Toby Birch

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The Guernsey Experiment

by Toby Birch

A long-forgotten alternative to unfettered credit creation...

AS WEARY TROOPS returned from a protracted foreign war, they encountered a land racked with debt, high prices and a crumbling infrastructure, whose flood defenses were about to be overwhelmed, writes Toby Birch of Blackfish Capital Holdings...

Not some nightmarish news story from New Orleans in the years ahead, but the stark reality faced by the island of Guernsey, just offer the French coast in the English Channel, after the Napoleonic Wars ended in 1815.

To fund Britain's fight against the French, credit creation had become rife in the early nineteenth century. Once Bonaparte was beaten, deficits and inflation in Britain were likewise kept in check by containing the money supply, through the introduction of the Gold Standard.

In theory, the holder of a paper note could demand an equivalent sum of Gold from their bank so money could only be created in proportion to the available bullion. The small annual increase in precious metal supplies helped restrict the growth of money, and price stability became the rule rather than the exception for the balance of the nineteenth century.

While 1815 brought an end to the conflict on the battlefront, however, severe austerity ensued on the home front. The application of the Gold Standard meant that loans issued over many years were then recalled to balance the ratio of money to precious metals. This led to economic gridlock as labor and materials were abundant, but much-needed projects could not be funded for want of cash.

This led to a period of so-called "poverty amongst plenty". And the independent States of Guernsey (or rather, their government), endured similar problems to England, since the Pound Sterling was also the currency of the Bailiwick.

The disintegrating sea defenses were symptomatic of Guernsey's financial woes as the island faced being swamped with hefty debts and interest payments. The situation seemed insoluble; existing borrowing costs were consuming 80% of the island’s revenues. What was already an unsustainable debt burden would need to be doubled to fund the two most essential infrastructure projects.

This was when a committee of States members was formed by the then-Bailiff, Daniel DeLisle Brock, in what proved to be the defining moment for the island’s finances. He is still commemorated on Guernsey £1 notes, as is the Town Market which was one of the first beneficiaries of the Experiment.
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