50 years ago this weekend the Government announced that the pound would be devalued by 14%. This decision – previously politically unthinkable – was taken after fending off a number of earlier currency crises. In an effort to reassure the public, Prime Minister Harold Wilson famously claimed that this did not mean the “pound here in Britain, in your pocket” had been devalued, despite the fact that this raised import prices.
Why was this an important episode in Britain’s economic history? What was its impact? And how do more recent falls in the value of the pound compare?
The “pound in your pocket” announcement
Chancellor James Callaghan released a statement at 9.30pm on Saturday 18 November 1967 stating that the Government had decided to lower the exchange rate from $2.80 to $2.40 per £1, a 14.3% change. Interest rates were raised from 6.5% to 8.0%, cuts to defence budget announced, and banks and the stock exchanges would be closed on Monday. The statement notes the “heavy cost” of this move in terms of higher prices in imports but also “fresh opportunities”.
The next day, Prime Minister Harold Wilson gave an address on TV and radio to the nation when he said the devaluation would tackle the “root cause” of the UK’s economic problems and presented it as a big opportunity for exporters. He railed at the “successive waves of speculation against sterling”, and said no international loan could be agreed given the conditions on economic policy that may be attached to them. He then infamously stated, in a comment for which he was later mocked, that:
“From now on, the pound abroad is worth 14% or so less in terms of other currencies. That doesn’t mean, of course, that the pound here in Britain, in your pocket or purse or in your bank, has been devalued.”
What was the economy like 50 years ago?
A relatively weak export sector, a trade deficit, an effort to rebalance the economy towards industry – the broad dynamics of the UK economy half a century ago share more than a passing resemblance to today’s vintage.
There were also, however, many important differences. One was that in 1967 the dollar was the main global currency and the exchange rate of other currencies was fixed to that. For the UK, following an earlier devaluation in 1949, this was $2.80 per £1.
The nature of this fixed exchange rate system in the UK meant that if there was a trade deficit – the value of imports being greater than those being exported – downward pressure was put on the pound (as more pounds were being sold to buy foreign currencies than vice versa). Similarly, if anybody holding pounds – as part of their foreign currency reserves for instance – wished to hold other currencies, such as dollars, instead, they would sell pounds. This would put downward pressure on the value of sterling.
The value at which the exchange rate is fixed was also crucial. If it was too high, then domestic businesses would be uncompetitive internationally causing a deterioration in the trade balance. Even if it was set at an appropriate rate originally, the same fixed rate could become inappropriate over time. For example, if the relative competitiveness of the UK economy compared with other countries worsened due to higher domestic costs or weaker productivity growth.
Why was sterling devalued in November 1967?
One long-term cause of the 1967 devaluation was that the UK economy had become less competitive compared with other major world economies. This chart shows how the UK’s productivity level relative to France and West Germany dwindled away during the 1950s and 1960s, as productivity growth in the UK failed to keep pace. The result was a persistent trade deficit.
Together with these long-term structural issues of an uncompetitive economy and the move away from sterling as a reserve currency, a series of shocks in 1967 ultimately led to the decision to devalue. These shocks included:
- a dockers strike which held up UK exports leaving the country, worsening the monthly trade balance figures
- financial flows out of sterling following weak trade data and waning confidence in the fixed exchange rate holding
- the Bank of England running low on foreign currency reserves and international creditors – the IMF and other countries’ central banks – less willing to lend the UK the substantial amounts needed to prop up the pound without conditions attached, something the UK government did not wish to do
- the June 1967 Six-Day Arab-Israeli War which resulted in the closure of the Suez canal disrupting trade flows and a sell-off of sterling assets by Arab countries
The pound’s long-term decline in context
At the time of the ‘classical’ gold standard (1880-1914) the pound was the anchor of the world financial system, with a fixed exchange rate of $4.87 per £1. The gold standard was suspended during the First World War and its aftermath. A short-lived return to the pre-war gold standard fixed exchange rate (1925-1931) was abandoned and the pound floated until the start of the Second World War in 1939. Following the War, as part of the Bretton Woods system, the pound was briefly fixed at $4.03 per £1 until 1949 when it was devalued by 30% to $2.80.
The collapse of the Bretton Woods system in 1971 led to the pound floating on international markets. Since then the pound has never regained its 1967 level of $2.80. Indeed, £1 is currently worth around half that at $1.31. The pound’s decline was around 11% in the weeks following the June 2016 EU referendum, a slightly smaller fall than the 14% seen in 1967.
What happened next?
In the weeks after the decision, the Chancellor resigned and the UK’s application to join the European Economic Community was blocked by French President Charles De Gaulle. A further sterling crisis in March 1968 almost led to another devaluation, but was staved off by an international loan, and a subsequent dose of deflationary measures in the Budget. The trade position did eventually improve with trade and current account surpluses being recorded from 1969-1971. This did not last, however, and by the mid-1970s persistent trade and current account deficits had returned.
Cover image credit: By Allan warren (Own work) [CC BY-SA 3.0 (https://creativecommons.org/licenses/by-sa/3.0) or GFDL (http://www.gnu.org/copyleft/fdl.html)], via Wikimedia Commons