“ We will no doubt see the political pendulum swing to the far right and left as it did in the 1930’s; surely
the most comparable decade to this. ”
in precious metal supplies helped restrict the growth of money, and price stability became the rule rather than the exception for the balance of the nineteenth century. While 1815 brought an end to the conflict on the battlefront, severe austerity ensued on the home front. The application of the Gold Standard meant that loans issued over many years were then recalled to balance the ratio of money to precious metals. It led to economic gridlock with labour and materials abundant, but much-needed projects could not be started for want of finance; a period known as "poverty amongst plenty".
Guernsey endured similar trauma. The disintegrating sea defenses were symptomatic of her financial woes as the island faced being swamped with hefty debts and interest payments. The situation seemed insoluble as borrowing costs consumed 80% of the island’s revenues. What was already an unsustainable debt burden would need to be doubled to fund essential infrastructure projects. This was when a committee of States members was formed by the then-Bailiff, Daniel DeLisle Brock, in what proved to be the defining moment for the island’s finances. He is still commemorated on Guernsey £1 notes, as is the Town Market which was one of the first beneficiaries of the so-called Guernsey Experiment. Like all great ideas, the principles were straightforward. The committee realized that if the government created their own money to fund a project, rather than borrowing from an English bank, there would be no interest to pay, leading to substantial savings. To bring balance to the equation they would have to avoid expanding or contracting the money supply
excessively to prevent either inflation or deflation. This was achieved by adding a sell-by date to the notes in issue, rather like a maturity date on a bond. For example, on a note issued 21 November 1827, it "Promises to pay the bearer One Pound on the first of October 1830". Rent from the resulting infrastructure and tax revenues on liquor were set aside into a sinking fund to pay off the interest-free borrowing. In other words, the projects paid for themselves once interest was stripped from the equation.
The end result was spectacular – new roads, sea defenses and public buildings were established, fostering widespread trade and prosperity. Full employment was achieved, no deficits resulted and prices were stable, all without a penny paid in interest. What started as a trial led to a string of construction projects, which still stand and function to this day. Money was used in its purest form for oiling the wheels of commerce and development. One would have thought that everyone would be happy with such a success story but this was not the case. When you open a closed shop to competition, those with vested interests become highly protective. The private banks were threatened because they were cut out of the action. No loans meant no interest and no profit margin. They may well have been the source of a mysterious complaint made to England’s Privy Counsel which put a ceiling on the issuance of Guernsey notes for the rest of the century. Why is this relevant today?
Whenever stimulus packages or bank bail-outs are paraded as solutions to the credit crisis they are actually part and parcel of its cause. Credit creation is possible
and even beneficial, but only if the money is later retired in a measured manner. This requires restraint and stewardship; qualities that are all-too-rare for those with misplaced incentives (or share options to be more precise).
Like swords to ploughshares, the banking industry does not have to be eradicated in the process of reform. Banks still have a role to play in providing liquidity by matching investors with borrowers. But they can no longer be trusted with unfettered credit creation. The Guernsey Experiment – as it was termed in a booklet compiled in 1960 by Olive and Jan Grubiak for Omni Publications, USA – shows that simple ideas can work wonders. They simply require an unselfish philosophy and a desire to do the right thing for future generations, much like America’s Founding Fathers. One of their number, Thomas Jefferson – who was US President during the Napoleonic era – had uncanny foresight when he said "If the American people ever allow private banks to control the issue of money, first by inflation and then by deflation, the banks and corporations that grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered."
As the blame game begins once more today, the very people who fostered conditions for the credit crisis will no doubt be implementing knee-jerk legislation. This is not the time for new laws, but for new leaders to match the calibre and insight of our ancestors. It is time for us to Master the Morlocks and take control of our destiny before we are devoured by debt and subjugated by selfish elites.
CALL IN TO SEE US FOR AN INFORMAL CHAT OR MAKE AN APPOINTMENT TO SEE ONE OF OUR PORTFOLIO MANAGERS, TO SEE WHAT WE COULD DO FOR YOU!
3rd Floor, NatWest House, Le Truchot, St. Peter Port, Guernsey, GY1 1WD Tel: 01481 721981 Mobile: + 44 (0) 7781 136 534 E-mail:
toby@guernsey-gold.com
20/20 Money Matters Page 49
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