Larry Elliott – Economics editor
Sept. 1, 2023
From the South Sea Bubble to the undoing of Trussonomics, this month of the year keeps providing lessons.
Be afraid. That’s the message from history to policymakers returning from holiday this week as they contemplate negotiating the trickiest few weeks of them all.
For while TS Eliot called April the cruelest month in The Waste Land, in economics and finance that unwanted label would better be attached to September, the time of the year – from the 18th century to the modern day – when problems that have been quietly developing over the summer come to a head.
As these five examples demonstrate, September can be the month when share prices crumble, banks wobble and currencies are devalued.
1. September 1720 and the collapse of the South Sea Bubble
Even three centuries on, the rise and fall of the South Sea Company is the yardstick against which all subsequent speculative manias are judged. That’s because this crisis had everything: a dodgy business prospectus; a company that was unable to generate the returns it was promising; the first example of what became known as a Ponzi scheme under which the company was buying its own stock to keep share prices high; groupthink; and investors left to rue their foolishness. The list of casualties when the share price collapsed from a high of £1,000 included Sir Isaac Newton, who lost upwards of £40m in today’s money. The main beneficiary was Sir Robert Walpole, who as chancellor handled the crisis deftly and went on to become prime minister.
Lesson to be learned: what goes up comes down.
2. September 1931 and the departure of sterling from the gold standard
In the early years of the Great Depression, Britain and most other major countries were subject to the strictures of the gold standard, under which governments agreed to exchange their paper currency for a fixed amount of the precious metal. The gold standard ensured that countries facing balance of payments deficits could not devalue their way out of trouble but instead had to deflate their economies to regain competitiveness. Britain had suspended membership of the gold standard at the start of the first world war but rejoined in 1925. The result was slow growth, high unemployment and pressure for cuts in welfare spending to balance the budget. A minority Labour government collapsed under the strain and a new national government – still with Labour’s Ramsay MacDonald at its head – bowed to the inevitable and came off the gold standard in September 1931. Other countries followed suit.
Lesson to be learned: bad economics equals bad politics.
3. September 1992 and Black Wednesday
Over the course of the 20th century, it was Labour governments that took the political flak for devaluation. The exception to that was the day speculators led by George Soros forced Britain out of the European exchange rate mechanism (ERM) and inflicted a blow to John Major’s Conservative administration from which it never recovered. Britain had joined the ERM in October 1990, less than two years previously, and was committed to keeping the pound within a set range against the German mark. The ERM effectively operated as a looser form of the gold standard and had many of the same defects. Pressure on the pound intensified as the UK struggled with recession at a time when reunification led to higher German interest rates. Soros and his fellow speculators saw the pound as a one-way bet and on Black Wednesday (16 September 1992) they were proven right. After announcing that interest rates would be raised to 15% to defend sterling, resistance crumbled, and the pound was allowed to float. Economic recovery followed swiftly but Major’s reputation was permanently tarnished.
Lesson to be learned: be careful of importing your economic policy from overseas.
4. September 2008: Lehman Brothers and the near death of the global banking system
The global financial crisis had actually begun more than a year earlier but culminated with the bankruptcy of Lehman Brothers, a middle-ranking US investment bank, on September 2008. Lehmans came to symbolise everything that had gone wrong across the banking sector: institutions had taken big bets on the US housing market, creating new opaque and complex financial instruments that magnified gains in the good times but left them exposed when the market turned down. Investors were unsure which banks were nursing the losses so assumed that all of them were in the same boat. Banks lacked the capital to cover their potential losses and when the US government allowed Lehmans to go to the wall panic set in. Even the most powerful banks were seen as vulnerable and ultimately governments were forced to step in with injections of public money. In the UK, the Royal Bank of Scotland and Lloyds were partly nationalised, while central banks slashed interest rates to mitigate the economic fallout. Fifteen years later, the banks look healthier but the global economy has never fully recovered.
Lesson to be learned: A bubble is a bubble so never believe people who say: “It’s different this time.”
5. September 2022 and the short-lived premiership of Liz Truss.
As a historian, Kwasi Kwarteng ought to have been aware of the perils of September, but Liz Truss’s chancellor was eager to make his mark quickly after being appointed in the month. Kwarteng sacked the Treasury’s top mandarin, Tom Scholar, decided not to run his proposals past the government’s spending watchdog and then seemed surprised when the biggest package of tax cuts in 50 years was greeted with the loudest of raspberries from the financial markets. The plan to kickstart Britain’s sluggish economy was an instant flop. Within a week the pound had fallen to its lowest ever level against the US dollar and the Bank of England was forced to launch an emergency bailout of the UK pensions industry. Mortgage rates soared, and Kwarteng was summoned home from a meeting of the International Monetary Fund to be sacked by Truss, who was forced out shortly afterwards. Orthodoxy returned under Rishi Sunak and Jeremy Hunt, who became the fourth chancellor of 2022.
Lesson to be learned: Mess with the financial markets at your peril.
