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The Pound in Post-War Britain — 1945 to 1976
Four crises and a devaluation
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.
Step 1 of 6
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 question
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.
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 scaleHe 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 scaleBritain 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.
Module 4 of 6 in The Pound in Post-War Britain — 1945 to 1976
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[1] What 1964 actually inherited: Hansard, Lords, 30 April 1968, Breakdown of 1964 Balance-of-Payments Deficit.
[2] The four crises, and the money that held the price: Bordo, MacDonald and Oliver, Sterling in Crisis, NBER working paper 14657.
[3] The decision, in the words it was announced in: Hansard, Commons, 20 July 1966, Economic Measures.
[4] The devaluation, and how it is usually reported: House of Commons Library, “Pound in your pocket” devaluation: 50 years on.
[5] The other half of the sentence: Bank of England, Quarterly Bulletin 1967 Q4.
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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