Posts Tagged ‘money’
Purchasing power: the changing value of the pound
“Is he married or single?”
“Oh! Single, my dear, to be sure! A single man of large
fortune; four or five thousand a year. What a fine thing for our
girls!”
(Pride And Prejudice, first published 1813, by Jane Austen.)
If you’re like me, you’ve wondered from time to time exactly how large this ‘large fortune’ is, in today’s money. What about someone strugging on a couple of hundred a year? Several years ago I stumbled across an interesting UK government research paper which attempted to answer that question, by tracking the purchasing power of the pound through the last 250 years. It could easily be used as a rich resource for a variety of activities in the classroom.
The most recent edition of the document was published in 2006, and is called ‘Inflation: the value of the pound 1750-2005‘. It provides a series of tables which enable us to convert prices between any two years from 1750 onwards.
From the introduction to the research paper:
This paper presents a price index covering the period 1750 to 2005 and illustrates the changing purchasing power of the pound over the long-term. No attempt is made to measure changes in the external value of the currency as a result of movements in exchange rates, but changes in the prices of imported goods are reflected in the price index.
It must be stressed that, for a number of reasons, such an exercise is very approximate. Expenditure patterns have changed dramatically over the past 250 years. Many products now commonly purchased (cars, electrical appliances, processed foods, etc) simply did not exist in 1750 and, conversely, goods that consumed a large share of household budgets in the eighteenth century - candles for instance - are now an insignificant part of most families’ expenditure.
It is, however, possible to compare price levels over the long-term by linking price indices covering relatively short periods into a single series.
The heart of the document is a table giving a relative price index for each year from 1750 to 2005 (artibrarily setting the value of the pound on January 1974 to be 100), as well as the inverse of this, which they call the ‘purchasing power‘
Let’s take the ‘large fortune’ I quoted at the start as an example of how to interpret the values.
| Year | Price Index | Purchasing power | % Change |
|---|---|---|---|
| 1812 | 15.9 | 630.4 | 13.2% |
| 1813 | 16.3 | 615.3 | 2.5% |
| 1814 | 14.2 | 704.8 | -12.7% |
| 2004 | 736.5 | 13.6 | 3.0% |
| 2005 | 757.2 | 13.2 | 2.8% |
The price index for 1813 was 16.3, and that for 2005 was 757.2. So in 2005 the average price level was roughly 46.5 times the 1813 level. This means that to have the same purchasing power in 2005 as £5000 had in 1813, we would need an income of around £230,000 a year. Not too shabby!
We’d get an even larger result if we’d used the value at other years close to 1813 — the pound in 1813 was at its weakest point since 1750. It soon recovered, and wouldn’t return to that low level until 1917 — over 100 years later.
Purchasing power and inflation
This research paper highlights a key way in which the character of money has changed over time. As the charts (which are reproduced below) show, the world we live in today, where prices rise year on year, is a fairly recent phenomenon. The first world war triggered a large jump in inflation, but we find significant deflation through the 20s and 30s — a pound was worth 50% more in 1935 than in 1920. The second world war triggered another bout of inflation, and we’ve been on the inflationary roller-coaster ever since — to the extent that a pound today is worth less than 10% of a pound in 1970!
As the research paper points out, prices have risen every year since 1945. Positive inflation is now built into modern economic theory (it encourages you to spend, rather than hoard, as the hoarded money will become less valuable over time), and ‘deflation’ is now looked upon as something to be avoided at all costs. Indeed, the Bank of England is instructed to keep inflation within a band around 2.5% per year, and is required to act when inflation is ‘too low’ just as much as when it gets ‘too high’.
We can see the contrast between the periods of price stability and price inflation very clearly if we graph the price index:
The price index is essentially flat for hundreds of years, and then ‘takes off’ after the second world war.
This linear graph does, however, hide some of the quite severe price fluctuations that occured even during the period of price stability. We can get a better idea of the relative changes in the value of the pound if we use a log scale, rather than a linear scale, for the price index:
Remember that both of these charts show the value of the price index — the higher the number, the less the currency is worth. In a sense, the value of the pound is the inverse of this price index. A (logarithmic) plot of the value of the pound over the last 250 years (scaled to make the value in January 1974 equal to 100) looks like this:
We can see very clearly here the fact mentioned earlier — that the value of the pound in 1813 was at a low point which would not be reached again for over 100 years. We can also see the deflationary period after the first world war, and the constant loss in value of the pound ever since 1945 (with a particularly steep loss in value during the 1970s — the period of double-digit inflation rates).
Further thoughts
In the middle of the 19th century, according to this site,
Servants, who had all living expenses taken care of, earned as little as £10/year, and the sign of being (or having become) a member of the middle class was having at least one servant. Some poor vicars at mid-century earned as little as £40-50/year.
Would you be able to survive on the modern equivalent of the poor vicar’s wage?
An interesting further investigation would be to get hold of some information on the wages of various occupations, and try to translate them into modern equivalents — or, equivalently, to try and convert modern salaries into those of Victorian England. Many interesting difficulties await!
Tags: inflation, Maths, money, purchasing power, research paper