750 Year of Industrial Prosperity

Most financial advisors have a good understanding of financial markets and economic history subsequent to the great depression. It is a prerequisite for being a successful advisor (my opinion).  However, when is come to history prior to the great depression, most professionals have limited knowledge.  It is almost as if people think world is now so different that understanding that past is of no importance - sort of like "ancient history" where concepts of monetary policy, taxation, inflation, real wage growth did not apply.   I disagree.  In 2009, I had this great opportunity to use a data set of "UK / England*" prices and wages going back 750 years to the year 1264 which I found festinating to analyze.   

The UK has a rich and sorted history.  The origins of English / British modern political framework resulted from civil war and was memorialized in the "magna carter", a document signed by the king in 1215.  It was a watershed event in the development of political ideology.  It sort on created a fiduciary duty on the part of the monarch as it related to "the people" and created the institutional base from which to launch a new empire.  However, in 1215, England was not that "significant power" we think of today and much of it attention was focused on internal fighting, except for the hundred year war with France.  Anyway, in 1588, the  UK* began to enter a period of increased global influence with the defeat of the Spanish armada in 1588.  Soon thereafter, the British evolved as a major sea power and began to take over most all the former colonies of the Portuguese and some of the Spanish.  By 1922, the British Empire encompassed what was then 52 independent countries, 13 million square miles of land and a population estimated at 458 million.  (approx - 1/4 of the worlds population and 1/4 of the earth's total land).  "Big things can have small beginnings"

 Hence a study of prices and wages in England is a good proxy for understanding global prosperity in the industrial age.  The study shows the following:  From 1264 to 2008,

• Prices increased 525 times over.
• Wages increased 11,856 times over.
• The ratio of Wages to Prices (a "the prosperity index") increase 22 times. Because wage increased more than prices, people were conceptually more prosperous.
• Important to note that over 80% of the increase in prosperity occurred after WWI, and as one might expect in the early history there were long period were prosperity decreased.  See chart.
• Also, for those not super up on "UK" history:  The Magna Carta was signed after a civil war in 1215; England and Wales shared a common monarch since 1284 (officially annexed by England in 1536); plague arrive in England in 1348 and killed as much as half the population; 1600 East India Company formed with British involvement in the Indian continent; Kingdom of England and Kingdom of Scotland merged in 1707, and they merged with the Kingdom of Ireland in 1801 to become the "United Kingdom";  1922 the southern section of Ireland leave "United Kingdom" leaving "Northern Ireland".  84% of the UK population is cite in England.
• 1780 the Industrial Revolution began everywhere.  1783, steam powered cotton gins, 1796 small pox vaccine invented; 1804 first locomotive, 1807 slave trade abolished, ...... 

Monetary Policy from 757 AD

The more I learn of history, the more I am amaze on how sophisticated and complicated things really were back then.  Then, just like now, "monetary policy" is a cornerstone of governance, and thus much though goes into it.  

• British Pound Sterling.  The history of silver coins and the "Pound Sterling" is rather fascinating and is really a long history of "debasing" the currency.  Around 757 AD, King Offa was a Christian king who lorded over portions of England and reigned for 37 years.  As an aside, he was in constant state of drama with the "Pope" at the time.  King Offa began minting "offa rex" silver coin that weighed 22.5 grains (about 1.5 grams) and were "copies" of Charlemagne coins system.  In the King Offa system there were 240 pennies to "a pound".   The Offa coins were pure silver. 
• In 1158 under King Henry II a new alloy coin - 92.5 % "sterling silver" was introduced.  "Sterling Silver" being a alloy was harder than pure silver which made it more durable as a coin.  
• Then, the silver content of these coin was reduced to 15 grain During Henry IV reign (1412-1421), and
• then to 12 grains in 1464. 
• In 1552, new silver alloy coins were created with 8 grains - now "one pound" of silver made "60 shillings". 
• In 1601, 7.74 grain coin based on the "62 shilling standard"; 
• In 1663, England went to a "unofficial gold standard" because gold became the most often received as payment for exports.

Effects:  1264 through 1500.

• I only have data on wages and prices in England going back to 1264 however that is far enough for this study.
• Price volatility was extreme in the early years with high price seen during period of war and conflict. 
• However, prices were relatively stable even though silver content in coins decrease more than 50%
  • prices decline 10% from 1264 to 1500 (using "20 year moving averages").
  • silver content went from 22.5 grains to 12 grains.
  • had the rulers not debased the currency, conceptually prices would have declined even more.
• Hence, these early English rulers and the financial advisors of the age had a very good understanding of benefits of price stability and monetary policy and more important, had a method of implement it.    To keep prices from decreasing, they merely decreased the silver content of the coins. 
• Over the period, prosperity, as measure by average wages relative to average prices increased 128%
• In sum, 250 of very little inflation and a double of real wages. 

1500 to 1600 (Systemic Inflation)

• Silver content in coins reduced 33%. 
• However, this time inflation sets in without real growth in wages 
  • Prices increase 255%
  • Wages increased only 144%
• Hence "Prosperity" as measured by the ratio of prices to wages decreased approximately 25%.
• Difficult to say why prices increased so much but I suspect that it was caused by a significant "increase" in the number of "silver coins" in the market place.
  • During this period, the Spanish discovered the great silver deposit in Potosi in Bolivia.  Spanish government begin minting the Spanish dollar (also known as the piece of eight, 8 reales).  A major currency till the formation of the Latin Monetary Union in 1865.

1600 - 1700 (Stable)

• Unofficial Adoption of a gold standard
• Wage, Prices, Prosperity Stable over a 100 years period.  (Prices increase 8%; Wages increase 21%; Prosperity increased 12% over this 100 years.)
• 1694 Establishment of the Bank of England.

1700 - 1800

• "systemic inflation"
• Prices increase 155%
• Wages increase 107%
• Prosperity decreased 20%over this 100 years.

1800 - 1900

• 1816, the gold standard was adopted officially,
• Prices decrease 33%
• Wages increase 83%
• Prosperity increased 173%
• In 1817, a 113 grains (7.3 g) 22-carat gold coin the guinea as the standard British gold coin.
• Silver standard reduced to 66 shillings (66/-, 2.3 pounds) and did not contain the value in precious metal.
• In 1865, the European Nations formed the Latin Monetary Union and had a  bi-metalic monetary standard with a fixed exchange rates between the metal.  England did not participate in the union.  By the end of the century, this union failed as the hording gold gold reached epic proportion and a global economic crisis - Panic of 1893 in the USA.  By the end of the century the world was on a gold standard.

1900 - 1950

• Inflation becomes imbedded and is at average levels never seen before 2.3% annually over 50 Years.
• However, wage growth exceeded inflation.
• John Maynard Keynes write" the economic consequences of peace" essentially predicting how the treaty of Versailles would result in WWII
• Prosperity
  • Increase 30% pre to post WWI
  • Increase another 30% pre to post WWII.

1950 - 2000

• Inflation increases even more - 6.2% annually over 50 Years.
• However, wage growth exceeded inflation
• Prosperity increased 173%.
• Oil shock of the 70's mitigated by the discovery of oil in the UK sector of the North Sea.  England was actually become an oil exporter.

2000 - future

• In my mind, China entry into the World Trade Organization makes the beginning of a new chapter in global finance.
• China's population is intimidating
• China's ambition almost equally so. 
• TO BE CONTINUED.

• Great site on British History:  http://www.woodlands-junior.kent.sch.uk/customs/questions/history.html#Medieval