Be Careful September: Five wake up calls from monetary history

Take fright. This is the lesson that history offers to policymakers who are returning from vacation this week as they prepare to negotiate the most challenging few weeks of all.

From the 18th century to the present, September has been the month when issues that have been slowly building throughout the summer come to a climax in economics and finance, contrary to what TS Eliot said in The Waste Land, which referred to April as the cruelest month.

These five instances show that September has the potential to be the month when share values plummet, banks tremble, and currencies depreciate.

1. September 1720 and the South Sea Bubble's demise

Even today, three centuries later, all future speculative manias are measured against the growth and collapse of the South Sea Company. That's because this crisis had everything: a dubious business prospectus; a company that was unable to deliver the returns it had promised; the first instance of what came to be known as a Ponzi scheme; groupthink; and investors who were left to regret their folly. Sir Isaac Newton was one of the victims when the share price fell from a high of £1,000; he lost more than £40 million in today's money. Sir Robert Walpole, who managed the crisis well while serving as chancellor and went on to become prime minister, was the principal beneficiary.

What goes up must ultimately fall, as a lesson.

2. September 1931 and the demise of the gold standard for the pound

The gold standard, which required governments to exchange their paper money for a certain quantity of precious metal, imposed restrictions on Britain and the majority of other major nations during the early years of the Great Depression. Due to the gold standard, nations with balance of payments deficits were forced to deflate their economies to become competitive again rather than just devaluing their currencies. At the beginning of World War I, Britain discontinued its participation in the gold standard, but it resumed it in 1925. Slow growth, rising unemployment, and pressure to reduce welfare expenditures to balance the budget were the outcomes. A minority Labour administration broke down under pressure, and in September 1931, a new national government, still led by Ramsay MacDonald of the Labour Party, conceded defeat and abandoned the gold standard. Other nations did the same.

Terrible economics and terrible politics are lessons to be learned.

3. The events of Black Wednesday in September 1992

The Labor administrations of the 20th century received political criticism for currency depreciation. The one exception to this rule was the day George Soros-led speculators pulled Britain out of the ERM, dealing John Major's Conservative government a blow from which it never fully recovered. Less than two years before, in October 1990, Britain entered the ERM and pledged to maintain the value of the pound relative to the German mark within a predetermined range. The ERM had many of the same flaws as the gold standard and functioned as a looser version of it. As the UK suffered a recession at a time when reunification resulted in higher German interest rates, pressure on the pound grew. On Black Wednesday (16 September 1992), Soros and his fellow investors were proven correct in their view of the pound as a one-way gamble. Resistance fell apart as it was revealed that interest rates would be hiked to 15% to protect the pound. The economy quickly recovered, but Major's reputation was ruined for good.

The takeaway is to be cautious when importing economic policies from other countries.

4. Lehman Brothers and the almost-death of the global financial system in September 2008

Although the global financial crisis had started more than a year before, it was finally resolved in September 2008 with the failure of Lehman Brothers, a middle-tier US investment bank. Lehman Brothers came to represent all that was wrong with the banking industry: Institutions had made large bets on the US housing market and had developed new, opaque financial products that were difficult to understand and that increased profits during boom times but exposed them to risk during downturns. Investors thought that all of the banks were in the same situation since they were unaware of which ones were suffering losses. Banks lacked the money to cover possible losses, and panic ensued when the US government let Lehman Brothers go bankrupt. Even the most powerful banks were seen as vulnerable, forcing governments to intervene with infusions of public funds. To lessen the impact on the economy, the Royal Bank of Scotland and Lloyds were partially nationalized in the UK. Although the banks seem better fifteen years later, the global economy has never completely recovered.

It's important to remember that a bubble is a bubble, so you should never trust statements like "It's different this time."

5. September 2022 and Liz Truss' brief tenure as premier

As a historian, Kwasi Kwarteng should have been aware of the dangers of September, but after being chosen chancellor by Liz Truss earlier in the month, he was keen to establish himself as fast as possible. Tom Scholar, the senior Mandarin at the Treasury, was fired by Kwarteng. He also opted not to submit his plans to the government's budget watchdog. Kwarteng later seemed shocked when the greatest tax reduction package in 50 years was met with the loudest of boos from the financial markets. The strategy to stimulate Britain's lethargic economy failed miserably right away. The pound reached its all-time low versus the US dollar in less than a week, forcing the Bank of England to conduct an urgent rescue of the UK pensions sector. Mortgage rates skyrocketed, and Kwarteng was called home from an IMF conference by Truss to be fired. Truss was then thrown out of his position soon after. Rishi Sunak and Jeremy Hunt, the fourth chancellors of 2022, brought back Orthodoxy.