Sterling is the most debased currency

Brian Sturgess - March 2015

Speed Read
  • The extent of currency 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. Today an ounce of gold costs US$1,208.
  • 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 February 20 2015.3 the price of gold had risen to US$1,208 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. It is expressed in terms of the number of currency units needed to buy an ounce of gold so that depreciation is shown as a rise in the index value of the currency. This inversion is necessary to be able to distinguish clearly the differences between the currencies analysed. 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 £786 by February 20th, 2015. 

The Chart reveals several 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.
  2. The relative worth of most of the major global currencies compared with gold improved for two decades until 2000 as counter-inflationary measures were taken across most OECD countries. In 1980, the average price of an ounce of gold was US$603.5, €374.7, £258.7, ¥136,040 and CHF1007.9. By 2000, the price of gold had fallen to US$277.10, €301.1, £183.2, ¥29,997 and CHF 468.2.
  3. Since 2000 the Yen and Franc have continued to be better stores of value depreciating less against gold than the US Dollar, Sterling and the Euro.
  4. The most recent trends have been caused by decisions of the Bank of Japan to commence quantitative easing which has weakened its currency and by the Swiss National Bank to end its tracking of the Euro in January 2015 which has had a strengthening effect.
  5. Over the past 40 years sterling has been the least trustworthy currency as a store of wealth.

1. Based on the price of gold in the composite basket of currencies comprising the Euro before 2000.