Fiscal & Monetary Policy Pose Dual Threats to the Dollar
“It does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued.”
Prime Minister Harold Wilson
On November 19, 1967, in a televised address, British Prime Minister Harold Wilson defended his decision to devalue the pound the day before. He maintained that doing so would defeat the “root cause” of the economy’s ill wills, helping it “break out from the straitjacket” of boom/bust cycles. The decision to lower the exchange rate to $2.40 from $2.80 came after weeks of the Bank of England trying to shore up the pound from its gold and dollar reserves at a cost of £200 million, roughly £3 billion today.
The Labour party assumed control in October 1964 fighting an uphill battle. An £800 million deficit had contributed to a string of sterling crises. A devaluation would make British exports cheaper abroad but at the same time stain the nation. Wilson viewed the pound as a symbol of global standing. On July 12, 1966, as the need to devalue became acute, the Cabinet rejected a proposed devaluation and instead handed down strict austerity measures.
The rest of the world, however, interjected on these best laid plans. Israel had gone to war with Syria, Egypt and Jordan in the Six Day War which ended with Israel controlling much more territory sending tensions in the Middle East soaring. The Vietnam War was raging with nearly half a million U.S. soldiers deployed to fight the war that was an immense source of strife. On July 23, 7,000 U.S. National Guard troops were sent into Detroit to quell the rioting and looting that had erupted in a summer punctuated by nationwide protests against the war. That same July, a minor labor dispute escalated into large-scale riots with pro-communism sympathizers rebelling against British colonial rule in Hong Kong.
Closer to home, a late 1967 dock strike for higher pay involving 16,000 workers gnarled trade exports. The financial pressure to devalue became overwhelming. The move to devalue was accompanied by cuts to defense spending, a tightening of credit conditions and higher interest rates. Wilson’s assertion that the “pound in your pocket” would not lose value sparked controversy given imports into the island nation would become more expensive.
The end of the 20th century would not begin to resemble its beginning, when Britain was in its “Golden Age.” British pound sterling, the world’s reserve currency, was fixed to gold. Most of the nation’s trading partners’ currencies were either linked to the pound or had themselves adopted gold standards. And the Bank of England ruled the world’s financial system. All of this ended with World War I which left the U.K. economy in tatters and heavily indebted to the United States. The fall of the British Empire thus began, starting with Ireland seceding in 1922. One after another, countries broke free of their dependence on the U.K. ending with the loss of the “Jewel In the Crown,” India in 1947. India’s independence was followed by Ceylon (Sri Lanka), Burma (Mynamar) and Palestine in 1948.