Economic history · What the Pound Cost — 1945 to 1976
Six steps, about nine minutes, one question at each. You need no economics and no preparation, only a willingness to guess before you are told.
For eighteen years the pound had one published price, and keeping it there was the main economic job a British government had: exchange control, and the country slowed down at home whenever the reserves fell.
The government elected in 1964 inherited a deficit that two people could correctly describe at two different sizes. It then spent three years holding the pound at $2.80 with money borrowed from other central banks, and in July 1966 chose to take more than £500 million out of the British economy rather than change the price.
On 18 November 1967 it changed the price, with the borrowed credit barely drawn on. It ends on the same shape it opened on: one event, two correct measurements, and only one of them ever quoted.
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 6
Two people can quote the size of the same hole, disagree by half, and both be right.
The government elected in October 1964 inherited a deficit with two sizes, because the word was doing two jobs.
“The deficit” names two different sums. One counts what Britain earned abroad against what it spent abroad, which is . The other adds the money leaving the country to be invested elsewhere. Both are correctly measured and they answer different questions. A government and its critics can each quote a true figure and still not be talking about the same thing.
Put it another way. Think of it like a household that is short £50 on its wages against its bills, and also put £400 into a savings account it cannot touch: both numbers are real, and they are answers to different questions.
One figure counts what Britain earned abroad against what it spent abroad. The other adds the money leaving the country to be invested elsewhere.
A peer asked the government in 1968 to break down the “£800 million deficit” it was said to have inherited. The minister answered with a different figure.
Take a guess. You are not expected to know the answers, and being wrong is what makes a number stick.
The minister replied with the government's own measure of the 1964 deficit on the current account. What figure did he give?
For scale. He gave 1967 in the same breath: a deficit on current account of £514 million, three years into the government.
There is a way to keep a promise you can no longer afford, and it is to borrow from the people watching you make it.
The pound was attacked four times between 1964 and 1967, and each time the price was held with money borrowed from abroad.
From other countries' central banks, arranged in advance as credit Britain could draw on. The total at Britain's disposal rose from $3,310 million at the end of September 1965 to $4,370 million a year later. It was still $4,323 million in the weeks before the price was changed, so the money to go on holding it had not run out.
Britain's own reserves would not stretch to four attacks, so it arranged credit from other central banks in advance and bought its own currency with that instead.
The attacks came in November 1964, July 1965, the summer of 1966, and again from May 1967.
The credit bought time, and no agreed plan existed for what the time was to be used on.
By September 1966, after two years of this, how much credit had Britain arranged from abroad to hold the price with?
For scale. Britain also owed abroad in its own currency: gross sterling liabilities were £3,602 million at the end of 1945 and £4,232 million by the end of 1963.
A promise is cheap on the day it is made. The bill for this one arrived on a Wednesday afternoon.
By July 1966 the pound was under pressure for the third time in two years, and the choice was between the price and the economy.
Changing the price would make everything Britain bought from abroad more expensive, and would break a promise the government had spent two years repeating. Holding the price meant taking spending out of the British economy on purpose.
Credit arranged abroad stood at $3,310 million at the end of September 1965 and had gone on rising since, so the means to hold the price existed.
You are the Prime Minister on 20 July 1966. The pound is under pressure for the third time in two years, and the bill above is what holding its price will cost at home. Do you pay it?
The government held the price. The Prime Minister told the Commons that day: “I estimate that they will reduce demand on the domestic economy by more than £500 million.”
What followedOn 18 November 1967 the price was changed anyway, from $2.80 to $2.40. The credit stood at $4,323 million in the weeks before it, so the money to go on holding the price had not run out.
The choice was never between changing the price and not changing it. It was between changing it in 1966 and changing it in 1967, having first spent more than £500 million finding out.
The measures were announced on the afternoon of 20 July 1966, each with a figure attached to it.
They work by making people spend less: harder to borrow for a car, more tax on drink and petrol, less public investment, and a stop on pay rises.
Pay was frozen for six months, with “a further six months of severe restraint, and … a similar standstill on prices”.
Every line of it was a cost paid at home so that one published price abroad would not move.
Put these four measures in order by what the government said each was worth, largest first.
For scale. Investment by central and local government was cut by a further £55 million in 1967-68.
The Chancellor, James Callaghan, announced at half past nine on Saturday 18 November 1967 that the price was being lowered.
British goods became cheaper to buyers abroad and everything Britain bought from abroad became more expensive at home. That was the trade the government had refused for three years.
Interest rates went from 6.5% to 8.0% the same weekend, and the government arranged $1,400 million of credit from the .
The pound had been $2.80 since September 1949. What was it worth from the Monday morning?
For scale. The Bank of England also recorded credits from other central banks of “more than $1,500 million” arranged around the change.
The module opened on one number with two sizes. It closes on another one.
The same change has two correct percentages, depending which way round you divide.
The evidence read for these six modules cannot say. No institution in it publishes a British figure for 1968, 1969 or 1970 against which the question could be settled: not for the trade balance, not for growth, not for the reserves. It is the obvious question to ask here, and the honest answer is that the sources go quiet exactly where a reader wants them.
The pound lost part of its value against the dollar, and the dollar gained more than that against the pound, because the two are fractions of different starting numbers.
The Bank of England put both in one sentence: values in sterling “represent less than before in terms of U.S. dollars by 14·3% and values expressed in U.S. dollars represent 16·7% more”.
A parliamentary library wrote about the devaluation fifty years on. Which of the Bank's two percentages did it print?
For scale. The Prime Minister's television words the next evening used a third version, “14% or so”.
Module 4 of 6 in What the Pound Cost — 1945 to 1976
The 1964 deficit on the current account, against the £800 million in the question
£402 millionCredit arranged abroad to hold the price, by September 1966
$4,370 millionWhat holding it took out of the British economy
more than £500 millionThe largest single line in the package, on consumer credit
£160 millionThe pound's new price, from 18 November 1967
$2.40The same change, measured the two ways the Bank of England measured it
14·3% and 16·7%You met one term in this module
The money to hold the price was still there on the day it changed. The argument for holding it had run out first.
[1] What 1964 actually inherited: Hansard, Lords, 30 April 1968, Breakdown of 1964 Balance-of-Payments Deficit. cc974-6, fetched and read twice. The disagreement is inside the exchange. Lord Trefgarne asks for “a simple breakdown of the £800 million deficit which they allege they inherited when they came into office in 1964”. Lord Beswick answers with a different figure: “the facts are that in 1964 the deficit on current account was £402 million and last year the deficit on current account was £514 million.” He declines the breakdown: “The facts are there in the Pink Book, which I advise the noble Lord to read.” The two reads gave col. 974 and col. 976 for the £402 million sentence, so the section is cited and not a column.
[2] The four crises, and the money that held the price: Bordo, MacDonald and Oliver, Sterling in Crisis, NBER working paper 14657. January 2009, fetched and read twice. P. 9, on the credit facilities at the British authorities' disposal for holding the price: “At the end of September 1965, this figure had risen to $3,310 million, rising to $4,370 million by September 1966 and falling slightly to $4,323 million in the weeks preceding devaluation.” P. 5: “At the end of 1945, the UK's gross sterling liabilities stood at £3,602 million and by the end of 1963 these had risen to £4,232 million.” Four crises: November 1964, July 1965, June to August 1966, and May 1967 to the devaluation. All figures identical on both reads.
[3] The decision, in the words it was announced in: Hansard, Commons, 20 July 1966, Economic Measures. The Prime Minister, Mr Harold Wilson. Read once whole and then three times one figure at a time, because two whole-page reads of a 9,926-word document disagreed with each other. Col. 629: down payments on “cars, motor cycles and caravans is raised to 40 per cent. and the repayment period shortened to 24 months”, cutting hire-purchase borrowing “by £160 million”; “a surcharge of 10 per cent. on the duties on beer, wines and spirits”, worth “about £150 million in a full year” (col. 630). Col. 632: public industry investment “to be reduced by £95 million in 1967-68”; “cuts amounting to £55 million in 1967-68” on central and local government investment; and overseas government expenditure reduced “by at least £100 million”. Col. 636: “a six-month standstill on wages, salaries and other types of income, followed by a further six months of severe restraint, and … a similar standstill on prices”, and the total, “I estimate that they will reduce demand on the domestic economy by more than £500 million.” HE STATES NO TOTAL FOR THE INVESTMENT CUTS, so the two figures are printed and never their sum.
[4] The devaluation, and how it is usually reported: House of Commons Library, “Pound in your pocket” devaluation: 50 years on. 17 November 2017, fetched and read twice. “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%”. Wilson on television the next evening: “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.” ASKED DIRECTLY ON BOTH READS: THE PIECE NEVER MENTIONS 16.7% AND NEVER SAYS THE CHANGE CAN BE MEASURED TWO WAYS, which is what step 6 is about.
[5] The other half of the sentence: Bank of England, Quarterly Bulletin 1967 Q4. One sentence carries both measures of the same change: “values expressed in sterling now represent less than before in terms of U.S. dollars by 14·3% and values expressed in U.S. dollars represent 16·7% more”. The Bulletin also carries an IMF standby of $1,400 million and central bank credits of “more than $1,500 million”. Reused as the content model's opened locator: the Bank blocks an unattended fetch, so no second read was possible and the wider credit totals in the content model are not printed.
Country data from the World Bank (CC BY 4.0) and the UNDP Human Development Report (CC BY 3.0 IGO)
Games · Learn · Atlas · Privacy