Recipients of interest on bonds
The Euthanasia of the rentier
rentiers - recipients of interest on government bonds.org
The bond market was potentially vulnerable in one crucial aspect.
Investors in the City of London, the biggest international financial market in the world throughout the 19th century, were wealthy but not numerous. In the early 19th century, the number of British bondholders may have been fewer than 250,000, barely 2% of the population. Yet, their wealth was more than double the entire national income of the UK; their income in the region of 7% of national income. In 1822, this income - the interest on the national debt - amounted to roughly half of total public spending, yet, more than 2/3rds of tax revenue was indirect and hence, fell on consumption. Even as late as 1870, these proportions were still, respectively, a third and more than half. It would be quite hard to devise a more regressive fiscal system, with taxes imposed on the necessities of the many being used to finance interest payments to the very few.
Small wonder Radicals like William Cobbett were incensed. Cobbett declared in his ‘Rural Rides’ (1830): ‘A national debt, and all the taxation and gambling belonging to it, have a natural tendency to draw wealth into great masses… for the gain of a few’. In the absence of political reform, he warned, the entire country would end up in the hands of ’those who have had borrowed from them the money to uphold this monster of a system… the loan-jobbers, stock-jobbers… Jews and the whole tribe of tax-eaters’.
However, such tirades did little to weaken the position of the class known in France as the rentiers - the recipients of interest on government bonds like the French rente. On the contrary, the decades after 1830 were a golden age for the rentier in Europe. Defaults became less and less frequent. Thanks to the gold standard, money became more and more dependable. Despite the generalized widening of electoral franchises, this triumph of the rentier was remarkable.
True, the rise of savings banks (which were often mandated to hold government bonds as their principal assets) gave new segments of society indirect exposure to, and therefore stakes in, the bond market.
But fundamentally, the rentiers remained an elite of Rothschilds, Barings and Gladstones - socially, politically, but above all, economically intertwined.
What ended their dominance was not the rise of democracy or socialism, but a fiscal and monetary catastrophe for which the European elites were themselves responsible. That catastrophe was the First World War.
The Resurrection of the rentier
In the 1920s, Keynes had predicted the ’euthanasia of the rentier’, anticipating that inflation would eventually eat up all the paper wealth of those who had put their money in government bonds. However, in our time, we have seen a miraculous resurrection of the bondholder. After the Great Inflation of the 1970s, the past thirty years have seen one country after another reduce inflation to single digits. (Even in Argentina, the official inflation rate is below 10%, though unofficial estimates compiled by the provinces of Mendoza and San Luis put it above 20%.) And, as inflation has fallen, so bonds have rallied in what has been one of the great bond bull markets of modern history. Even more remarkably, despite the spectacular Argentine default - not to mention Russia’s in 1998 - the spreads on emerging market bonds have trended steadily downwards, reaching lows in early 2007 that had not been seen since before the First World War, implying an almost unshakeable confidence in the economic future. Rumours of the death of Mr Bond have clearly proved to be exaggerated.
Inflation has come down partly because many of the items we buy, from clothes to computers, have got cheaper as a result of technological innovation and the relocation of production to low-wage economies in Asia. It has also been reduced because of a worldwide transformation in monetary policy, which began with the monetarist-inspired increases in short-term rates implemented by the Bank of England and the Federal Reserve in the late 1970s and early 1980s, and continued with the spread of central bank independence and explicit targets in the 1990s. Just as importantly, as the Argentine case shows, some of the structural drivers of inflation have also weakened. Trade unions have become less powerful. Loss-making state industries have been privatized. But, perhaps most importantly of all, the social constituency with an interest in positive real returns on bonds has grown. In the developed world a rising share of wealth is held in the form of private pension funds and other savings institutions that are required, or at least expected, to hold a high proportion of their assets in the form of government bonds and other fixed income securities. In 2007, a survey of pension funds in eleven major economies revealed that bonds accounted for more than a quarter of their assets, substantially lower than in past decades, but still a substantial share. With every passing year, the proportion of the population living off the income from such fund goes up, as the share of retirees increases.