The decision to call in part of the War Loan leads to this remarkable figure from FT Alphaville:
The Treasury highlighted that “the nation has paid £1.26bn in total interest on these bonds since 1927″.
They sound awful. But in fact the Treasury has been a hands-down winner from the bonds. It issued them in 1927 in exchange for a bunch of maturing First World War bonds it couldn’t easily repay (Winston Churchill was struggling to cope with his disastrous decision to return to the gold standard at the pre-war rate, and the economy was crumbling as a result). Since then inflation has annualised at 4.77 per cent a year, well above the coupon of 4 per cent.
The result has been that in real terms, HM Treasury sold its “Consols” for £100 each, and is buying them back for £1.82 each. The government definitely got the better side of this bargain.
That's the effect of inflation over the long term. Anyone who had £10,000 in those in 1927 would have been considered a rich and wealthy man (a house was perhaps £250 in those days) and today that amount is below the level of savings at which you can still receive certain poverty related benefits. So lending one's money to the government, the same government that can decide what the inflation rate is going to be, might not be the most sensible thing one can ever do.
At which point we can only express surprise at those who tell us today that bonds are how we should all be saving for our pensions. If this is the effect of inflation upon bonds then why on earth would we want to do that? We want, obviously, something that captures some part of the increasing wealth of the society, meaning equities or possibly property. But there really are people out there insisting that pensions savings must be done in bonds, even in gilts. And sadly, one of them was Chancellor at one point: as when Gordon Brown changed the rules about how pension funds could invest.
History tells us that's really not a very sensible way to be doing things despite how convenient it might be to the government.