Five Ways to Compute the Relative Value of a UK Pound Amount, 1270 to Present
Often one knows the price, cost, or value of something in a particular ("original") year, and one wants to know the value of this money amount in another ("desired") year. There are many contexts in which such a computation might be performed. Examples include: the determination of the appropriate level of deferred compensation in a legal case, updating the price of a commodity fifty years earlier, and assessment of government expenditure on health care in one year relative to another. There is no single "correct" measure, and economic historians use one or more different indicators depending on the context of the question.
This comparator performs such computations for amounts in U.K. currency. The technique is as follows: (1) select a general measure of price, income, or output, and (2) multiply the money amount by the desired-year/original-year ratio of the measure. The resulting, "updated", monetary amount may be termed the "relative value" of the original amount.
The measure often used is the price of a "bundle" of goods and services that a representative group of consumers buys or earns. In the U.K. that measure is usually taken to be the "retail price index" (RPI), which corresponds to what is called the "consumer price index" in other countries.
However, there are problems with the RPI as a measure. One problem is that the bundle changes over time. For example, carriages are replaced with automobiles, and new goods and services are created (such as personal computers, cellular phones, and heart transplants). Another problem is that the RPI is oriented solely to what is purchased by households and omits business investments or government expenditures. Perhaps most important, the context of the monetary amount may lead to a measure preferable to the RPI. It is a fair statement that the RPI is used far too often without consideration of its consequences.
Prior to February 15, 1971 ("Decimal day," or "D-day"), monetary
amounts in the U.K. were expressed as pounds (£), shillings
(s.), and pence (d.), where £1 = 20s. = 240d. After 1970, there
were 100 pennies in a pound, so one (new) penny = 2.4 old pence.
All numbers should be entered in decimal rather than fractional
form (for example, 1.5 rather than 1 1/2).
Here Are Some Examples
Cost of Big Ben: "Big Ben" was the name commonly used to refer to the clock at the top of the clock tower of the Houses of Parliament (Westminster Palace) in London. The tower was renamed Elizabeth Tower in the summer of 2012. It is also conventionally considered to be the name of the clock tower itself. Both usages are incorrect. The clock is properly termed "the Great Clock," and the tower "St. Stephen's Tower" or "the Clock Tower." Rather, "Big Ben" is the name of the giant bell weighing almost 14 tons that hangs in the Clock Tower and strikes on the hour. In fact, "Big Ben" is sometimes called "the Great Bell." The name "Big Ben" is generally considered to emanate from Sir Benjamin Hall, a large man, who was Commissioner of Works at the time the bell was constructed. Another theory is that "Big Ben" was the nickname of a contemporary heavyweight boxer, Benjamin Caunt, and it was later applied to the bell. Actually, the name "Big Ben" denoted an earlier bell, cast by John Warner and Sons in 1856, that cracked. The Whitechapel Bell Foundry recast the bell in 1858 using the metal from the original bell, and the name "Big Ben" was retained.
The gross charge for casting the bell was �2,401; but the value of the metal obtained from the earlier bell was �1,829. So the net cost, and the invoice submitted on May 28, 1858, was only �572. The relative value of that net amount in 2008 was �44,000 via the CPI; �58,800 via the GDP deflator; �388,600 using average earnings; �507,800 using per capita GDP; and over �1 million applying GDP itself. For relative values of the gross cost, the figures would be increased more than fourfold (2401/572 = 4.20).
Borrowing to Purchase Shares of Suez Canal Company: In 1875 the government of Prime Minister Benjamin Disraeli borrowed £4 million from the House of Rothschild, enabling Great Britain to purchase 176,602 shares (out of 400,000 total shares) of the Suez Canal Company from the financially strapped ruler of Egypt. This transaction gave Britain ownership of 44 percent of the Company and, more important, the pretext to invade Egypt in 1882 and incorporate the country into the British Empire. It is interesting that the Rothschilds had some years earlier refused to be involved in financing the Suez Canal project. When Disraeli's private secretary, Montagu Corry, was sent as an emissary to Lionel Rothschild to request the loan of £4 million "tomorrow," Rothschild asked, "What is your security?" Corry replied "The British Government," and Rothschild responded: "You shall have it." Though this account (based on Corry's recollection) is no doubt correct, it is misleading in suggesting that the Rothschilds were surprised by the request. In fact, there is reason to believe that Disraeli had discussed the matter previously with Lionel Rothschild.
Relative value in 2008 of the £4 million borrowing was £280 and £376 million, via the CPI and GDP deflator, however, these would be inappropriate indicators to use. Relative value is £2.1, £2.5, and £4.6 billion* according to average earnings, per-capita GDP, and GDP. Given the implication of the purchase for the British Empire, relative values do not appear unduly high.
Cost of World War I: The effect of World War I (also known as "the Great War") on Great Britain was disastrous. The human, physical, and financial losses of the country were immense. For the fiscal year April 1, 1917–March 30, 1918, the war expenditures of Great Britain have been estimated as £2.5 billion. Taking this amount to apply to the calendar year 1917, the last full year of the war, the comparator yields relative value in 2008, of £840 billion using the share of GDP, the only indicator that makes sense when comparing an expense of this size. In comparison, 2008 GDP was £1,443 billion.
Earnings of Barristers and Physicians: A "rising barrister" in 1850 could have an annual income of £5,000. The 2008 relative value of these earnings was £428,200 via the CPI, and £568,000 according to the GDP deflator. The barrister's earnings relative to average earnings was certainly greater in 1850 than in 2008; for the 2008 relative value using average earnings was £3,870,000. The barrister's income relative to the total economy loomed larger in 1850 than in 2008; the GDP per capita relative value was £5,660,000 and the GDP relative value £12,620,000. In comparison, "a doctor with a fairly fashionable practice" might earn £1000-£2000 in 1850 versus the £5000 of the barrister. Relative values for a physician's income would correspondingly be 20-40 percent of those of the barrister.
Stipend of Archbishop of Canterbury: In 1896 the Archbishop of Canterbury received a stipend of £15,000 annually. Relative values in 2008 are amazingly high. In fact, they are as much as millions of pounds: £1.294, £1.585, £7.123, £8.900, and £13.780 million, according to the CPI, GDP deflator, average earnings, per-capita GDP, and GDP.
Price of Tea: In 1870 "normal working-class quality" tea sold at 3s. 4d. per pound-weight. In 1889 Lipton tea was offered at "the phenomenally low price" of 1s. 7d. per pound. Neither price can be construed as low, according to relative values in 2008: the 1870 and 1889 prices were £11.90, and £6.50 via the CPI; £16.30,and £8.20 via the GDP deflator; £98.40, and £40.39 via average earnings; £115.20 and £49.20 according to per capita GDP.
Price of Daily Mail: The first mass-circulation newspaper for the general public was the Daily Mail, which began in 1896 and sold for 1/2 d. (old pence). The corresponding relative value in 2008 was 18, 22, 99, and 124 (new) pence via the CPI, GDP deflator, average earnings, and per-capita GDP.
*In these examples, we use the convention that a billion is 1,000 million.
http://www.londonnet.co.uk/ln/guide/about/gallbigb.html, http://www.parliament.uk/faq/history___buliding_faq_page.cfm, http://www.britainusa.com/faq/showfaq.asp?SID=293, http://www.en.wikipedia.org/wiki/Big_Ben
Niall Ferguson, The World's Banker: The History of the House of Rothschild. London: Weidenfeld & Nicolson, 1998, pp. 820-821; Hugh J. Schonfield, The Suez Canal in Peace and War, 1869‑1969. Coral Gables, FL: University of Miami Press, rev. ed., 1969, pp. 35, 47.
World War I
Edwin R. A. Seligman, "The Cost of the War and How It Was Met." American Economic Review, vol. 9, no. 4 (December 1919), p. 749.
Barristers and Physicians
John Burnett, A History of the Cost of Living. Harmondsworth, Middlesex, England: Penguin, 1969, p. 233.
Archbishop of Canterbury
Peter Wilsher, The Pound in Your Pocket, 1870‑1970. London: Cassell, 1970, p. 79.
Wilsher, p. 28; Burnett, p. 213.
Wilsher, p. 74.
Defining the Measures
The best measure of the relative value over time depends on the type of
thing you wish to compare.
If you are looking at a Commodity, then the best measures are:
Real Price is measured using the relative cost of a (fixed over time) bundle of goods and services such as food, shelter, clothing, etc., that an average household would buy. In theory the size of this bundle does not change over time, however, adjustments are made for the items in the bundle. This measure uses the RPI.
Labour Value is measured using the relative wage a worker would use to buy the commodity. This measure uses the earnings index.
Income Value is measured using the relative average income that would be used to buy a commodity. This measure uses the GDP per capita.
If you are looking at an Income or Wealth, then the best measures are:
Historic Standard of Living measures the purchasing power of an income or wealth in its relative ability to purchase a (fixed over time) bundle of goods and services such as food, shelter, clothing, etc., that an average household would buy. This bundle does not change over time. This measure uses the RPI.
Labour Earnings measure the amount of income or wealth relative to the earnings an average worker.
Economic Status measures the relative "prestige value" of an amount of income or wealth between two periods using the income index of the per capita GDP. When compared to other incomes or wealth, it shows the relative prestige the owners of this income or wealth because of their rank in the income distribution. This measure uses GDP per capita.
Economic Power measures the amount of income or wealth relative to the total output of the economy. When compared to other incomes or wealth, it shows the relative "influence" of the owner of this income or wealth has in controlling the composition or total-amount of production in the economy. This measure uses the share of GDP.
If you are looking at a Project, then the best measures are:
Historic Opportunity Cost of a project is measured by comparing its relative cost using the cost index of all output in the economy. This measure uses the GDP Deflator.
Labour Cost of a project is measured using the relative wage of the workers that might be used to build the project. This measure uses the earning index.
Economy Cost of a project is measured using the relative share of the project as a percent of the output of the economy. This measure indicates the opportunity cost in terms of the total output of the economy. The viewpoint is the importance of the item to society as a whole, and the measure is the most inclusive. This measure uses the share of GDP.
There are Five Indicators Used
For a more detailed discussion of the measures, see What Is Its Relative
Value in UK Pounds: Methods, Sources, and Examples.
Lawrence H. Officer and Samuel H. Williamson, "Six Ways to Compute the Relative Value of a U.K. Dollar Amount, 1270 to present," MeasuringWorth, 2014.
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