Economic history · What the Pound Cost — 1945 to 1976
Seven steps, about ten minutes, one question at each. You need no economics and no preparation, only a willingness to guess before you are told.
Britain came out of the war owing more than it ever had, borrowed dollars from America, cut the value of the pound in 1949, and then built a health service it could not afford alongside weapons it could not build.
After 1949 the pound had a single published price in dollars, and every major country had made the same kind of promise about its own currency. Keeping the promise had a method, the method had a price, and the price was paid at home.
It ends on the comparison the whole period turns on: Britain grew faster in these years than in almost any other stretch of its history, and its neighbours grew faster still.
What this module covers
Written for every level. Tap any underlined word for what it means, and open the boxes below for the economics behind each decision. If you already know the theory, skip both and the history reads straight through.
Step 1 of 7
A currency now costs whatever the market says it costs that morning. For a long stretch after the war it had one price instead, and a government that had promised to keep it there.
From September 1949 the pound had one published price in dollars, and it stayed there for eighteen years.
It buys its own currency whenever too many people are selling it. The money it buys with is the , so every day of pressure costs something real. The reserves can run out. A government that wants to keep the promise without emptying them has to act on the economy at home instead.
Put it another way. Think of it like a shopkeeper promising to buy back anything he sells at the sticker price: he can keep the promise exactly as long as the till holds out.
The promise behind the price was to buy the currency back whenever enough people wanted to sell it, paid for out of .
The price was $2.80, from 18 September 1949 until 18 November 1967.
Take a guess. You are not expected to know the answers, and being wrong is what makes a number stick.
Governments came and went, and the pound kept the same price in dollars all the way through. How many times was that price changed before 1967?
For scale. Before it, the pound had been at $4.03, and the change to $2.80 was the last one for eighteen years.
Britain's one published price was not a British invention. Every major country had agreed to keep its currency fixed to the dollar, and the dollar was fixed to gold at $35 an ounce.
The rule allowed a country to change its price and did not allow it to let the price drift. Each government had to act whenever the market moved its currency beyond a narrow band, and Britain acted for eighteen years.
The agreement was signed in 1944. “In 1958, the Bretton Woods system became fully functional as currencies became convertible”, and Britain declared sterling convertible in December 1958.
Countries had to keep their currencies “fixed but adjustable” to the dollar. How far either side of the fixed price was a currency allowed to move before the government had to step in?
For scale. Britain took on the full obligations of the Fund's rules in February 1961, seventeen years after signing the agreement.
Governments made this promise to each other. It ended up deciding what a family could spend on a summer holiday.
Holding the price meant a British person could not freely move money out of the country.
Take it out of the country freely. Buying foreign currency, holding money abroad and investing overseas all needed permission, and the permission was not always given. Control on everyday spending abroad by British residents was lifted in 1961, but the machinery stayed in place and could be tightened again whenever the pressure returned, which is what happened in 1966.
Every pound sold for dollars is a pound the government may have to buy back, so buying foreign money, holding money abroad and investing overseas all needed permission.
The machinery had been in force since the war. It is what made a fixed price possible at all: a country cannot promise a price if its own residents may sell without limit.
The rule was never only about bankers. It set what an ordinary person could do with their own money in their own year.
In 1966, with the pressure back on, the Prime Minister told the Commons what one person would be allowed to take abroad for a whole year's travel outside the sterling area. How much?
For scale. The allowance ran for the twelve months from 1 November 1966, and it applied to every country outside the sterling area.
Britain had an option no government campaigns on, and it used that one for the better part of twenty years.
Britain's answer, through the 1950s and into the 1960s, was to slow its own economy down whenever the reserves fell.
Imports fall when a country slows down, so fewer pounds are sold for foreign money. The cost of that lands on people at home, not on the .
Growth ran over 4 per cent a year from 1953 to 1955 and under 2 per cent from 1956 to 1958. It was back over 4 per cent in 1959, and 6.3% in 1960.
The economy grew 6.3% in 1960. Then the pressure came back and the government slowed things down. How fast did the economy grow in 1962?
For scale. Both parties ran the same cycle. The swings do not line up with which of them was in office.
Slowing a country down is not one lever. It is a set of small decisions about who is allowed to borrow, and they do not all get announced.
The building societies were the first of four levers, and what they moved was house building.
Their interest rates were held so low that they ran short of mortgage money whenever the government wanted the country slowed. Credit for builders was tightened, council housing cut and planning made stricter alongside it.
The same authors write that “these restrictions were never formally announced and were hidden from Cabinet for much of this period”.
The price of one unmoved number was paid in houses that were not built, by people who were never told that was the trade.
Governments slowed the country down without touching the published price. Which part of the economy took most of the weight?
For scale. The account comes from one learned society, and it publishes no figure for how many houses were not built.
Countries do not usually call off a war because of what is in the bank. Once, Britain came close to it.
The reserves did not just decide a in 1956. Britain sent forces to Egypt on 31 October and accepted a cease-fire on 6 November.
Britain wanted to borrow from the Fund, where the United States was the largest member and no large request went through without it. So the money and the war were on the same table.
November's loss was “$279 million, net”, and in the Fund's words it “had pushed the balance below the $2 billion floor” the reserves had been kept above.
Britain wanted to draw on the International Monetary Fund. The Fund's own history records what the Cabinet was told on 6 November 1956. What was it?
For scale. The Fund approved the money on 10 December: a drawing of $561.5 million and a stand-by arrangement for $738.5 million, together $1.3 billion and the whole of Britain's quota.
Most accounts of these years pick one of two stories. Both are true, and a reader given only one of them has the period wrong.
Britain grew faster from 1950 to 1973 than in almost any other period of its history, and fell behind its neighbours anyway.
No, and three others say it too. Real output per person grew 5.02 per cent a year in West Germany and 4.02 in France against 2.42 in Britain over the same years. Investment in buildings and machines in 1970 was 19.6% of output in West Germany and 16.3% in France against 14.6% here. And Britain's share of world exports fell from 8.1% in 1960 to 6.4% in 1969.
Four institutions state the claim and only three publish figures for it, which is one below the standard set for a claim this important. The figures come from a university research centre, an economic history institute and a parliamentary library. The fourth body states that the gap with Britain's neighbours widened across most of the post-war years and publishes no numbers with it. The claim is carried, and the count is stated rather than rounded up.
Both hold at once because they answer different questions. One asks how fast Britain was improving; the other asks how fast West Germany and France were.
In 1950 West Germany produced 54.5 and France 62.5 for every 100 a British worker produced in an hour. By 1973 the figures were 110.1 and 110.9.
That gap is what holding one number cost, and it is why the runs on the pound after 1964 mattered to people who were never in the room.
Output per hour worked, average growth each year from 1950 to 1973. Which country's grew faster?
A tie counts as correct either way.
For scale. France grew 5.02% a year over the same period, and Britain had unemployment of 2.1% and inflation of 1.0% in 1960.
Module 3 of 6 in What the Pound Cost — 1945 to 1976
The pound's published price, unchanged for eighteen years
$2.80How far a currency could move either side of it
1 per centWhat one person could take abroad for a year's travel, from 1966
£50Economic growth in 1962, after the country was slowed down
1.1%What was slowed down to do it
house buildingThe reserve loss that went through the floor in November 1956
$279 millionOutput per hour worked, yearly growth 1950 to 1973, Britain against West Germany
2.85% against 5.85%You met three terms in this module
, ,
The price never moved. Everything else did: the growth, the houses, and once a war.
[1] The rule every country was under: Federal Reserve History, Creation of the Bretton Woods System. Sandra Kollen Ghizoni, 22 November 2013, fetched and read twice. Countries were to “keep their currencies fixed but adjustable (within a 1 percent band) to the dollar”, and “the dollar was fixed to gold at $35 an ounce”. On the delay: “In 1958, the Bretton Woods system became fully functional as currencies became convertible.” Wording confirmed on the second read.
[2] What exchange control was: Bank of England, The UK exchange control: a short history. Quarterly Bulletin 1967 Q3, a standalone article on this one subject. Exchange control was in force throughout and was the machinery that made a fixed price defensible; non-resident sterling became freely convertible only after 1958; control on current transactions by UK residents was removed in February 1961, when Britain accepted the obligations of Article VIII of the Fund's articles. Reused as the content model's opened locator: the Bank blocks an unattended fetch.
[3] When the system started working: The National Archives, The Cabinet Papers. Sterling convertibility declared December 1958. Reused as the content model's opened locator.
[4] How fast the economy grew, year by year: House of Lords Library, The UK economy in the 1950s and 1960s. Briefings of 8 December 2023 and 13 February 2024. Growth “over 4% per annum” 1953 to 1955, “under 2%” 1956 to 1958, over 4% in 1959, 6.3% in 1960 and 1.1% in 1962; unemployment 2.1% and inflation 1.0% in 1960. Reused as the content model's opened locator: the Lords Library blocks an unattended fetch.
[5] What was actually slowed down, and who was told: Scott and Walker, Stop-go policy and the restriction of post-war British house building, Economic History Review 72(2). 14 February 2019, fetched and read twice. The instruments: restricting the growth of building society funds by pressing their cartel to keep interest rates so low that they were starved of mortgage funds, limiting building firms' access to credit, reducing municipal housing investment, and a restrictive planning policy. Verbatim, and identical on both reads: “These restrictions were never formally announced and were hidden from Cabinet for much of this period.” ONE INSTITUTION, NO QUANTITY, so it is attributed and not asserted.
[6] The 1956 crisis, told by the Fund: Boughton, Northwest of Suez: The 1956 Crisis and the IMF, IMF Staff Papers 48(3). 2001, fetched and read twice, the second time for the words character for character. The reserves: “On December 4, Macmillan would have to announce that a massive loss of reserves in November ($279 million, net) had pushed the balance below the $2 billion floor.” The credits: a UK quota of $1,300 million and a package of “100 percent of quota, comprising an immediate drawing of $561.5 million and a 12-month stand-by arrangement for $738.5 million”, approved by the Executive Board on 10 December 1956. The Cabinet learned on 6 November, in Macmillan's own memoir as the Fund quotes it, that the United States would not support the request to draw “until we had agreed to the cease-fire”. ATTRIBUTION CORRECTED ON THE SECOND READ: “it is clear that it was financial pressures that were driving British policy” is Gorst and Johnman (1997), quoted by Boughton, NOT the Fund's own words. The Fund's own sentence is: “Although Macmillan persisted in denying that financial pressure was the decisive factor, none of the extensive evidence supports a credible alternative explanation.”
[7] What the Chancellor of the day was writing in private: The National Archives, Suez and the economy. Macmillan to Eden, 29 August 1956, PREM 11/1135: “a very big loss- over $100 million August on the reserves”, and that there were “too many sterling balances which could easily be withdraw[n]”. RE-SWEPT AT STAGE 4 FOR THE CAUSAL CLAIM AND IT IS NOT HERE: the page carries the pressure and does not say the pressure decided the policy.
[8] How Britain did against its neighbours: Crafts, The Postwar British Productivity Failure, CAGE working paper 1142, University of Warwick. November 2017, fetched and read twice. The claim in one sentence, p. 2: “During the 'Golden Age', Britain experienced its fastest-ever economic growth but at the same time relative economic decline proceeded at a rapid rate vis-a-vis its European peer group”. Table 2, p. 18, annual growth 1950 to 1973: real output per hour worked, West Germany 5.85, France 5.02, the United Kingdom 2.85; real output per person, West Germany 5.02, France 4.02, the United Kingdom 2.42. Table 3, p. 18, productivity levels with the United Kingdom at 100 in 1950: West Germany 54.5, France 62.5; by 1973, 110.1 and 110.9. Table 4, p. 18, non-residential investment as a share of output in 1970: West Germany 19.6%, France 16.3%, the United Kingdom 14.6%. Causes, in his own voice, p. 1: “Weak management, dysfunctional industrial relations, and badly-designed economic policy were all implicated.” All figures identical on both reads.
[9] A fourth institution on the claim, with no figures: National Institute of Economic and Social Research, What is holding back UK productivity? Lessons from decades of measurement. 9 November 2018. Found on the stage-4 re-sweep for hole 4. It states the claim and gives no figures for it: “the gap with both France and Germany increased throughout most of the post-war period.” SO THE CLAIM IS AT FOUR INSTITUTIONS AND THE FIGURES ARE AT THREE, and the count is stated rather than rounded up.
[10] How far the machinery could reach: Hansard, Commons, 20 July 1966, Economic Measures. The Prime Minister, Mr Harold Wilson, col. 634, fetched and read twice: “For the 12 months starting on 1st November next there will be a basic allowance of £50 per person for travel to countries outside the sterling area.” CORRECTED AT STAGE 4: the research file and the stage-3 treatment both called this the Chancellor's statement. It is the Prime Minister's, on two reads. The rest of the 20 July package belongs to module 4 and is not printed here.
Country data from the World Bank (CC BY 4.0) and the UNDP Human Development Report (CC BY 3.0 IGO)
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