A core myth promoted by “sound money” advocates is that the value of Sterling is a fragile flower, held together by nothing more than “faith” and the government’s willingness to bribe savers with interest.
The argument typically runs like this: “If the government stops paying interest on its debt, or stops issuing gilts, nobody will want Sterling. There will be a collapse in the value of the currency as everyone rushes for the exits.”
This view is rooted firmly in the past. It is a hangover from a fixed exchange rate world that died in the 1970s, yet it continues to haunt the nightmares of commentators who haven’t quite grasped how a modern floating currency actually works.
Unsurprisingly, it also serves those who profit from the current arrangement. The “sound money” crowd isn’t just wrong: it’s entrenched and enriched.
Who is Faith? HM Inspector of Taxes, That’s Who
First, let’s deal with the “faith” argument. You often hear that we must maintain “faith” in the currency. But currency is not a religion; it is a legal and accounting construct.
You don’t need “faith” to require Sterling. You need Sterling because the British state has the power to levy taxes and the courts have the power to enforce contracts denominated in Sterling. If you owe HMRC, or have a mortgage or business contract in the UK, you need the tokens the government supplies. If you don’t get them, you end up bankrupt or in jail.
That creates a permanent, structural demand for the currency that has nothing to do with “belief” and everything to do with the practical reality of avoiding the heavy hand of the law.
The Missing Buyer
The “currency collapse” crowd always focuses on the seller. They imagine a stampede of people “getting out” of Sterling. But they never seem to ask the most basic question when selling anything: To whom?
In a floating exchange rate regime, Sterling doesn’t just disappear into a black hole. It isn’t like the Gold Standard, where you could “cash in” your notes for a physical commodity and take it somewhere else. Every time someone sells Sterling, someone else is, by definition, buying it.
When the “currency collapse” theorists imagine a mass exit, they are thinking in terms of the old fixed-rate logic—where you swapped your Sterling for Dollars or Gold held centrally. But in a modern open market, the person buying that Sterling isn’t doing it as a favour. They are buying because they intend to do something with it within the Sterling currency zone.
They are buying to:
- Spend it: Purchase British goods and services.
- Invest it: Buy British assets, businesses, or infrastructure.
When people “hoarding” Sterling (by sitting on interest-bearing government debt) decide to sell, they are replaced by people who want to put that currency to work in the real economy. They buy because a growing economy offers returns that dwarf the old gilt bribes.
From Rent-Seekers to Investors
What the “collapse” narrative describes as a catastrophe is actually a rebalancing.
If we stop paying people the “free money” of government interest, the “hot money”, and the rent-seekers might indeed leave. They will sell their Sterling.
Yet the new buyers of that same amount of Sterling are intent on spending and investing it in the UK.
Spending and investing increase GDP. It boosts productive capacity. It makes the “Sterling zone” more valuable.
How can the price of something go down if it is becoming more valuable? It can’t – unless we’ve been propping it up wrong all along.
The Dip is Real. The Bounce is Too.
Will there be a dip? Initially, yes. And we should be honest about why: paying interest on gilts is a hidden import subsidy.
Gilt interest means importers have been paying £50 for what should cost £60. The rest of us pick up the tab in higher taxes. Remove the bribe, and Sterling finds its honest level.
This is why those interest savings must flow directly back to the British people. Using that fiscal headroom to hike the Personal Allowance changes a subsidy for “hoarders” into a pay rise for workers. You offset the import adjustment by putting money into the pockets of people who actually live and spend here.
Sceptics are not wrong about the dip. They’re wrong about the depth and duration. In a world of sophisticated futures contracts, the “pain” of a shifting exchange rate is largely a private matter for a few slow-moving hedgers. For the rest of the economy, the J-curve resolves on paper before it hits the high street.
A growing economy cannot stay cheap for long. Capital chases returns. Returns follow productivity. Once Britain shifts from rent-seeking to real investment, the currency will inevitably track any improvements in the real terms of trade. The dip isn’t a warning. It’s a brief adjustment while the builders move in.
The Only Shift That Matters
We shouldn’t fret about those who grumble as the government stops handing out free pints. The buyers picking up tickets from the quitters aren’t here for a bung; they’re here to get involved and build.
And that’s the only shift that matters.
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