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 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 £800p.a.. This equates to £12,650. I would guess that someone with 2 years trading experience now would be earning at least £40,000p.a. Using this as a multiplier the numbers come out like this:

1967 2014 Salary Adjusted £5,000.00 £78,900.00 £250,000.00 £6,000.00 £94,680.00 £300,000.00 £0.30 £4.73 £15.00 £12,624.00 £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 NOK100,000 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 trading in foreign currency amount in the London broking market - never is 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.

One of the most exciting years of my life! Part 1.

The year that lasted from June 1967 to June 1968 was a very exciting one for me. It was a year of extreme financial turmoil that left a newly married 22 year old in the middle with a small role to play.

Firstly, a reminder of the background. I was the number two in the District Bank's dealing room. District Bank was one of the smaller UK clearing banks with around 570 branches. It was wholy owned by the National Provincial Bank. For more details check out either Wikipedia or the RBS heritage site (RBS being the eventual owner). The head office was in Manchester but all of the FX trading was carried out in the London Office. Sometime during this year we had an extra team member join - Peter Johnston (maybe wrong spelling - sorry Peter). Peter joined the bank in the same week as me in the Walks Department (see earlier blog entry) and at that time was Assistant Foreign Cashier. On being asked to suggest a new member of the team, I was pleased to recommend him. As a member of the Clearing House, we had a direct line through to the Bank of England which enable them to place orders with us to be executed on their behalf in the markets. At that time, it was unheard of for central banks to intervene in the markets in their own name. They also would never confirm intervention nor would they discuss the amounts involved.

1967-68 was 12 months that encompassed a huge Sterling currency crisis, a Sterling devaluation, an international gold crisis and riots in the streets of Paris that shut the banks for a while. Through all of this, I was to play a small and, but not to me, insignificant part.

Let us start with the latter part. For a quick run down, check out the Wikipedia entry. The main effect on me was that the banks in Paris all closed down meaning that the turnover in the French Franc currency market trickled to a halt because no payments could be executed. We had some discussions with a couple of banks in Paris and it turned out that they were perfectly willing to quote us prices in French Francs with the understanding that the normal 2 day delivery of funds would have to be suspended - funds would transfer to settle all outstanding deals when the banks in Paris were working normally again. This gave us the opportunity to enter the London French Franc market as a market maker - something that was normally done by the likes of Credit Lyonnais and Banque National de Paris. We had a very successful run at this and made quite a lot of money as none of the London based French banks seemed to want to get involved - at least we didn't see them.

Now, we come to the gold crisis of March/April 1968. From 1961, the major central banks had agreed to hold the price of gold at $35 per ounce. This had suffered some strains but had generally held in place. However, stresses in the market from the devaluation of Sterling in late 1967 (see later) caused a huge run on gold. Eventually, President de Gaulle decided that France would no longer participate in the "Gold Pool" as it was called. This had become a heavy net provider of gold to the market due to the fixed price in a crises. De Gaulle decided that he wanted to hold gold, not sell it so the French central bank (The Banque de France) started repatriating all of its US Dollar trade receipts to New York for payment in Gold. Eventually, the Gold Pool couldn't hold. On March 8th, 100 tons was sold by the pool - against only 5 tons on the previous day. the following Wednesday it was 175 tons and on the Thursday 225 tons! Needless to say, this could not go on. The Queen declared Friday that week a bank holiday and the gold market was closed for two weeks. It finally opened with a two tier market of official sales between central banks at $35.20 but all other trades at a market price.

Aside: The change from $35 to $35.20 is interesting. Up until then all supply had come from London but the swing from then was to a New York delivery - the 20 cents represented the cost of transporting the gold!

All of this made the exchange markets extremely volatile and I was pretty much rooted to my desk for the period. In fact I was due to visit our Manchester Head Office during this time. The idea was that I would spend a few days up there to see what they did and explain to them what we did. Their exchange desk was purely a reporting desk to us and they had no role in fixing rates for customers over and above a small amount, which they would do at rates updated by me during the day. This means that they had to request rates from us for any large transactions - again, more of this later. I was delayed in going up to Manchester. I was quite proud when I did finally check into my hotel. I was greeted with the expression - "oh, you were the one delayed by the gold crisis". I never felt more important!

All, in all, both of these events were headline news in the newspapers and I was really proud to read about the day's events in the Evening Standard on the train ride home and think that I had been in the middle of it all. However, the best bit was yet to come!