THE DISCREET RETURN OF THE BOURGEOISIE

James Buchan considers the diverging paths of the stock market and the inflation rate, and announces that a new golden age has begun

A woman is the only infallible thing in this world, except Government Paper of the '79 issue, bearing interest at four and a half per cent.

Kipling

IN HIS Treatise on Money, published in 1930, J.M. Keynes predicted that the need for savings, and the return on them, would very gradually vanish; and 'the euthanasia of the rentier' would ensue.

But in the back end of last year two events occurred that suggest to me that the rentier has returned from the dead. Last October, inflation — that scourge of the rentier class — disappeared: retail prices, weighed down by brutal competition and cheap imports from new industrial coun- tries, fell for the first October in 31 years. At about the same time, according to the Central Statistical Office, the savings of the British public in cash and securities and net of all debts reached the round and very large sum of £1 trillion (that is, a million million).

These small events were drowned in the din of the everyday economy, and were ignored by all the organs of British publici- ty: the rentier, when he returns, comes not with the roar of the Schumpeterian entrepreneur or trailing clouds of historical consciousness like Marx's proletarian, but in embroidered carpet slippers. Half a gen- eration from now, as you fix an orchid in your soft lapel, kiss your dowered daughter and stride off towards that discreet little establishment you keep in Muswell Hill, remember that you read of your good for- tune first here, yes, in The Spectator of London, in the 1994 New Year.

Since the rentier achieved his apotheosis in the year 1896, and since the experience of almost every English person alive is of more or less permanent inflation, I should explain its opposite, which is deflation. Inflation, or rising prices or depreciating money — you can look at it from both sides — damages families with savings or inheritance, driving them into penury or speculation; distresses the creditor class, whose advances gradually become worth- less, but makes the task of government easy; and delights business and working people who take advantage of the fog of price confusion to capture higher real product prices and wages. Inflation spreads wealth to new fractions of society by allow- ing these to borrow and then repay their debts in depreciated money.

Deflation, or falling prices or an appreci- ating money, cripples the active or borrow- ing classes of society — farmers, business people, central govern- ment and the working class — for it depresses their income while maintaining their debts.

But it favours anybody who, through his own business activity or as heir of active forebears, is in possession of financial assets: in short, the rentier.

The rentier thus stands alone against all other classes of society and is hated like poi- son. The rentier is far from helpless. He is armed with the power of compound interest and inheritance. His enemies can tax or expropriate him, but their Maxim gun is inflation: the deliberate debasement of the currency by central government to wipe out its own and its supporters' debts.

In this secular struggle, which has defined the course of European history for two centuries, the score so far is: Rentiers: 1, Debtors (inc. central govt):1, with the rentiers effortlessly taking the 19th century, but stumbling badly in the 20th. The battle for the 21st century has just been joined.

The word rentier derives from the Old French word rente, which itself comes from the vulgar Latin rendita, meaning the yield or return on an investment. In mediaeval

.France, rentiers came to mean the people or institutions living off the income from land or the capitalised annuities sold off from time to time by the French Crown. From there it spread to describe those citi- zens of once dynamic manufacturing towns in the Low Countries who now lived by lending their accumulated capital (which seems usually to have been in short supply and well remunerated). Writing at the turn of the 18th century, Defoe said:

Formerly, it had been necessary for [the mer- chant] at any rate to be active and diligent in order to acquire his fortune; but now he has nothing else to do than to determine to be indolent and inactive. National rents and land ownership are the only proper invest- ment for his savings.

But it wasn't until the turn of the 19th century that the reform and consolidation of government debt in England and France created the security indispensable to a ren- tier existence. Between Waterloo and Mons, an entire class came into existence and flourished on the income of the gov- ernment debt securities called Consols (i.e. Consolidated Annuities) and rentes con- solidees.

In England, it was a halcyon era of fiscal solidity, stable or falling retail prices and a downward trend in rates of interest, and these conspired to make Consols one of the great passive investments of history. Keynes discovered that the general level of retail prices was the same in 1915 as in 1826. Interest rates moved down from 3 per cent to 2 per cent by the end of the century, thus augmenting the capital value of Consols by 50 per cent; and even in 1848, when thrones were toppling all over Europe, Consols lost just 5 percentage points in value.

In France, where there was not even the English distraction of aping the aristocracy on the land, the rentiers of the cities gave texture to society and its masterpieces of literature. Balzac's courtesans can discount an income stream in a flash of melting eyes:

`Ah! Shopkeeper, hair-oil seller that you are, you put a price-ticket on everything! Hector told me that the Duc d'Herouville brought Jose pha bonds worth thirty thousand francs a year in a cornet of sugared almonds! And I'm worth six Josephas! Ah to be loved!' she sighed, twisting her ringlets round her fingers and going to look at herself in the glass.

(Cousin Bette, 1847)

The appetite of the French bourgeoisie for these investments was near insatiable: between 1850 and 1880, the French govern- ment debt in issue quadrupled and still did not satisfy demand, which only exhausted itself in railway debentures and the bonds of what are now termed emerging coun- tries.

Elsewhere, the rentier came on the scene later: in the United States, after Appomat- tox Courthouse in 1865 when the Union greenback was re-attached to gold; in Ger- many, after Sedan; and in Russia, hardly at all, for the most perfect rentier in litera- ture, Oblomov, has his income not from government stocks but 350 serfs on an estate deep in Asia.

The high noon of the rentier class was exactly a century ago, the era of Victoria's Diamond Jubilee, when Kipling was writ- ing, in The Education of Otis Yeere, 'All good people know that a woman is the only infallible thing in this world, except Gov- ernment Paper of the '79 issue, bearing interest at four and a half per cent.' But from then on life became much harder. In England, death duties were introduced, income taxes began to rise (to a standard rate of 30 per cent in 1920), bond prices fell and the war caused governments to detach their currencies from gold and print money. By 1919, when Nikolai Bukharin published in Russian his great fulmination against the rentier, The Economic Theory of the Leisure Class, that figure had been wiped out in Germany and the Russian and Austro-Hungarian successor states, and more or less in France. In England, Keynes's beautiful 1923 essay, A Tract on Monetary Reform, is a tender and ironic elegy for the death of the rentier. Keynes showed that the after-tax purchasing power of the income from Consols, which he fixed arbitrarily at 100 for 1914, had fallen to 26 by 1920; while the capital had also crashed in real terms to a level lower than in 1815.

In 1925, giving in to the rentiers' polite clamour, Churchill pegged sterling to gold at its pre-war parity, but this caused a hor- rific deflation and a general strike and the link with gold was broken again in 1931. After the second world war, the rentier either retired to Switzerland or deposited his money on the Bahnhofstrasse in Zurich. Only in western Germany, where the Allies had imposed the sort of independent cen- tral bank only the United States dared tol- erate at home, was there the price stability the rentier craves. In England, prices start- ed to rise at the turn of the 1960s and erupted into bursts of hyperinflation: in the mid-1970s, at the turn of the 1980s and in 1990. The British bourgeoisie was forced to

borrow heavily against hard assets (mostly dwelling houses) to maintain its standard of living.

The absolute low point for the rentier in Europe came in 1989. The Berlin Wall came down, burying sound money in its last metropolitan outpost on the continent; the Swiss began to talk openly about joining the European Community; while in Eng- land the market for houses collapsed, infla- tion was pushing towards double figures and Lloyd's lost more money in one year than it had made in 300.

But the darkest part of the night is the hour before dawn. Already the rentier, in spats and gaiters, was tip-toeing towards Bethlehem.

Here is why. First, there has been no continental war for 50 years; and, however spendthrift a modern government is, it can never destroy a nation's savings in peace- time quite as thoroughly as in war. Second, the organised working class in Europe has suffered a defeat in the collapse of Soviet communism compared to which the events of 1919 and 1848 were mere setbacks. Third, and partly because of the last, new producers in the Far East and cheap labour in the lands of former Soviet hegemony are forcing down prices as brutally as in the late-19th century. The prices of the follow- ing items are falling in England: bread, crude oil, mains gas, telephone calls, nan- nies (i.e. domestic servants), wine and pharmaceuticals. This deflation is so pow- erful that it has been arrested not at all by the events of September 1992, when Britain abandoned a modern version of the Churchillian gold standard, the Exchange Rate Mechanism of the European Mone- tary System.

Fourth, rates of income tax have been reduced to levels last seen in the rentier's Indian summer before the Great War (though many more people pay taxes). Finally, and above all, the British public, shaken to the core by the fall in the value of housing collateral, has been saving with a vengeance: since the summer of 1990, British people have been squirrelling away about 10 per cent of their after-tax dispos- able income or about £50 billion (a thou- sand million) a year into deposit accounts, National Savings and other government debt and the stock market. (In comparison, these savings were £18 billion in 1979 and £2 billion in 1962.) The British public now has gross financial wealth of £1.5 trillion, nearly twice what it had in 1987 or half as much again after taking account of the inflation of the late 1980s.

The public is saving because it thinks it is bankrupt, and is told so by the newspapers.

But financial journalists, and the writers on Saturday savings pages, do not generally invest in financial assets, partly out of scru- ple, partly out of inexperience. Like every- body else, they sought to profit from the era of inflation by occupying highly geared houses. Many owe more than they own and all are mesmerised by the volume of the nation's mortgage debt, which is £347 bil- lion.

Yet, however painful it may be to be a tenant in your own home, negative equity is a problem of individual households. Taken as a whole, the nation's mortgages are comfortably secured, even in what today passes for a housing market, on fan- lights and pebble-dash; and the burden has become progressively lighter. In 1990, a house in London cost about 40 per cent of its value to occupy, comprising about 15 per cent in interest and about 25 per cent in loss of capital. If you borrow at 40 per cent in a deflation, you go bust, rather rapidly. The same house now costs about 7.5 per cent in interest and there is no capi- tal charge. That rate is still a bit expensive, which is why houses are still not worth buy- ing, but it is not crippling.

If, as I believe, the public's mortgage debt is well secured, its actual net financial wealth is, after overdrafts and trade credit, £1.4 trillion. This may not sound much when spread across a population of 57.5 million: a mere £20,000 a head would make a pretty poor annuity even in 6 per cent gilt-edged stock. But I never said every- body would be rentiers. In fact, these sav- ings are not spread evenly across the British population. If we exclude children, anybody who had been unemployed for any time and spent his savings, those who bought houses on credit between 1988 and 1992 and those who know where Lime Street is, we are left with about 10 million bourgeois households with an average holding of financial assets (including their retirement provisions) of about £150,000. This is sufficient to pay an income of a cou- ple of hundred pounds a week, or about the nation's average working wage. And the capital is compounding rapidly in run- away stock and bond markets, through more saving and more inheritance. Those old Consols, for example, for two genera- tions the laughing-stock of fixed-income markets, have gone through the roof. The two issues quoted in the Financial Times returned 43 per cent and 41 per cent in interest and capital last year.

Who will these new rentiers be? Some will not be new, merely restored: the heirs of the aristocracy and the City dynasties who, if they can just keep off the sauce and the gear, will live as comfortably as Bertie Wooster. Others are the hard-faced men and women who did well out of the infla- tion, and paid off their debts before the ERM took hold. Others still are the new City profiteers, like the many fortunate London partners of Goldman Sachs, who will enjoy rich annuities on their invested bonuses.

But the majority, I suspect, will be part- time rentiers. Women have evidently decid- ed that they want to work for pay, which greatly relieves the burden of the bourgeois male. What I think will happen is that men and women will start working later (the average age for university graduation in western Germany is 30) and stop earlier (very many Frenchmen retire at 55), and make up the loss in salary with rents. I, for example, work out of habit and to deceive my relations who suspect me of the most aggravated Oblomovism; my wife works like a demon; but mostly I stay at home, clipping coupons and defending my property against a highly active and dynam- ic burglar class, and thinking, in the descriptive and undisciplined way of the classical rentier, about the tides in the affairs of men. My life, now a bourgeois curiosity, will become a bourgeois norm.

But surely, you might say, the public will regain its nerve and it'll be spend spend spend, a housing boom, a crisis in the bal- ance of payments and hyperinflation? I doubt it. The forces of deflation are very strong. And the British realise — or should do, if they haven't already — that, in the ruins of a welfare state, capital is not a lux- ury: they're going to need an income to pay for their children's college education, and their own retirement and terminal health care. Who wants a mobile phone, anyway? It will only be stolen from a burglarised car, till it, too, falls in price and even Satur- day night junkies must needs stay at home.

But what of working people and the debtor classes and the Government? Surely they will not tolerate such parasites in their midst? Surely Kenneth Clarke, that Colbert in Hush Puppies, will impose taxes on income or capital transfer to pay for that government patronage (hospitals, schools) which alone makes life bearable for non- rentiers? Or he'll inflate: for printing money, as Keynes said in the Tract, 'is the form of taxation which the public finds hardest to evade and even the weakest gov- ernments can enforce'.

Again, I doubt it. England has changed since the era of inflation. Workers in indus- try and small public servants are so enfee- bled that their wages are already lower in relation to the income of the high middle class than in the 1880s. This is an old and sophisticated economy; entrepreneurs are not thick on the ground and farmers are an error due to rounding. The housing debtors are much more numerous and voluble and their inflationary expectations are so entrenched as to be all but ineradicable: these innocents believe that there is a natu- ral price for London houses — the price of

'It hurts when I do this.'

summer 1988— and that a mortgage is not a loan but a gift. But gradually even this debt will be amortised and the Major Gov- ernment may find, by the end of this parlia- ment, that part- or full-time rentiers are a powerful constituency. It will have to be very cautious if it is to defend its majority. For capital, as in the late 19th century, has become as slippery as quicksilver. Rising inflation or higher income taxes will drive the British public's savings overseas. And this is as it should be: Britain has passed into an economic lull and has smaller need of savings than poor countries abroad struggling towards a modest prosperity.

The rentier's return is a cruel insult to the working people of Britain, but, for the fortunate bourgeoisie, it heralds an era of indolence and cultivation.