Gordon Brown's gold sell-off and its links to the pound

"YOU can't eat it and you can't f*** it, so what value does it really have?" remarked Yennefer of Vengerberg as she dipped her hand into a barrel of gold coins, hidden in a deep cellar for safekeeping. This observation by a character in the Netflix series, The Witcher, perhaps really gets down to the nitty gritty of what is actually valuable and what is not.

Recently, a primary school teacher told me that his pupils believe that our currency, the pound, is still linked to gold, despite the fact that the gold standard ceased across the globe in 1971 along with Richard Nixon's mounting Vietnam war ambitions. It is also clear that many adults still think the pound is linked to gold – note the resistance to Gordon Brown's sell-off of 395 tonnes of the stuff between 1999 and 2002.

However this is perhaps less surprising when this major, world-changing event wasn't even discussed by economics lecturers during Warren Mosler's economics degree, which he was studying for at that time, and which he discusses with us in episode 24 of Scotonomics.

The second largest custodian of gold in the world is the Bank of England (BoE), after the New York Federal Reserve. Approximately 310 tonnes are held in the BoE vaults, that's 400,000 bars worth just over £200 billion. Most of that gold has come from just three countries: China, Australia and South Africa, with the United States coming fourth in this line-up. So why do we possess so much gold?

Historically, the UK has always been the world hub for gold trading and, interestingly, in 2019 the Office of National Statistics reported a £13bn export of gold, which represented an almost 1000% increase from previous exporting patterns and brought the then UK's current account into surplus for the first time since 1998.

Within this percentage increase, there was no inclusion of monetary gold from the BoE vaults but it "could be explained by accounting changes by a foreign firm, which holds large stocks of gold in the UK (such as a bank)", according to Drew Woodhouse, lecturer of economics at Sheffield Hallam University. He also suggested that "investors still have confidence in the London gold market, but little confidence in the UK economy."

Between 1717 to 1931, a formal or de facto gold standard was operated in Britain, thus banknotes issued by the Bank of England (BoE) could be exchanged for gold bullion at a fixed conversion rate. So, to ensure that sufficient gold was attracted to London to maintain convertibility, the BoE set "attractive" interest rates.

However, Britian dropped the gold standard during the First World War and finally in 1931. The currency has to serve the needs of the country and this was not well understood, especially by the Cuncliffe Committee, which reported in 1918. Keynes was the dissenter within this committee, who in turn thought Keynes did not have enough knowledge of "business problems". I would argue along with Keynes that a country is not a business and those who seek to run it as if it is should not be in government.

The exchange rate straightjacket that the gold standard imposed upon its users led to slow growth and unemployment, unnecessary emisserations for a country to impose upon itself when you understand that as a politician you are not running a business and your restrictions are real resources. This was most vividly demonstrated by the two world wars, when there was no unemployment. Glasgow folk singer Matt McGinn witnessed this and remarks on it in his autobiography that: "Ordinary folk knew little of the machinations behind the scene but they could see the sudden appearance of jobs where none had existed before."

READ MORE: Scotonomics: Why does the economy work for so few people?

So was Brown's gold sell-off enlightened? Alan Beattie writing for the Financial Times in 2011 suggested that we should "let speculators go gambling on shiny metal. For most governments, in rich countries, holding gold remains a largely pointless activity. "

Yet gold is still viewed by many as a safe asset, even if you can't eat it or f*** it, and if you are running a country the fixed exchange rate that it imposes upon you restricts your policy making choices and stops you from employing one of your main resources, your people.

The UK's pound is a fiat currency and we use it "by agreement" as a means of exchange and a store and measure of value. By definition, it is not backed by a "commodity" such as gold, but you may no longer view gold as a commodity after reading this article. The agreement of us all to continue using the pound allows the functioning of the UK, or not as the case may be.

If you are one of those who are minded towards Scottish independence, by default you agree that the UK is not functioning. Unlike Bitcoin, there is, in theory, democratic control over the fiat currencies that we choose to use via the politicians that we choose to represent us. However, democracy is in short supply in the Westminster First-Pass-the-Post/House of Lords system and this democratic shortfall has seen some very poor utilisation of the fiat currency "policy tool" that we currently all have to use. Of course, it doesn't have to be like this at all, and with independence we could have much more democratic control over this shared, and agreed-on, policy tool.

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