Why was the UK so slow at introducing 20p and £2 coins?

[FosseWay]

Some held it was more the other way round - that there was increased inflation due to the 10p coins - or more exactly - the decimalization of the currency

Rob

I think there is some evidence that there was a short-term upturn in inflation in 1971 that can be attributed to retailers adjusting their prices en masse at decimalisation, rather than doing them one by one at random intervals as they normally would. The same was reported in 2002 in some countries that adopted the euro. But:

1. This was a one-off, short-term event. You can't lay the high inflation that continued through to the early 80s at decimalisation's door. That's down to good old incompetence on the part of governments of both colours at that time.

2. The prices would have been adjusted at some point anyway, as retailers' overheads increased and their suppliers put their prices up. The difference in 1971 is that they tended all to adjust their prices on all their product lines at once. Over a year or two, it would iron out.

The same would be true if small denominations were removed from use, including electronic use (so everything was priced to the nearest 5p). It would cause a bump of inflation increase followed by a rate of increase that is much lower than if nothing had happened, such that after a short period the two lines on the chart come together again.

[Alan71]

As a child of the 70s, I was blissfully unaware of the high inflation, and I'm still struggling to get my head around it.

Did inflation hit around 25% at one point?  Using <k>'s example of the Guardian from earlier, a 25% increase on 8p would still "only" be 2p, compared to now when it costs £2.  Such an increase would be 50p, taking it to £2.50.  These days, newspapers and magazines routinely do such an increase.  The Radio Times increases by about 20p every January.

I know I'm looking at it the wrong way though - 2p then is probably worth 50p now - but as prices were much lower then, I'd imagine a 25% inflation rate now would be much more of a catastrophe than it was then?

[Figleaf]

You can't lay the high inflation that continued through to the early 80s at decimalisation's door. That's down to good old incompetence on the part of governments of both colours at that time.

While I agree with your post, the statement above needs a somewhat comical adjustment. A significant part of the responsibility for the inflation of the period lies with the London School of Economics (LSE).

LSE research found that the wheels of government budgeting turn so slowly that Keynesian deficit spending came about much too late. It recommended a mechanism dedicated to adjust the budget in view of the economic growth cycle. The government adopted the suggestion. After a decade or so, the mechanism was quietly dismantled. Later US research showed that the mechanism had indeed succeeded to shorten the budget adjustment cycle, to the point where government spending became countercyclical, rather than running about a whole cycle behind! As a result, the cycle had been reinforced, rather than dampened, increasing inflation in good times and unemployment in bad times.

Peter

[<k>]

I know I'm looking at it the wrong way though - 2p then is probably worth 50p now - but as prices were much lower then, I'd imagine a 25% inflation rate now would be much more of a catastrophe than it was then?

Officially, inflation was around 26.5% for 1975 (as announced at the time). We were used to small items going up a penny at a time, then suddenly it was 2p, 3p, 5p a time. Look at how stamp prices zoomed after 1974-5. As a schoolboy with fixed pocket money, I found it quite frightening.

[Figleaf]

Alan, you are looking at inflation from a consumer point of view. From that point of view, the important point is whether price inflation is compensated by wage inflation (or an increase in pocket money.) People will gripe about changing prices, but they don't lose purchasing power when prices and wages rise in tandem.

When that concern is settled, a 25% inflation rate is exactly the same when an item costs 2p or 50p. What changes is the use of coins. Again, it will not make any difference on a macro-economic level, but people will hate the change.

Where inflation makes a difference, is in foreign trade. If GBP is subject to higher inflation than say FFR, it will lose value against FFR. This ought to promote exports and hinder imports. This is the much vaunted argument against the euro. As you can see from experience, including the seventies and Brexit, other factors get in the way, so the mechanism may well not have the expected effect.

Peter

[EWC]

Well, I was not a child in the 1970's.  I was saving hard to fund some world travel.  On about 5K per annum I saved about 1300 per annum for 3 years, so had about 4K in a building society.  When inflation hit 26% interest payments were about 6% - so I was saving 1300 a year but I was losing 800 a year to infaltion. 

Put it another way - I worked 7 months of the year for nothing as far a savings went.  I quit. 

I am afraid this talk about inflation going up a penny etc  misses the point, as I see it.

As to the ultimate problem here - I track it back to Keynes, although he in turn seems much inspired by Plato......

Rob

[EWC]

Usually old women of feeble intellect.

I do not know about you, but I myself find the complexity of transactions at supermarket check outs increasingly bewildering.

Anyhow its in the nature of society that old women of feeble intellect end up holding a lot of the independent cash - the Catholic Church always seems to have understood that.

Heath's government, and in particular Anthony Barber, panicked and resorted to Keynesian stand-bys, increasing the money supply massively. This stored up inflation in the system, which Denis Healey had to deal with when Labour came to power. Healey gives his side of the story in one of his autobiographical books (or was there just one?) - a worthwhile read.

Thanks - but as you say - that is his side of the story.  Surely inflation solved a lot of the government's debt problems, for Heath and Healey alike?

1. This was a one-off, short-term event. You can't lay the high inflation that continued through to the early 80s at decimalisation's door.

Puzzling    I can, indeed I just did 

Perhaps you meant to say "in my opinion one cannot"?

Sure there were other fundamental factors kicking in – selling on the never-never for instance.  But in my opinion UK decimalisation was crucial in breaking the still rather firm anchor of traditional price structures, making way for a more calculated, government favouring, permanent inflationary regime

Electric money will ramp this up further – at least if Andy Haldane and Ajay Banga get their way

Rob

[<k>]

Many countries that had decimalised prior to the 20th century also suffered high inflation in the 1970s. Your theory doesn't hold water.

[EWC]

Many countries that had decimalised prior to the 20th century also suffered high inflation in the 1970s. Your theory doesn't hold water.

Perhaps, but your putative test of my theory is too simplistic to take seriously, thus far

[Figleaf]

Well, I was not a child in the 1970's.  I was saving hard to fund some world travel.  On about 5K per annum I saved about 1300 per annum for 3 years, so had about 4K in a building society.  When inflation hit 26% interest payments were about 6% - so I was saving 1300 a year but I was losing 800 a year to infaltion.

You are right that there is also the investor point of view of inflation. I didn't mention it, because I tend to be harsh on pro-investors. You suffered from inflation? Pox on you. You should have seen it coming and taken protection. That is way too harsh for a retail investor. They usually have no training in investing and tend to do the wrong thing by instinct.

So it is with you. Nobody explained to you that by putting money in a bank you run a small counter-party risk (the bank goes broke, this risk is often insured by regulation) and a large inflation risk (interest is below inflation). BTW, the same is true for bonds, including government bonds.

You should have used your small capital to borrow as much as you could and buy real estate (if you couldn't buy a house, a real estate investment fund would have done the job). When you wanted to travel, you could have liquidated your investment and you'd have had a great return. Another, riskier strategy would have been to buy quality, high dividend stock as the economy plunges and exchange that for doubtful equity when it recovers. With some luck, that would have doubled your investment. In that same period, I was lucky. I had already assembled some money, the family was growing and we stumbled on an opportunity to buy a house if we were willing to get deeply into debt. I paid 16% interest on my first mortgage, refinanced a few times, then rented out the house while working abroad. When we returned, the mortgage was paid off and the value of the house had more than doubled. Just pure luck. I mention it not to show "how smart I was" but only to show that even retail investors can defeat inflation.

You didn't take shelter because you didn't know how to, you may not have seen it coming or there were no instruments available or all of the above. Forgive yourself. You are Mr. Normal. Many people were in the same trap and next time it will be the same. However, your experience doesn't mean that you can blame decimalisation for what happened to you. You have the responsibility for your own decision to invest badly, even it's just bad luck.

Peter

[<k>]

So maybe you agreed with the old women, who said, "We should bring back the OLD money! We didn't have inflation in those days." 

[FosseWay]

Perhaps, but your putative test of my theory is too simplistic to take seriously, thus far

Inflation in the EEA generally and the Eurozone specifically has been generally at fairly low levels over the last 15 years. Some countries (Germany sticks in the mind in particular) reported spikes in inflation at the time of the changeover, but with hindsight this seems to have been the one-off kind that I mentioned - a load of price rises that would have happened anyway over, say, 12 or 24 months instead taking place all at once, followed by a period of less than normal inflation so the two lines meet again on the graph.

Many things are priced at price points. Books, for example, tend to be priced in whole pounds (well, £x.99). Inflation isn't running at 10% so if you want to raise the price of a £9.99 book you put 10% on the price now and then leave it unchanged for the next three years rather than increasing it by 30p or so per year. In normal times, this process occurs at different times and varying amounts from product to product and supplier to supplier and it all evens out. But if there is a fundamental change to the currency, such as decimalisation or (even more so) the introduction of the euro, everyone will do this, plus adjust their prices so they make sense in the new currency, at the same time and it will have an effect on the inflation figures. But given stable economic conditions (which weren't in place in the 1970s but were between 2002 and 2008), the rises in subsequent years are likely to be lower.

[EWC]

Forgive yourself. You are Mr. Normal.

If government steals my cash by printing money you think I blame myself?

You suffered from inflation? Pox on you.

I long believed that Keynes thought along those lines – but he was never quite so candid