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An old kind of gilt

by Luis de Sousa Wed Mar 21st, 2012 at 06:16:49 PM EST

Last week some very interesting news surfaced in the UK. The Chancellor of the Exchequer, the government member responsible for the budget, whom in the continent we call Finance Minister, has presented some alternative ideas for the financing of his government. George Osborne of his name, seems to be interested in issuing government debt instruments, called gilts in Britain, of 100 years maturity. Rare, though nothing unheard of. But Mr. Osborne seems willing to go even further and commanded his staff to study the issuing of infinite maturity gilts. This simply means that such instruments cannot ever be redeemed, they perpetually pay interest to their holder. The media both in Britain and the continent reacted with bewilderment to the news, showing their usual struggle to cope with out of the ordinary news.

Update [2012-3-22 5:21:9 by Luis de Sousa]: Now with the English corrected, thanks to Frank.


This is a crosspost from AtTheEdgeOfTime.

In reality, the UK government used non redeemable gilts as its main financing vehicle for the larger part of its history. Back in old times investors willing to finance the state budget would deposit their monies directly with Exchequer. The sum wound be engraved in a stick that would then be splinted in two halves, one resting with the Exchequer and the other with the investor. Better known for tally sticks, they functioned in first place as a guarantee of authenticity, no other stick could be splinted into halves exactly equal to those produced by Exchequer. The deposit with the Exchequer was for the investor mostly a way to safely protect his assets, at the time mainly gold and silver, which can be cumbersome to transport and protect. The tally sticks started to be exchanged between investors and effectively became a form of money themselves, never to be redeemed again. This practice dates back at least to the XII century, when existing documents first make reference to it, and it seems the Exchequer was created precisely for this purpose. Tally sticks were only superseded by debt in the first half of the XIX century. With time this form of financing acquired the name of stock, perhaps as its usage widened beyond the original deposit with the Exchequer. They remain today as one of the basic forms of financing of private companies in Market Economies; but just not for states themselves. Not surprisingly, a return to sovereign stock was anticipated at the EuropeanTribune by Chris Cook.

The media has been pointing the historically low interest rates on UK gilts as the main motivation for this study. History is usually a short thing for the media, hence they don't see that deeper reasons are at play. What 100 year debt bonds or stock do is in first place to take away the power banks acquired over governments. George Osborne is probably thinking of protecting his country of the sort of events witnessed in Europe in 2011, the boycott of German banks on the Italian government, and later the boycotts French and Italian banks tried on their own governments; luckily matched by unusual displays of power by governments. With governments financing themselves with stock banks can never menace to trigger a sovereign default by refusing to roll over debt instruments.

The folk writing for the big media outlets were quick in questioning who would ever invest in such instruments, if they would ever come to be (or more precisely, ever to return). Buying sovereign stock is like investing on oak forestry, it is something for the future, not for today. The main difference is the stock being much easier to trade (or exchange) in case of need. The first thing the media do not understand is that by investing on stock the investor gets its money back. With an interest of 2 %/a and compounding the investment, the original sum doubles in 35 years. For an interest rate of 3 %/a this span goes down to 23 years.

A simple exercise: imagine an individual that starts working at the age of 25 and retires at 65. During his active life the individual spares every month 100 to commit into sovereign stock. In 40 years the total investment, without compounding, is 48 000 . The total compounded with interest is given by the summation of each single investment tranche; simplifying to 40 tranches of 1200 :



Which gets close to 74 000 . Not bad as a retirement complement and without risk of some bank you never heard of collapsing and getting you back to the workforce.

Beyond the clear stand up to the power banks have today over governments, this return to sovereign stock is a much more fundamental change in our Society. The fact is that with the physical expansion of the economy on hold, money supply cannot grow as it did up to 2008. This was one of the essential monetary policies of the XX century, but today it cannot be applied the same way, due to the risk of a fast devaluation, a problem I detailed some years ago. Some folk refer to this issue as Peak Debt, though that particular nomenclature is somewhat narrow minded. What makes debt a burden is primarily a deceleration of money velocity, not a variation of the money supply itself. During the scholarly hyperinflation of the Weimar republic in 1924, money supply actually contracted, but velocity was so high that it paid off all outstanding debt, let alone the interest. During the second half of the XX century the continued expansion of the monetary mass, supported by the physical expansion of the economy, created expectations on investors that prevented money velocity from foundering. Not anymore.

Limits to Growth are this way imposing a different approach to monetary and economic policy, that can find interesting echoes in History. Stock relieves governments of the burden of debt roll over, allowing them to concentrate on interest payments and policies directed at monetary velocity, and of course, the transition of economies into a fossil fuel free paradigm.

I hope that in the continent the EcoFin can look at the things that Britain is trying to do right. Here sovereign stock could have a very important role to bring the Eurozone out of the impasse it is still immersed in. Though not that I expects those benefiting of the present state of things to let these changes to take place easily.

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Are you sure you don't mean gilts rather than guilts?

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by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Mar 21st, 2012 at 07:09:10 PM EST
It is debt, after all...

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Mar 21st, 2012 at 07:13:59 PM EST
[ Parent ]
unlike the German word schuld, guilt and debt are not quite the same thing!

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by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Mar 21st, 2012 at 08:19:47 PM EST
[ Parent ]
And gilts are gilt-edged, not guilt-edged...
by afew (afew(a in a circle)eurotrib_dot_com) on Thu Mar 22nd, 2012 at 02:47:53 AM EST
[ Parent ]
And to give a gilt as a gift is not to poison the free market... it could be an "orderly restructuring" of property relationships

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by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Mar 22nd, 2012 at 06:10:33 AM EST
[ Parent ]
I could have bought my coop for $3500 in 1957. Now it's $70,000.

By your reasoning, it would have been an excellent investment, eh?

Align culture with our nature.

by ormondotvos (ormond no spam lmi net no spam) on Thu Mar 22nd, 2012 at 01:47:00 AM EST
Beyond the clear stand up to the power banks have today over governments, this return to sovereign stock is a much more fundamental change in our Society.

It is neither. There is nothing system altering about issuing consols rather than bullet bonds. And standing up to the power of banks would involve simply printing the money at will, rather than pretending to borrow it from the private sector.

The fact is that with the physical expansion of the economy on hold, money supply cannot grow as it did up to 2008.

Why not? No law of nature prohibits adding another zero or two to the money bills every century.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Mar 22nd, 2012 at 04:00:47 AM EST
The modern version of the tally sticks is something like bitcoins I guess, but the tally sticks have one advantage which digital equivalents cannot (I think?).  Namely, not only can no third party counterfeit a tally stick, but even the original holder cannot duplicate it.  I think this is not true of digital money because any process which is deterministic can be used repeatedly to mint the same bitcoin.
by njh on Thu Mar 22nd, 2012 at 11:48:28 AM EST
This Dialogue Concerning the Exchequer is a fascinating account, translated from the Latin, of the workings of the Exchequer c1180.

This segment of the dialogue concerned the Maker of the Tallies (my bold).


As to the Maker of Tallies

How at the head of the second seat the serjeant of the chamberlains comes first, a clerk or a layman, whose office can briefly be disposed of; in word, however, not in deed.

He brings forth from the treasury the tallies against the sheriff or against him who renders account; and, when it is necessary, according as the manner of accounting demands, he changes or diminishes or adds to the tally, comparing it with the counter tally of the sheriff.

This having been done at the Easter term, he gives back the longer one to the sheriff to bring again at the Michaelmas term. But at the Michaelmas term, when the amount of it shall have been put down in writing in the roll, he hands this same longer one to the marshal to put in his box.

D. I wonder at thy saying that a tally once offered for an account, should again be offered for another account.

M. Do not wonder; for with regard to whatever has been exacted, or paid by the sheriff at the Easter term, he must again be summoned; not, indeed, in order that what has been paid should be paid again, but that the sheriffs shall present themselves to give account, and that the tally offered for the payment previously made may be reduced to writing in the roll, and that thus he may be absolved from his debt.

For so long as he has the tally in his possession, he will not be acquitted but will always be liable to be summoned.

D. And all this seems necessary. But proceed, if it please thee, concerning the offices.

M. Nay, since we have made mention of tallies, learn in a few words what the process is in which the matter of tallying consists. There is, then, one kind of tally which is called simply tally; another, which we call memoranda tally.

The length of an ordinary tally is from the top of the forefinger to the top of the extended thumb; there it is perforated with a moderate borer.

But a memoranda which is always accustomed to be made for a blank farm is a little shorter; for when the assay is made through which the farm is blanched, that first one is broken, and the tally of combustion being added to it, it then first merits the length of a tally.

The incision, moreover, is made in this way: At the top they put 1000£, in such way that its notch has the thickness of the palm; 100£, of the thumb; 20£, of the ear; the notch of one pound, about of a swelling grain of barley; but that of a shilling, less; in such wise, nevertheless, that, a space being cleared out by cutting, a moderate furrow shall be made there; the penny is marked by the incision being made, but no wood being cut away.

On the side where the 1000 is cut thou cost not put another number, unless, perhaps, the middle part of it; in such wise that thou in like manner cost tale away the middle part of its notch and cost place it below.

(1) Just so if 100£ is to be cut in, and thou hast no thousands, thou shalt do the same; and if 20£, the same; and if 20 shillings, which we call a pound.

But if many thousands or hundreds or twenties of pounds are to be cut in, the same law shall be observed, so that on the more open side of the tally, that is, that which is placed directly before thee, a mark being made, the greater number shall be cut Abut on the other, the lesser; but on the obverse side, is always the greater number at the top, but on the converse always the lesser, that is, the pence.

For a mark of silver there is no special notch at the exchequer, but we designate it in shillings. But a mark of gold thou cost cut in the middle of the tally as though it were one pound.

But one gold piece is not cut altogether like a silver piece, but by drawing the knife directly through the middle of the tally; not obliquely, as in the case of the silver piece.

Thus, therefore, both, the arrangement of the positions and the difference of cut, determines what is gold and what is silver. But thou shalt learn all this more conveniently by looking at it than by hearing of it.

D. What remains of this will be made clear by ocular demonstration. Now, if it please thee, proceed concerning the offices.

M. After him, as we said above, a few discreet men who are delegated by the king coming in between, sits he who, by command of the king makes computations by the placing of coins used as counters.

This office indeed is perplexing and laborious enough; and, without it, seldom or never could the business of the exchequer be carried on; but it belongs officially to none of those who sit there, but to him to whom the king or the Justice shall give it to fill. Laborious, I say, for other offices are filled by the tongue or the hand, this by both; in it "the hand, the tongue and the eye, and the mind are unwearied in labour."

Note that there was a difference between two types of tally, one being known as a 'memoranda' tally.

As the tally accounting system developed over the centuries, we saw the use of these two types of tally develop.

The memoranda tally - as I understand it - constituted a receipt for value received against an existing obligation (eg like a receipt given by a shop as evidence of payment).

The tally accounted for debit and credit obligations (this is of course single-entry book-keeping which pre-dated double-entry book-keeping) with the 'stock' portion being issued as a sovereign IOU returnable in payment of tax obligations to be matched against the counter-stock or foil.

The problem has been that the description of tallies as memoranda/receipts has become the only accepted one, and their use as sovereign credit instruments has been conveniently forgotten.

As here



"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Mar 22nd, 2012 at 04:17:05 PM EST


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