Is this actually what happened?

Inflation of 5 per cent per annum would more than halve the real value of the existing stock of debt in less than 10 years, all other things being equal. This is essentially what happened in post-war America, where repeated bursts of inflation, manufactured through ultra-loose monetary policy and the “financial repression” of bond yields legally capped at 2.5 per cent, helped quite rapidly to reduce public debt to manageable levels.

I hadn\’t heard that they had capped bond yields.

Anyone got more details on that?

16 thoughts on “Is this actually what happened?”

  1. “legally capped” isn’t accurate – there was no law controlling the price one could sell a bond at. Bond prices were supported by the Fed, with a view to capping yields at the long end at 2.5%.

    The Fed was able to do this credibly and successfully because the government was running a surplus. In 1950 it decided to fight a war in Korea instead, and gave up on the cap.

    (If pressed I would admit that that explanation of the end of the cap is simplistic.)

  2. “Inflation of 5 per cent per annum would more than halve the real value of the existing stock of debt in less than 10 years”: no it bloody wouldn’t. Hasn’t this twerp met the Rule of 72? Failing which, he could use a calculator.

  3. The UK did that to mostly US owned WW1 debt in the 1930s.

    Cut the coupon in half to 2.5% and moved the rememption date to infinity.

    It is little wonder that the US insisted on payment in gold the next time around.

  4. “Regulation Q was Title 12, part 217 of the United States Code of Federal Regulations.[1] From 1933 until 2011 it prohibited banks from paying interest on demand deposits in accordance with Section 11 of the Glass–Steagall Act (formally the Banking Act of 1933). From 1933 until 1986 it also imposed maximum rates of interest on various other types of bank deposits, such as savings accounts and NOW accounts.”

    Looks to be aimed at savings rather than bind rates, but I’m guessing the two are at least vaguely related.

  5. Bollocks. All holders were given the option of refusing the new terms and retaining the old.

    The article I read said holders were given the option of having the bonds redeemed. If without compensation and if that is what happened then it is a kind of default.

    I saw today the govt is considering changing the index from index linked gilts from RPI to (usually lower) CPI. I couldn’t tell if that was on existing bonds or just new ones.

  6. “helped quite rapidly to reduce public debt to manageable levels.”

    A nice euphemism for “they defaulted and never paid it back”.

  7. Bah!
    How many of you have talked to owners of War Loan?
    5% War Loan was sold to the patriotic middle class to help finance the “War to end all wars”. After the Wall Street crash and the 1929-31 slump interest rates were cut. The British government offered holders the option of redemption at par or converting the stock into 3.5% War Loan. Most, but not all, chose to convert into the new stock.
    Since when did redeeming stock at par equate to default?

  8. Joe Blow is confusing WWII and WWI. After WWI the UK government went back onto the gold standard and after WWII the Attlee government devalued. At the end of WWI, the US owned very little of UK government debt.

  9. Incidentally, I was trying to do a research project on the returns on gilt-edged during war and peacetime a couple of years ago – had to give up because it needed about six people, rather than one, to collect and analyse the data reliably. There is NOTHING to support the libel that the UK defaulted on debt owed to the USA. War Loan was overwhelmingly owed to UK citizens (such as my great-grandparents) and the option was to redeem at par or roll over into a new gilt at 3.5%. 3.5% War Loan actually went to a premium for the next few years – in October 1936 it stood at 106.375% so if Homer Joe Blow Simpson had sold his stock then he would have made a noticeable profit – it takes an American lawyer to call that default.

  10. Rob writes: “No government which knew it could inflate away debt would ever control spending. They’d just borrow even more.”

    STOP channeling Krugman. STOP IT NOW.

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