Although the suspension of gold convertibility lasted from 1797 to 1821, the period after Napoleon’s defeat in 1815 was used to prepare for the reintroduction of convertibility, including a reduction in note issuance. Between 1797 and 1815, inflation averaged 2.7%, and at its peak in 1813, the price level was 73% higher than in 1797. Between 1816 and 1821, by contrast, inflation averaged –5.2%.
A similar pattern emerges during the 20th century. At the beginning of WW1, the UK loosened the link to gold, and inflation surged. After the war, the government restored the link to gold, and inflation turned negative (in sharp contrast to the hyperinflation that overwhelmed paper-money regimes in Germany, Hungary and Austria). The UK government finally abandoned the gold standard in 1931, after which inflation started to rise again, before accelerating sharply during WW2.
Post-WW2, there were two notable policy regimes. The first occurred during the immediate postwar decades, when Keynesian policies dominated and the UK experienced its first sustained period of high peacetime inflation (6.5%, on average, between 1946 and 1979). The second regime began at the end of the 1970s, with the introduction of monetary targeting, and the subsequent adoption of inflation targeting (1992) and Bank of England independence (1997). Since 1997, UK inflation has averaged 1.9%.
When we review the whole period from the end of the restriction in 1821 to 2018, we can see two distinct phases. In the 93 years between the end of the restriction in 1821 and the beginning of WW1, with the British pound linked to gold, the price level declined by 1.1% (essentially unchanged). In the 100-year period after the end of WW1, with paper money the norm, the UK price level increased 38-fold.
How can we account for this huge difference?
Both phases involved technological change, positive and negative demographic trends, and the back-and-forth of globalization. Yet the price level was stable in the first and rose enormously in the second. We believe the common thread is clear: changes in the underlying policy regime presage changes in inflationary conditions. Now, as governments struggle to repair the economic damage from COVID-19, manage massive debt levels and address the urgent challenge of climate change, once-in-a-generation policy change is underway, opening the door to higher inflation.