Investors wondering whether to take advantage of the latest gyrations in the FTSE 100 could be forgiven for thinking this quotation refers to equities. In fact, it expresses how investors saw UK government bonds - then known as 'the funds' - in 1892.
At that point, write Sidney Homer and Richard Sylla in their classic History of Interest Rates, "the great bull market in British funds was at least seventy-five years old... It was worthwhile to buy funds in spite of the low yields because the buyer was virtually sure of a handsome capital gain."
The national debt then took the form of 'consolidated stock' or Consols - 'perpetual' bonds (ie, without maturity date) that came with a 2¾p coupon, due to fall to 2½p in 1903 under the terms of a famous debt conversion masterminded by chancellor George Goschen in 1888. With hindsight, we know that buying Goschen's 2½% Consols in 1892 would have made a terrible long-term investment. By 1912 - even before the inflationary turmoil of the First World War - you would have lost a fifth of your capital. If you had the patience of Job and waited 30 years until 1922, the capital loss would have mounted to 40 per cent.
In fact, you - or rather your estate - would have had just two opportunities to redeem your capital without taking a nominal loss (adjusted for inflation, losses would have been near-total). One was in 1946, during the post-war era of easy money created by enforced domestic savings. The other was this summer.
On 5 July, chancellor George Osborne redeemed all of Britain's outstanding 2½% Consols and other perpetual stock at face value as part of a debt clean-up first announced last October. There were headlines at the time about the 'war loan' being repaid - a reference to the 4% Consols issued by chancellor Winston Churchill in 1927 to refinance National War Bonds. But the redemption of Britain's 19th century 2½% Consols, which was announced in April, digs deeper into our financial heritage.
The accompanying graph shows the yield on those Consols and their pre-Goschen predecessors since 1727. The Battle of Waterloo in 1815, marking the end of the costly Napoleanic Wars with France, paved the way for an 80-year bull market that peaked in 1897 as the running yield on Consols fell to just 2.21 per cent. Fifty years later, the end of World War II opened a new era of mass consumption. An unprecedented surge in inflation and interest rates followed, reaching a climax in 1975 before a complete reversal into today's environment of deflation and quantitative easing.
This is why Mr Osborne, like Mr Goschen and Mr Churchill before him, has been able to convert old debt to new. As the graph shows, yields in the late 1880s had fallen below 3 per cent for the first time since the mid-18th century, offering the Victorian chancellor a golden opportunity to cheapen the government's interest payments on the national debt. Likewise, 30-year gilt yields in April were around 2.5 per cent, offering today's debt-minded chancellor a similar conversion opportunity on those 2½% Consols.
This parallel carries with it the obvious implication that buying 30-year gilts today, at a yield of about 2.5 per cent, may be a similarly bad investment to Groschen's Consols. Of course, history is never that simple: we live in a very different monetary era of fiat currencies, and if the global economy is entering a period of 'secular stagnation', as many sensible people believe, low interest rates should be here to stay for years. But the record of nearly three centuries shows just how extreme investors' demand for long-term debt has become.
Average yield on 2.5% consolidated stock
