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Tuesday, 12 November 2013

In Denial About Inflation. Coinage in the UK.

This Blog returns to a subject of other recent Blogs published here

People tell us that "Being in Denial" is bad for you and me, for our relationships, for our businesses and for our politics. No one has a good word to say about being in denial. But, of course, it flourishes.

Governments and Central Banks in recent decades have crafted a real commitment to holding down price inflation to a couple of percentage points annually. They have also crafted a rhetoric which goes with that policy. In many - maybe most cases - they have succeeded and continue to succeed in controlling inflation.

Despite their success, governments and central banks seem hugely lacking in confidence about their ability to achieve what they have indubitably achieved. Faced with real examples of inflation, they sometimes go into complete Denial.

On the 15 February 1971, the pounds shillings and pence United Kingdom decimalised its currency and largely decimalised its coinage and banknotes. The coinage only became fully decimal in 1984 when the halfpenny coin was demonetised (a half is not a decimal unit). But ignore that anomaly and go back to 1971.

On the day of decimalisation, Royal Mail set the basic (now the First Class)  inland letter tariff  at 3p. Ignore the halfpenny and it is the case that you could not (even if you wanted to be difficult) pay for your 3p stamp with more than three coins.

Fast forward 42 years and you will find that the cost of sending an inland letter is 60p. But the coinage has not changed in those 42 years except for the addition of one higher value coin worth £2. The other coins in circulation remain these:

1p, 2p in "copper"
5p,10p, 20p, 50p in "silver"
£1 in "gold"

So if you wanted to be really difficult, you could now pay for your 60p First Class postage stamp with 60 coins. Coins which - incidentally - each cost more to mint than their 1p face value.

Something is wrong here. Why hasn't the 1p coin been withdrawn from circulation? Why are governments and the Bank of England allowing vast quantities of  expensive-to-produce and virtually worthless small coins to accumulate in jam jars throughout the United Kingdom? Why are they in denial about inflation which in the case I have chosen has seen  a 20-times (2000%) price increase?

If the coinage was tracking that level of inflation, then if you think three coins for a postage stamp (as in 1971) is a reasonable maximum, then the smallest coin should now be the 20p (since 3 x 20p = 60p).

Imagine trying to get that idea past those who guard us from Inflation. Why are they in such total Denial about what has happened over forty years?

There are two main reasons.

First, they don't want a discussion of long-term inflation. They don't want us to think beyond annual rates which have comfortingly low numbers like 2.2%

Second, looking at the total and pathetic failure to introduce the Metric system into the UK they don't want a repeat of those tabloid newspaper stories which held up Metric Martyrs  - sad people who refused to sell their bananas by the kilo - as heroes. From the perspective of the government and the Bank, Penny Martyrs in The Daily Express are too terrifying a prospect to even contemplate.

And so we are condemned to this junk coinage which is just a nuisance in people's purses and pockets. It costs more to produce than it's street value. Tons (or tonnes) and probably hundreds of tons (or tonnes) are stashed in jam jars, unused. Charities are supposed to be grateful if we dump these wretched coins  in their collecting boxes.

A rational approach would link the coinage to long-term inflation and would have a Target which looked something like this:

Specify the Maximum number of coins which a customer trying hard to be difficult could offer to a corner shop keeper for one single everyday commodity: a tabloid newspaper, a pint (or a liter ) of milk, a First Class postage stamp, a currant bun.

Three coins sounds a good number to me but I would compromise on five or six to allow the 10p coin to remain in use for a few more years. But even that compromise would meet a stone wall of resistance.

To be a bit fairer, this is not just a UK problem. In €uroland, they have their tiny 1 cent, 2 cents and 5 cents coins. And you can still see shop assistants struggling with these badly-designed and now virtually worthless coins, a dozen years after the introduction of the €uro.

POSTSCRIPT 13 November 2013 : The  Big Flaw in the Above Argument

I should have thought forward from my argument. If the smallest coin is 20p, then when Royal Mail wants to increase the price of a stamp from 60p it has to jump to 80p - an increase of 33%. If the smallest coin is 10p, it has to jump to 70p - an increase of nearly 17%.

In other words, the smaller the smallest coin, the smaller the minimum price increase which is possible. In principle, you can jump from 60p to 61p with existing coinage, which is under 2%.

Small coins thus serve an anti-inflationary purpose.

Go back to 1971 and you could say that the new decimal coinage was itself a contributor to inflation. Even making use of the 1/2 p coin, Royal Mail would have to jump from 3p to 3 1/2 p at one go - an increase of nearly 17%. Using only the 1p coin as a point of reference, the increase from 3p to 4p is 33%

Doh! (But I did think this up myself, over my £4.39 ready meal)

1 comment:

  1. At the time (1971), the inflationary effect of introducing decimal coinage was a big reason for opposition to it. Raised voices didn't just belong to wild eyed reactionaries wedded to the past.