
That Debt from 1720? Britain’s Payment Is Coming - benbreen
http://www.nytimes.com/2014/12/28/world/that-debt-from-1720-britains-payment-is-coming.html
======
MarkMc
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/](http://www.measuringworth.com/)

[2] [http://www.independent.co.uk/arts-
entertainment/books/review...](http://www.independent.co.uk/arts-
entertainment/books/reviews/london-in-the-18th-century-by-jerry-
white-8553732.html)

~~~
stygiansonic
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.

~~~
graeme
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.

~~~
BrentOzar
> 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.)

------
Animats
"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.

~~~
pacaro
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.

~~~
jdavis703
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.

------
lifeisstillgood
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.

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

Some do. See
[https://en.wikipedia.org/wiki/List_of_countries_by_public_de...](https://en.wikipedia.org/wiki/List_of_countries_by_public_debt)
as a starting point.

~~~
aikah
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.

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

~~~
eru
Singapore, too. No natural resources, still no net public debt.
([http://www.gov.sg/government/web/content/govsg/classic/factu...](http://www.gov.sg/government/web/content/govsg/classic/factually/Factually-310812-IsitfiscallysustainableforSingaporetohavesuchahighlevelofdebt))

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

~~~
mkramlich
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.

~~~
themartorana
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...](http://www.factcheck.org/2008/02/the-budget-and-deficit-under-
clinton/)

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

~~~
minot
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.

~~~
bunderbunder
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.

~~~
logfromblammo
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.

~~~
judk
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.

------
jaysonelliot
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?

~~~
ars
You can read it for yourself:
[http://www.pdavis.nl/Legis_07.htm](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.

~~~
arethuza
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...](http://www.artofmanliness.com/abolition-speech-by-william-wilberforce/)

~~~
ars
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.

~~~
DrJokepu
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.

~~~
ars
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.

------
rsp1984
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).

~~~
throwaway183839
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).

~~~
dredmorbius
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...](http://www.econ.ucdavis.edu/faculty/gclark/papers/Agprice.pdf)

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.

------
SapphireSun
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."

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

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

------
charlesdm
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?

~~~
throwaway183839
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.

~~~
bboreham
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...](https://www.fixedincomeinvestor.co.uk/x/bondtable.html?groupid=3)

------
mleonhard
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...](http://www.moneychimp.com/calculator/compound_interest_calculator.htm)

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

~~~
Marazan
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.

~~~
mleonhard
Thanks for explaining this.

