Living in a Former Imperial Capital

“How do they do it?” asked an American visitor earlier this week. How do they pay their bills? How can they afford to live in London?

Americans can stop worrying. The empire may be in decline, but there’s still plenty of declining left to do. Rome declined for at least 300 years before the Barbarians took over. England has been in decline — in terms of its place in the world — for at least a century. Even now, the world’s last imperial capital is still a decent place to live, provided you have the money, of course.

London is one of the most expensive cities in the world. It is so expensive that the ordinary Londoner has to move out to the far suburbs and travel by train into the heart of the city every day. A one-hour commute is regarded as standard. Many people spend two hours traveling to work; people have been known not simply to read novels traveling to and from work, but to write them.

On Wednesday night, we went to dinner at an antique gentleman’s club. The members are all distinguished older men, many with titles, ranks, honors — and all with gray hair. Your editor gets in not because of his many fine qualities, but because he is a member of an American club with reciprocity privileges. Always feeling as though he could be chucked out at any moment, he keeps a low profile.

Dinner for four with a single bottle of wine was $320. And that seemed quite reasonable compared to other prices in the city. London is a fine city with much history, good taxis, many delightful restaurants, interesting architecture, a rich, dynamic financial-service industry, and a bubbly property market. It is a great place to live. It’s too bad most Englishmen can’t afford it.

How did the city get to be so expensive, we wondered? How come it didn’t sink along with the British Empire? And, what can we learn from the British experience? The burthen of the following reflection is…not much. But, a look at the details serves to reinforce opinions we already hold.

In the 19th century, the British Empire was an empire fueled by coal, and financed by trade. Successful manufacturers in Manchester and Bristol imported raw materials and exported finished products to the rest of the world. Profits were used to build new plants and equipment. Profits also helped pay for British colonial administrators all over the globe.

Britain’s industry was solid; so was its money. For a good hundred years, the crown’s money was the world’s reserve currency, as the dollar is today. From the defeat of Bonaparte at Waterloo in 1815 to the trenches on the banks of the Marne in 1914, the pound ruled the world. But what ruled the pound? God was in His heaven; the Queen was on her throne. The Bank of England would exchange an ounce of gold for about 3.85 pounds — with no hard feelings.

At the beginning of the twentieth century came the Great War. It so strained Britain’s finances that she was forced to turn to her erstwhile New World colony, America, for financial support. Thereafter followed a long string of reverses, defeats, setbacks, world improvements, devaluations, inflations, and hustles — both for the British Empire and for its money. As the British Empire softened, so did the pound. American and German manufacturers had already surpassed British output by 1910. By 1917, during World War I, America was paying the piper and calling the tune. By the 1950s, America was indisputably the Free World’s hegemon.

The great Anglo-Saxon commercial empire did not die. It had always been a collection of English-speaking people. Its soldiers were gathered up from all over the empire. In the mud of Flanders, German troops were surprised to find the corpses of young men in plaid skirts, for the English had always made good use of conquered vassals and distant colonials: the Scots, Irish, Welsh, Canadians, Australians, New Zealanders, Indians.

And so, between 1917 and 1952, the empire simply evolved. Its capital was transferred from London to Washington and today, it is led not by William Pitt the Elder, but by George Bush the Younger. Otherwise, however, it is much the same. Is it not a commercial empire still? Is it not still regulated by English common law principles — as amended and contradicted by the many moronic edicts and nonsensical rules that have been issued from parliaments over the years? Is it not misgoverned by the same squawking knaves and hectored by the same world-improvers-on-the-make?

But there is a big difference, too. The U.S. Empire is built on the dollar, not the pound. It reached its apogee at a time when the dollar had become only an abstraction. This is another first. Not only is the U.S. Empire the first to squander its most precious resource in a war against nobody, it is also the first to do so with money of no value. Since 1971, the dollar has had no sure connection to anything of real value. It is only a piece of paper. You can buy things with it, but how much of anything you can buy with it depends.

But, let us back to the tale of the pound. Enter World War I, and the Bank of England was forced off the gold standard. As soon as the shooting stopped, however, it tried to force its way back onto it at the same level. Aiming to help our English cousins, U.S. Fed chief Ben Strong administered a little “coup de whiskey” to the American market and put the U.S. economy on the road to the hell of the ’29 crash — and the Great Depression thereafter. Even with American support, Britain couldn’t hold its ground. The pound was devalued in 1931, again in 1949, and then again in 1969. The British money was still widely used in international commerce, but it was steadily slipping. By 1960, British reserves represented less than one-twentieth of the world’s total, and were only half of those of Germany. Ten years later, the country was nearly broke, and in 1976, the poor Brits had to beg the IMF for emergency loans in order to meet current obligations.

Through all this, you can imagine how the pound fared. We recall visiting London in 1985. Back then, a pound was scarcely worth more than a dollar, but that was before Alan Greenspan came to his post at the Fed two years later. Since then, in the race to monetary hell, the dollar has spurted ahead. Today, the dollar is quoted at $1.73 to the pound, but it is in terms of gold that the damage is most clearly visible. At today’s price, you can buy an ounce of gold for 317 pounds. Thus has the pound of Queen Victoria lost 98.79% of its value.

With so much recent monetary history available to them, you’d think Britain’s central bankers would be among the world’s most sage. They have only to look back a quarter of a century to see what can happen to a mismanaged currency. They might even remember that gold, during the late 1970s, was setting new price records. And, they might have reminded themselves that the financial world is a treacherous place, that things go wrong, and that when they do go wrong, it is not such a bad idea to have a little of something solid stashed away…just in case. They might have even reflected on how history has a way of grinding down empires and paper money, until there is almost nothing left of them.

But alas, they who made themselves so familiar with monetary history seemed to have learned nothing but contempt for it. When Britain’s brightest and best got together in the late ’90s to plot monetary policy, every sensible thought seems to have fled straight out of their heads. They came up, instead, with what had to be the worst trade of the decade: after watching their own paper currency go down against gold for nearly a century, they decided to swap the nation’s remaining gold for more paper currency at the lowest prices in 20 years! Nearly 400 tons of the metal was sold between 1999 and 2002, at prices only half of those of today.

“Was there ever a worse time to sell gold?” we asked earlier this week. We still haven’t come up with one.

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.