Table Of ContentSterling in Decline
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Sterling in Decline
The Devaluations of 1931, 1949 and 1967
Sir Alec Cairncross
Former Master of St Peter's College, Oxford
and
Barry Eichengreen
Professor of Economics and Political Science
University of California at Berkeley
Second Edition
lidiijlcive
* © The Estate of Sir Alec Cairncross and Barry Eichengreen, 1983,2003
Softcover reprint of the hardcover 1s t edition 2003 978-1-4039-1305-0
All rights reserved. No reproduction, copy or transmission of this
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of this work in accordance with the Copyright, Designs and Patents
Act 1988.
First published 1983 by
Basil Blackwell Limited
Second edition published 2003 by
PALGRAVE MACMILLAN
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ISBN 978-1-349-51164-8 ISBN 978-0-230-59630-6 (eBook)
DOl 10.1057/9780230596306
This book is printed on paper suitable for recycling and
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A catalogue record for this book is available from the British Library.
Library of Congress Cataloging-in-Publication Data
Cairncross, Alec, Sir, 1911-
Sterling in decline: the davaluations of 1931,1949, and 1967/
Alec Cairncross and Barry Eichengreen. -2nd ed.
p. cm.
Includes bibliographical references and index.
ISBN 978-1-349-51164-8
1. Devaluation of currency-Great Britain-History. 2. Great
Britain-Economic policy-1918-1945. 3. Great Britain-Economic
policy-1945-1964. 4. Great Britain-Economic policy-1964-1979.
I. Eichengreen, Barry J. II. Title.
HG939.5.C352003
332.4' 14-dc21
2003054926
10 9 8 765 4 3 2 1
12 11 10 09 08 07 06 05 04 03
Contents
Foreword vii
Prologue to the New Edition ix
1 Introduction 1
2 Britain's Exchange and Trade Relations 10
International Trade and Payments 12
British Trade Policy 17
Control of Overseas Lending 21
The Sterling Area and Clearing Arrangements 23
3 The 1931 Devaluation of Sterling \ 27
Reconstructing the Gold Standard System 27
Initial Difficulties 44
The Anatomy of Crisis 52
Banking Crisis or Balance of Payments Crisis? 72
Macroeconomic Effects of Devaluation 83
Conclusion 102
Appendix 104
4 The 1949 Devaluation of Sterling 111
A Narrative of Events 112
Lessons of the 1949 Episode 139
The Economic Background 142
The Impact of Devaluation 151
5 The 1967 Devaluation of Sterling 156
First Difficulties 160
The Initial Position of the Labour Government 166
The Formulation of Balance of Payments Policy 173
The Exchange Crises of 1965 and 1966 176
The Impact of Deflationary Measures 181
The Failure of Deflationary Measures 191
The Aftermath of Devaluation 193
The Impact of Devaluation 197
Conclusion 213
VI Contents
6 Concluding Reflections 218
The International Economic Situation 218
The Domestic Economic Situation 221
Common Elements in the Three Devaluations 223
The Development of Thought on Devaluation 226
The Effectiveness of Devaluation 228
References 232
Dramatis Personae 245
Index 253
Foreword
This book brings together a study of the devaluation of 1931 prepared by
Eichengreen with studies of the devaluations of 1949 and 1967 prepared
by Cairncross. The decision to join forces had led to revision and expansion
of these studies, to a consideration of the common features of the three
devaluations, and to an effort to view these three episodes in the light of
subsequent developments. We have aimed to provide a comparative analysis
of the three devaluations. We have not sought to write an economic history
of the past half-century in terms of successive exchange crises occurring at
18-year intervals. Nor have we attempted to review exhaustively theories of
exchange rates and their relation to the balance of payments or to advance
theories of our own. Nevertheless, we hope that our analysis of these three
devaluations of sterling will be of value in a world where exchange rate
changes are so frequently the subject of attention.
We wish to thank the late G.C. Allen, David Higham, Peter Kenen, Charles
Kindleberger, Donald Moggridge, William Parker, Leslie Pressnell, Lord
Roberthall and Philip Williamson for providing comments on portions of
the manuscript. We acknowledge the permission of the Controller of Her
Majesty's Stationery Office to include in chapters 3 and 4 references to
materials in the Public Record Office. We are grateful also to the Treasury
for facilitating study of some of the papers relating to the devaluation of
1949 which are drawn upon in chapter 4, and to David Higham for
providing some materials used in chapter 5.
AKC
BJE
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Prologue to the New Edition
Sterling in Decline takes the devaluations of 1931,1949 and 1967 as a metaphor
for Britain's changing position in the world economy. This prologue, written
on the twentieth anniversary of the original study, frames the analysis in
light of subsequent contributions and brings the story up to date.
Figure 1 on page x displays the currency's value against the US dollar,
extending a picture first published on the dust jacket of the first edition.
The pound is shown to behave like an elderly man tripping down a flight
of stairs, its value against the dollar falling from the parity of $4.86 restored
by Winston Churchill in 1925, to $3.69 following the abandonment of gold
convertibility in 1931, to $2.80 following the 1949 devaluation, and then
to $2.39 following the 1967 devaluation.1 Its decline continued through
the 1970s; a crisis in 1976 forced the government to turn to the International
Monetary Fund for assistance (Burk and Cairncross 1992), and in 1977 the
currency fell to a new low of $1.75 (on an annual average basis). It recovered
at the beginning of the 1980s, when Mrs Thatcher tightened the monetary
screws, before succumbing to yet another bout of weakness in 1985.
Sometime around 1990 there appears to be a break in the trend, as if the
fallen man is struggling back to his feet. It was in 1990 that Mrs Thatcher
brought sterling into the Exchange Rate Mechanism of the European
Monetary System, in what some regarded as an echo of Churchill's 1925
decision. But the pound was then attacked, and the UK was forced to uncer
emoniously leave the ERM in September 1992. Over the subsequent 9
months, sterling lost 12 per cent of its value against the deutschmark, the
anchor of the ERM, and 21 per cent against the dollar.2 But it then
recovered much of this lost ground, and subsequently continued to
fluctuate against the dollar and other currencies, showing neither persistent
strength nor weakness.
At the beginning of the twenty-first century, Britain still ranked as the
world's seventh largest economy when national incomes are compared
using purchasing power parities.3 This was hardly an embarrassment for a
