Perfidious Albion: Sterling - the most debased currency?

Brian Sturgess - June 2013

Speed Read
  • The US decision to end dollar convertibility to gold in 1971 ushered in four decades of paper currency depreciation.
  • The extent of depreciation can be measured by the number of currency units needed to buy an ounce of gold.
  • US$35 were needed to buy an ounce of gold in 1970 to $1469. Today an ounce of gold costs US$1469.
  • Sterling has fallen in value against gold more than the other major currencies.

Four Decades of Debasement
Currency depreciation is the modern equivalent of debasing the coinage. The unilateral United States decision to end the convertibility of the dollar to gold in August 1971 has been followed by over 40 years of significant depreciation of paper currencies. Freely floating exchange rates removed constraints on the Federal Reserve and other central banks on currency creation. 

The extent of currency depreciation over time can be measured by the rise in the number of units of a currency needed to purchase an ounce of gold. Gold, like most precious metals, is seen by investors as a store of value and a hedge against inflation. Ownership of the metal is then one potential means of preserving the purchasing power of wealth. The Bretton Woods international system of fixed exchange rates established in 1944 had set the price of gold at US$35 per ounce. From the early 1970s the breakdown of this system meant that the price of gold and currencies were subsequently set by market forces. As inflation devalued paper currencies the price of gold went up and by August 1972 US$66.9 was needed to purchase one ounce of gold. By the end of April 2013 the price of gold had risen to US$1,469 producing a massive relative fall in the value of the US Dollar. 

Sterling performs worst
The relative fall in the value of five major international currencies against the price of gold since 1970 is shown in the following chart in index form. The Chart shows that over the period the fall in the depreciation in the Swiss Franc and the Japanese Yen has been far less severe than the reduction in the value of sterling, the US dollar and the Euro.1  The worst performing currency over the period was sterling with the number of Pounds needed to buy an ounce of gold rising from £15 in 1970 to £944 by the end of April 2013. 

The Chart reveals two noteworthy trends. 
  1. During the inflationary decade of the 1970s all of the five currencies experienced significant depreciation against gold, although the fall in value was less severe for the Swiss Franc and for the Japanese Yen. The relative worth of these two currencies compared with gold was maintained for two decades until 2000. The Swiss franc has historically been considered as a safe-haven currency for investors with the country experiencing very low inflation. Although the Bank of Japan has had relatively loose monetary policy for many years, trade surpluses and domestic deflation have combined to uphold the Yen as a strong currency.

  2. Since 2000 the Yen and Swiss Franc continued to be better stores of value depreciating less against gold than the US Dollar, Sterling and the Euro, but there has been a distinct downward trend in their relative value over the decade.

Who to trust?
There has been a fall in the rate of currency depreciation against gold since the start of 2013 with the value of all the major currencies rising apart from the Yen. It is unclear whether the fall in the price of gold is a market correction to past speculative excess or a more fundamental response to the failure of serious inflationary pressures to appear despite the various programmes of quantitative easing undertaken by Central Bankers. What is very clear is that over the past 40 years sterling has been the least trustworthy currency as a store of wealth. Where this process will end is unknown. In a recent article by Gillian Tett in the Financial Times she warns that in a world of cyber finance there are few constraints on the expansion of virtual credit. 2

[1] Based on the price of gold in the composite currencies comprising the euro before 2000.

[2] Gillian Tett, How the Fed lost its cred, Financial Times, May 10, 2013: