The pound’s down but it can go lower
In the month the pound fell below $1.50 on the currency exchanges, remember that 25 years ago sterling sunk to $1.03. In 1985 Britain worried about parity with the dollar, not parity with the euro, and compared with old-fashioned sterling crises, we ain’t seen nothing yet.
There was no euro a quarter century ago, of course, but despite the pound trading at $2 so recently, sterling’s history has been steady decline. The pre-war fixed rate of $5 was down to $4.03 before it was devalued to $2.80 in 1949; when the battle to hold that rate became impossible, it was devalued to $2.80 in 1967, and when that line could not be held, the pound was floated in 1972. It first sank below $2 in 1976 before the IMF rescued the UK economy but by the time Nigel Lawson was chancellor it had hit that nadir of $1.03.
The fall from $2 over the past two years shows how volatile currencies can be: the pound has both doubled and collapsed over those 25 years. Later in 1985 world governments signed the Plaza Accord to devalue the dollar against the yen and German mark- then two years later, when the dollar had plunged over 50 per cent again the yen, world governments signed the Louvre Agreement to support the dollar.
Old-fashioned sterling crises were caused by governments’ attempts to hold fixed rates; allowing the pound to float removed the need to waste UK reserves buying our own currency or raise interest rates to support sterling. Black Wednesday in 1992 was the last time Britain undertook this future exercise. Now the government seems happy to let the pound fall, keep rates low, hope inflation does not take off and wait for exports revive the UK economy. Business should not complain at that scenario, even if the pound sinks even further.
Britain still exports as much to the Americas as to mainland Europe – 30 per cent each – so the dollar is as important as the euro. And while the pound’s devaluation against the euro has been less severe, the fall against both should help exports and deter imports.
By creating the euro, mainland Europe is effectively locked into fixed currency rates and suffering Britain’s old problems. If the exchange rate cannot budge, other things have to, whether wages, house prices, inflation or the premium over the central bank interest rate that riskier countries have to pay.
Business may hanker for currency stability when it sees sterling falling, but the pound is the variable that allows other economic indicators in the UK to remains steady.
