not arguing the that the Civil War was the best way of settling the dispute. I will note that in the case of the UK

The point remains, however, that the Confederacy was the first aggressor.

You can read it for yourself: http://www.pdavis.nl/Legis_07.htm

Slavery was not considered a "horror" at the time, it was considered "injust" and it was seen as equally "injust" to take away a right society had given someone and not compensate them.

It's interesting that they also say "expedient". To me that means they felt their economy would continue just fine without the slaves. And they were freeing them as a sort of "eh, why not".

Remember these slave holders were not people on the fringes of society, they were ordinary people. Society did not consider what they did to be evil, so why would that same society punish them?

You have to look at people's actions through the lens of their own life, not the lens of yours. Well, you can look at them through your own lens, but that only lets you condemn the result, not the people, and not the actions.

It clearly was considered a "horror" in the late 18th and early 19th century - that's why it got banned in places like the UK. Consider William Wilberforce's 1789 "Abolition Speech" in the House of Commons:

http://www.artofmanliness.com/abolition-speech-by-william-wi...

Did you read the link you gave me?

He did not talk at all about freeing the slaves, but rather about the condition of their transport. To me it seemed that if instead of freeing them, they would have instead improved the transport conditions, he would have been satisfied.

Or in other words he did not see a problem with owning people. He had a problem with treating them badly.

Except there are plenty of other sources that clearly show that William Wilberforce did, in fact, support the complete abolition of slavery in the British empire.

Then he should have linked to that.

But keep in mind, the question isn't really about if they supported abolition, but if they considered slavery a "horror" and slave owners to be "evil".

It's a separate question from supporting abolition because it is morally justified.

I think the speech should be seen in the context of the struggle against slavery.

This was a battle against substantial commercial vested interests and deeply held racism/race hatred. Wilberforce and other abolitionists argued from biblical belief that all had been made in the image of God. They believed (and spoke and wrote) that slavery was contrary to Christianity, and that to fail to fight slavery was unchristian. Additionally, as in the United States, the use of slaves by the ruling class was held to be an attack on the economic position of the working class, so there was a popular sentiment against slavery which was not moral or anti-racist but instead self interested. Most English people thought that if blatant slavery were allowed they would loose their livelihoods and would either starve or end as slaves themselves. Note: there were many practices in England at this time that would be described as slavery now, but they stopped short of the extraction of free labour via violence as per field slaves in the USA and the Caribbean.

The position of slavery in law was tenuous and attacked by the racism of the establishment and the vast wealth of slave owning and slave trading interests. It rested on the common law assertion of the rights of individuals in England. These rights had emerged over 700 or so years as a bargain between the English ruling class, the King and the peasantry and were the basis of civil society. Undermining them could (and had cf. France, the English Civil War, the Peasants Revolt) led to mass slaughter, including of noble people and members of parliament. They were not explicit or clear.

The position at the time of the speech was that it was vaguely agreed that if someone was in England they could not be a slave. Some people included non-Caucasians in the "someone" category, but there were a lot of people who would exclude non-Caucasians (and other groups like Irish people, Scottish people, people who were poor and so on) from the definition of humanity. There were many examples of slaves being owned and no one doing anything about it. This is very similar to the position in law of domestic violence in the 20th century, it was quite possible to assert that it was banned completely, but in fact it was allowed so long as no one really kicked up a fuss, which if you were very powerful would be never - although if you beat your wife to death you would probably get in trouble.

The question, for the pro-slavers was, where to drive the wedge so as to avoid the nasty "my house is on fire and there are 1000 people outside with sticks" episodes that other ruling classes had been faced with.

So for Wilberforce it was fundamental to assume that Slavery was utterly banned in England, and that it was unthinkable and inadmissible to consider it. Tacitly the argument was that if you drew the line anywhere at all then the position of the elite would be unsustainable. Wilberforce believed that all humans were made in the image of God and were God's children equal in his eyes but was trying to sell the proposition that having slaves in England was impossible and the slave trade was necessarily wicked.

It was not established at all that slavery outside of England and the protection of the Common Law as enforced by God's representative (the King of England) was not allowed. And no one believed that slaves in the USA or any other god forsaken hole would lead to a revolution in England. Many racists didn't care at all that non-Caucasians were enslaved, and didn't see anything wrong with it.

Additionally some silly behaviour in Boston harbour and the subsequent brilliantly diplomatic and subtle disengagement from the territory of the USA by the British (we ran away) meant that there was no prospect of the English parliament being able to assert a ban on slavery in the USA. Also a direct assault on the economics of the sugar plantations in Jamaica would have stirred some strong opposition that the abolitionists were keen to avoid.

The propensity of the English working classes to violence could not be invoked to attack the slave trade or ownership overseas. They could be relied on to prevent the admission in public debate that anyone wanted to establish mass slave ownership in England. The evident cruelty of some of the practices of slavery were widely used to attack it, but it was argued that these were not part of the institution of slavery, any more than cruelty to livestock was part of farming. The cruel practices of slavery could be characterised as aberrant and amenable to remedy. But Wilberforce is arguing that the institution of the Trade of Slaves is necessarily cruel, and these cruelties are not amenable to remedy.

This is why Wilberforce is attacking the trade and not the practice.

That's one of the factors that damaged Haiti after its independence. In order to normalize trade relations, they had to accept debt at the market rate for the slaves who had been emancipated. This was many, many times their annual income and is probably a major reason why the country became a failed state.

As a matter of historical fact, yes, see link below. As a matter of rhetorical response, wouldn't paying off whomever be worth ending the horrors of slavery? As a matter of imagining a counterfactual, what would the late 19th and 20th centuries have looked like in the US if it had somehow followed a similar route instead of embarking upon the Civil War?

http://en.m.wikipedia.org/wiki/Slavery_Abolition_Act_1833

The people that had slaves lost money because of the new law. They would have rioted and possible reverted the law if they got no compensation.

Law change is forever, compensation is short-term - of course it's worth it (that's one thing that paradox grand-strategy games taught me - never grant priviledges to provinces for gold ;) ).

BTW there's a lesson there - it shows how we should deal with the CO2 problem and global warming. Countries that industrialized recently won't stop becoming rich just because it's bad for someone else. We can try to make everybody pay, or we can compensate these that need coal industry the most (i.e. developing countries) to make them switch to better (and more expansive) alternatives.

I wonder what the process is for paying back the Nominal. Surely Pound Sterlings in 1720 had an entirely different value than today (as has pretty much every other currency, in case Pounds was not the currency for this particular debt).

Sure, pounds sterling had a different value in 1720 (although the question arises - a different value in comparison to what? The US dollar and the Euro didn't exist in 1720! You could take a set quantity of gold as your comparison, but the value of an oz of gold has fluctuated more than the value of a pound sterling over the same period).

However, it is all a bit immaterial. If the debt was denominated in pounds sterling, then it will be repaid in pounds sterling. If it was in guilders, then it will be repaid in guilders (or in sterling, at whatever the current nominal sterling/guilder exchange rate is).

The question of how to compare prices over time is an interesting one in economics. There are a few answers which have been arrived at.

There's Angus Maddison's history of GDPs dating to the year 1.

Gregory Clark of UC Davis has compiled a price history of England dating from 1209 to 1914:

http://www.econ.ucdavis.edu/faculty/gclark/papers/Agprice.pd...

Generally, there are commodities with fairly well-established prices and costs, including food and energy. In particular, food as a share of average wages is a reasonable proxy over time.

Another argument is that money should ultimately be considered to be backed in energy units, an idea I've traced to H.G. Wells and a 1914 short story. It appears subsequently in Arthur C. Clarke, R. Buckminster Fuller, and Kim Stanley Robinson's writings.

Clarke was quite the fan of Wells.

>The value of an oz of gold has fluctuated.

Compared to what? Other goods.

So, value of pounds is determined by its purchasing power

Debts are usually denominated in a currency, so if the nominal was 100 pounds, even if that used to be worth 100 times more before, that's what the government needs to pay.

100 pounds (lb) of silver?

I think it used to be pretty common to use metals instead of currencies to denote debts, for reasons mentioned in this thread.

I have a friend who once lent me money in one currency, but denoted the debt in "in X Euro or (X Euro in Yen at lend date), whichever is worth more", which I'm pretty sure is the best way to deal with inflation problems as a lender.

Currency exchange rates are not the same as (or even very closely correlated in the medium term to) inflation.

> which I'm pretty sure is the best way to deal with inflation problems as a lender

Why stop at 2 currencies? Why not specify the debt in a large number of currencies that take the value at whichever is ultimately worth more? Of course this sort of hedging is good for the lender but it would be horrible for the borrower. I guess if you were desperate for the loan (or he was giving a really favorable rate) it's probably worth it, but I've never heard of a lender trying to hedge exchange rates in this way. But then again maybe I'm unaware of some of the games people have to play with other currencies since I mostly only have to deal with the dollar.

You could denote your loan in Singaporean Dollar. Their central bank pegs the SGD to a basket of currencies, effectively giving you a similar hedge.

If you do so, you run the risk that in the future the Singapore dollar is no longer pegged to a basket of currencies.

You do. That's akin to counterparty risk. Depending on the time scale, this risk can go from miniscule to certainty.

Isn't it just priced into the interest rate?

What is interesting is the different types of 'lender'. Banks are lending money they create by fractional reserve, and will pay a lower interest on those deposits than the lent money, so they don't really care about inflation.

A wealthy individual investing in bonds would be a different prospect. But bond prices go up and down based on how the yield compares to interest rates. If I understand correctly lowering interest rates makes the bond worth more.

Any long term debt for 100's years ago is eroded by inflation but by the same token the lender probably profited from all the interest years ago, so the diminishing returns now are just some left over pocket money.

In reverse it is like a mortgage where you can go interest only and have a more modest mortgage in 10 years time, but I don't think that means the bank is the loser.

If you are going to lend money rather than putting excessive terms just factor the inflation risk into the interest rate, and diversify into other assets. Owning some shares, real estate or gold, or foreign currency bonds.

Absent devaluations. I don't believe it's happened in England, but as an example, Russia re-based the Ruble in the 1990s following an inflationary period. The exchange was 1,000 old rubles per new ruble, in 1995, and/or 1998:

https://en.wikipedia.org/wiki/Russian_ruble#Post-Soviet_rubl...

https://a248.e.akamai.net/7/1635/50139/1d/origin.nbclearn.co...

Yes, they'll only get the nominal amount back.

Although there has been a huge amount of inflation since then you'd expect that the interest payments have more than made up for this.

Pound Sterling didn't evolve in a vacuum -- there are acts of Parliament regulating exchange rates with previous denominations; I expect they will be used, and have likely been used to pay out compounded interest until today, i.e. when the last Sterling reorganization happened (in the 70s? I can't remember), these debts were likely recalculated. It's not like the Bank of England is still issuing XVIII-century Pound Sterling just to pay interest on something.

One thing the United Kingdom of Great Britain really excels at, is continuity of government. It would be much more difficult for, say, Germany or France to deal with debts from 1720, considering they went through several revolutions and dissolutions and likely defaulted or simply ignored previous obligations at various points.

This stood out to me:

"Reissuing bonds was a big administrative endeavor in earlier eras. In 1932, the conversion of an earlier war loan to one paying lower interest required so many temporary clerks that 700 lambs were prepared to feed them one evening, according to a history of Britain’s debt by Jeremy Wormell. Now, in the computer age, the task is relatively straightforward, officials say."

... And yet we have >10x the civil servants now... What do they all do?

They sit and collect dividends from the social contract you were forced into.

Are there other EU countries that issued these kinds of consols? 4% interest sounds like a great low risk investment to own as part of a portfolio

Am I missing something?

Not necessarily. The standard way of valuing a bond is future value discounting. If the annualized interest rate between times 0 and T is r, then a payment of 1 unit at time T is worth

  exp(-r * T)

and a stream of payments C1, C2, ... CN at times T1, T2, ... TN is worth

  C1 * exp(-r * T1) + C2 * exp(-r * T2) + ... + CN * exp(-r * TN)

In particular, N can be infinite, so that the value of a never-ending stream of payments is

  C1 * exp(-r * T1) + C2 * exp(-r * T2) + ...

which can sum to a finite value. For example, if all the C's are constant, and T1 = 1 year, T2 = 2 years etc, then the present value is

    C * exp(-r) + C * exp(-2r) + C * exp(-3r) + ...
  = C * (exp(-r) + exp(-2r) + exp(-3r) + ...)
  = C * exp(-r) / (1 - exp(-r))

so, for example, if C = $1,000 and r = 4%, then the value of this infinite stream of payments is about $24,500 - so if you had to lend more than $24,500 for a 4% consol paying $1,000 you would be getting a bad deal.

This is before taking account of the possibility of default, which means that what you thought was an infinite payment stream turns out to be quite finite.

Right now, when interest rates are low, a 4% consol looks like a great deal. But you obviously can't buy a 4% consol at the moment. Maybe you could buy a 1.5% consol, if you're lucky.

Just to correct your last point, UK 30-year gilts are currently trading around 2.6% yield, so perpetual bonds should pay at least that.

And indeed, according to this page, they pay around 3.7%. They don't seeem to trade very often. https://www.fixedincomeinvestor.co.uk/x/bondtable.html?group...

The key risks are:

1. Prevailing interest rates can go way above 4%, leaving you with a less-valuable investment. This is what happened for most of the period.

2. Prevailing interest rates can go way below 4%, so your investment ought to be more valuable, but the issuer retained the right to call in and repay the bond at face value. This is what just happened.

You're probably making the mistake of confusing the interest rate with the yield. Just because the bond pays 4% on its principal doesn't mean you're getting 4% yield.

295 years at 4% yields 105,885 times the principal [1]. The income value of £1 in 1720 was equal to £2,271 in 2013 [2]. Therefore the investment yielded only 4,700% over 295 years.

[1] http://www.moneychimp.com/calculator/compound_interest_calcu...

[2] http://www.measuringworth.com/ppoweruk/

You don't get the interest compounded though, this isn't a bank account, it's payment on a bond. You'd have to find other south sea bubble bond holders to sell you their bonds (which would only be done in whole units, you wouldn't be able to dribble in your 4% every year) to get the compound effect.

Basically you look at the interest paid over the whole issue yearly and linear sum it, not apply a compound interest calculation.

Thanks for explaining this.

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