Borrowing More Money Isn’t The Solution

The Chaplain was looking rather pleased with himself. His fat round face wore a self-satisfied smile. He helped himself to a second custard cream

‘Yes,’ he reflected. ‘I think that went down rather well…’

‘It’s only a biscuit,’ I said.

‘No, no, dear boy,‘ he explained. ‘I meant my sermon. Rather suitable for these times, did you not think? Appropriate. A message upon which we should all reflect. ‘Neither a borrower nor a lender be.’’

‘Good idea,’ I agreed. ‘But about thirty years too late.’

‘Neither a borrower nor a lender be;’ repeated the Chaplain, ignoring my interruption. ‘For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry’. How very true are those words of William Shakespeare.’

‘OK,’ I said, making my point again. ‘But it is all very well to say that we should not borrow money. The problem is that most of us already have done so.’

‘And so has the Government,’ said Professor Roundabout who, along with Dr Susan Swings from City investment bank Floggit Burnhem, was taking coffee in the Chaplain’s comfortable, book-lined room on this Sunday morning. ‘Did you know that of all the tax revenue raised last year the Government spent £31bn simply paying interest on the national debt?’

‘And now I see that the Government is proposing to borrow even more,’ said the Chaplain, ’to try to escape from the mess that was caused by………..our borrowing too much money in the first place. Very amusing!’

‘Oh it’s easy to be cynical!’ Dr Swings joined the conversation. ‘It’s all very well to take the high moral ground, but down at the coal-face…’ – hardly an apt description of the banking halls of London, I felt – ‘we are striving with might and main to stave off recession.’

’You sound like Gordon Brown,’ I remarked. ’And anyway striving as you and your fellow movers and shakers in London might be, it doesn’t seem to be making much difference.’

‘Yes,’ agreed the Chaplain. ‘I know little of the great world of finance. Much too complex for me, I am afraid! But I observe that Mr Brown and that funny looking man with the eye-brows have borrowed vast, unimaginable sums of money to keep the economy on the straight and narrow – and yet it seems that we have a recession anyway. It’s all very curious to a mere cleric.’ He took another biscuit. ‘But I dare say you financial experts know what you are doing.’

There was a hint of insincerity in his tone, and Dr Swings was not slow to notice.

A short history of borrowing… ‘Look here,’ she began, leaning forward and speaking with some urgency. ’I think you know that I have personally advised the Chancellor and we know perfectly well what we are doing. You may disapprove of borrowing but, you know, it is nothing new…….’

‘Indeed it is not,’ chimed in the Professor. ‘People have always borrowed money, and the Government of this country has done so since the Middle Ages. Let me tell you about it.’

I sensed that we were in for a long dissertation from the Professor, and refilled my coffee cup.

‘The Treasury dates back to Norman times,’ Roundabout began. ‘But it was in the 1430s that the Government ran up its first large deficit, to finance the war against France. This was of £30,000 – a figure equivalent to £100 billion in today’s money! Under Elizabeth I the Government achieved a budget surplus but the Stuarts with their extravagance and corruption lost control and after the restoration Charles II appointed George Downing to rectify the situation. Downing was a wealthy man. He owned a street in London that was named after him – Downing Street. But he also was the first person to raise money for the Government through the sale of marketable Treasury orders with a guaranteed repayment date – the origin of our UK Government bonds. By the eighteenth century the Government had quite got into the habit of borrowing money - but in 1720 confidence was shattered.’

‘The South Sea Bubble,’ interrupted Dr Swings.

‘Precisely,’ said the Professor. ‘In 1711, the Treasury established a scheme that gave Government creditors a holding of stock in the South Sea Company. When this turned out to be worthless, thousands of investors lost their money and such was the outrage that the Chancellor of the Exchequer was sent to the Tower of London.’

‘Now there’s an idea….’ observed the Chaplain with a chuckle.

‘Anyway,’ continued the Professor. ‘The Government learned the error of its ways, confidence was restored and, skipping through to the twentieth century, the two World Wars were financed by borrowed money. The 1914-18 war saw the National Debt increase from £650 million £7,500 million, and by the end of World War II the national debt stood at £21 billion.’

Scope to borrow more?

‘Yes.’ Dr Swings jumped in. ‘And that was equivalent to 250% of GDP, far higher than the 43% we have today. So you see we have plenty of scope to borrow more.’

‘Well I don’t know,’ said the Chaplain. ‘We are not at war today, are we? And the Government should try to set an example. If people see that it is alright for the Government to borrow, then they will think that it is alright for them also. But as we can now see borrowing brings false hope and then causes distress. We should not condone or encourage it.’

There was a silence. The Professor’s mind was still back in the realms of economic history, while the moral dimension of the debt crisis seemed beyond the wit of Dr Swings.

The Chaplain stood up. ‘Well, I must be on my way. It is my mother’s birthday and I need to buy her a box of chocolates.’ And in so saying he produced his wallet from his inside pocket and shuffled through its contents.

‘Er,’ he said. ’I don’t seem to have any cash on me. I don’t suppose one of you could lend me a ten pound note?’

Regards,

Tom Bulford
for The Penny Sleuth

P.P.S. If you want to follow the insights of a small company investor, and uncover the hidden gems of the stock market, find out more about The Penny Sleuth by clicking here.

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Borrowing More Money Isn’t The Solution

Professor Roundabout and the Man Who Owned Downing Street