Inflation Indices and Billions!

To understand the forthcoming blog post, you need a minimal understanding of inflation mathematics.

The world I traded in back in the mid-1960s was a world  miles away from where we are now. Firstly, I will show you how the exchange rates against Sterling have changed over those  47 years.

31/03/67 18/11/14
German Mark DEM 11.11 2.4477 22%
Norwegian Kronor NOK 19.91 10.54 53%
Swiss Franc CHF 12.10 1.5030 12%
Canadian $ CAD 3.01 1.7670 52%
US $ GBP 2.7932 1.5656 56%

As you can see, the pound has suffered quite substantially against all of these currencies – not too bad against the Norwegian Kronor and the US$  but terribly against the Swiss Franc and the Deutsche Mark. The rot started back in the early 1960s and built to a peak in the late 1970s and early 1980s until inflation was got “sort of” under control.

It is difficult to understand the prices of things in those days. Houses sold for £5,000 to £6,000, cigarettes were 20p – 30p a packet and petrol was around 6/- (30p a gallon  – yes gallon – not litre – we didn’t understand litres in those days). To understand them, you must know the inflation multiplier for use between 1967 and now. According to my information this number is 15.78. This means that all the above prices have to be multiplied by that to get a 2014 equivalent. This results in the following:

1967 2014
£5,000.00 £78,900.00
£6,000.00 £94,680.00
£0.30 £4.73
£12,624.00 £40,000.00

This makes houses and petrol look cheap but allowance needs to be made for salaries at the time.  As a 7 year experience bank clerk working in the dealing room, I was earning £800 p.a.. This equates to £12,650. I would guess that someone with 2 years trading experience now would be earning at least £40,000 p.a. Using this as a multiplier the numbers come out like this:

1967 2014 Salary Adjusted
£5,000 £78,900.00 £250,000.00
£6,000 £94,680.00 £300,000.00
£0.30 £4.73 £15.00
£12,624 £40,000.00 317%
As you can see, this makes house prices look almost normal. £15.00 per gallon equates to £3.34 per litre as against the current pump price of £1.24 so petrol and cigarettes look cheap at current prices.
I will now look at the type of trading amounts that were usual in the City at that time.
1967 2014
£5,000.00 £78,900.00
£100,000.00 £1,578,000.00
£1,000,000.00 £15,780,000.00
£50,000,000.00 £789,000,000.00
The £5,000 figure represents the type of amount that we would trade against the smaller currencies, so we would keep NOK 100,000 in our account at Den Norske Bank Oslo. Normal trades in GBP/USD would be for £358,000 (USD$1,000,000 as we always traded in foreign currency amount in the London broking market – never in Sterling) which is the equivalent now of £5.6 million. I will discuss in the next article about our trading in Canadian Dollars but suffice it to say for now that our regular trading amount was CAD 15,000,000 which, nowadays, equates to around £78,000,000! Wow, we knew it was big but not that big!

Next time, I will talk about how all of this is relevant to our trading on behalf of one major customer and the Bank of England.

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