Economics is tricky and tracing the consequences of policy decisions into future outcomes is fraught with whatifs. Counterfactuals are hugely difficult. So, if the Tories had won the 2001 election, would Britain’s fiscal position been in any better shape? Spending would have been less, but we might have had huge tax cuts instead, a bigger housing boom… Or, instead, if they had cut the deficit, would rates have been lower, the housing boom even more out of control? And so on. Only the truly idiotic would think that Brown bringing in the FSA somehow led to the financial crisis. But you still read it from time to time.
However, one piece of counterfactual history is SO easy that the Right can seldom resist bringing it out against Brown, and that is the Decision to Sell the Gold. Leading from this Times’ article , Tim Montgomerie at ConHome can barely contain his gloating on the subject (hat tip LeftOutside). But I think LO’s attempt at a defence – continued on LibCon – does not go far enough. Sure, the money was invested so the loss was smaller. More important is to bear in mind the record of abject failure that Brown had inherited, and was trying to rectify when he ordered that decision*.
First, let us remind ourselves of a couple of points. One: gold earns nothing. In fact, storing it costs money, though I will leave that fact out for my calculations. Two, since 1979 the price went downhill or sideways therefore losing money compared to any other assets during a great boom for all things from 1982 – 1998.
Three, gold is normally regarded as an inflation hedge. It ‘keeps its value’ (caveat: see graph above!). So when things look inflationary, or the value of nominal financial assets looks under pressure (see 2007-9) it rises in value.
Four: the point of central bank reserves is to have something you can sell that has external value. It can’t be your domestic currency because you have as much of that as you need. Liquid currency from trusted foreigners will do as well. Like $s.
Five, in 1979, for the first time since the 1920s, there arrived a British government with an absolute intention to kill inflation if necessary by crunching unemployment, high rates and all that. Really determined. Therefore Geoffrey Howe could have known with great certainty that from Britain’s point of view gold was going to become less valuable. He might have also thought: if I want to demonstrate my commitment to low inflation (because high inflation has so many temptations), then getting rid of any inflation hedges whatsoever would be a good idea. It would show people I put my money where my mouth is. In fact, a bit like what Brown did.
So. Why didn’t Howe sell? And how much did it cost us that he didn’t?
I have done the calculations. Really simplifying: the scenarios are (1) 650 tonnes of gold held from 1979 to 2008; (2) What happened: 650 tonnes held, then 400 of those tonnes sold and presumed to be invested in $s at T-bill rates; (3) If Howe had taken the action Brown did and sold 400 tonnes in 1979.
Here is the result I get:
to put the figures into context: at about $12bn, in 1979 the 650 tonnes of gold were worth about 3% of Britain’s GDP. By 1998, they were worth $6bn or so, which would have been worth about 0.4% of GDP at the time ($1.6trn). Had Howe sold 400 tonnes, they would have been worth $28bn, or about 1.75% of GDP. That is a lot to foresake, because of fetish with gold.
Brown’s current mistake has cost perhaps $7bn by my calculations, to the end of 2008. As someone who used to work in spreadbetting, I find hindsight trading hugely irritating, so taking it far beyond the years he sold it annoys me immensely. Still, let’s round it up to $10bn to take the recent uprush into account. By my estimations, that is about 0.4% of GDP. There are far bigger mistakes to make.
I have no bone to pick with Howe. You might wonder if it fair to compare an act to an 0mission. But just like the management of the fiscal position (where I amongst other berate Brown for his omissions ,with great justification), management of our assets must include both. If your fund manager bought and held Logica in 1999, would it be the purchase or the failure to sell that would have you wringing his neck?
I think holding onto 600 tonnes of expensive inflation-hedge while actively trying to kill inflation was a costly mistake of the Conservatives. Brown’s error on the other hand looked good for 2-3 years, has cost far less, and at least had the virtue of reason on its side. It is, after all, a barbarous relic – and a fixation with gold has cost mankind greatly at crucial times in the past.
*I had nothing to do with it. I’m guessing what he was thinking.