Devaluation of the Pound

9 Key excerpts on "Devaluation of the Pound"

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  The International Monetary System

  Highlights From Fifty Years Of Princeton's Essays In International Finance

  • Peter B Kenen(Author)
  • 2019(Publication Date)
  • Taylor & Francis

    (Publisher)

  7 Currency Devaluation in Developing Countries Richard N Cooper Currency devaluation is one of the most dramatic-even traumatic-measures of economic policy. that a government may undertake. It al-most always generates cries of outrage and calls for the responsible offi-cials to resign. For these reasons alone, governments are reluctant to devalue their currencies. Yet under the present rules of the international monetary system, laid down in the Articles of Agreement of the Inter-national Monetary Fund, devaluation is encouraged whenever a coun-try's international payments position is in tcfundamental disequilibrium,'' whether that disequilibrium is brought about by factors outside the country or by indigenous developments. Because of the associated trauma, which arises because so many economic adjustments to a discrete change in the exchange rate are crowded into a relatively short period, currency devaluation has come to be regarded as a measure of last resort, with countless partial substitutes adopted before devaluation is finally undertaken. Despite this procrastination, over 200 devaluations in fact occurred between the inauguration of the IMF in 1947 and the end of 1970; to be sure, some were small and many took place in the years of postwar readjustment, especially 1949. In addition, there were five upvaluations, or revaluations, of currencies. Two more· occurred in May 1971. By convention, changes in the value of a currency are measured against the American dollar, so a devaluation means a reduction in the dollar price of a unit of foreign currency or, what is the same thing, an in-crease in the number of units of the foreign currency that can be pur-chased for a dollar.

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  An Exchange Rate History of the United Kingdom

  1945–1992

  • Alain Naef(Author)
  • 2022(Publication Date)
  • Cambridge University Press

    (Publisher)

  2 The 1949 Devaluation Readjusting the Post-War Parities After the failed convertibility attempt of 1947, the 1949 devaluation dem- onstrated that sterling still played an important role when it came to Europe. Governments across the continent, aware that their currencies were overvalued against the dollar, waited for sterling to devalue before they followed. More than nineteen countries followed sterling. The devalu- ations reshuffled the whole currency equilibrium not only in Europe but across the world. The devaluation also laid the ground for negotiations that would lead to the European Payments Union (EPU). What is not clear is whether the devaluation was triggered by external international pressures or if the decision was based on domestic policy. The timing of the devaluation suggests that British policymakers took the decision to devalue only once reserves were exhausted. Using new archival materials, I demonstrate that the key issue was a worsening of the balance of payments. From May to August 1949, imports from the United States saw an up to six-fold increase. These spikes were mainly due to two factors: worsening economic conditions in the United States, and speculation through leads and lags. 1 I establish a precise timeline for the run on the pound by using daily data, which was unavailable in previous research. Claudio Borio and Gianni Toniolo argue that the 1949 devaluation and the realignment of currencies were planned in a ‘coordinated fashion, reflecting the new postwar cooperative mood, and moved exchange rates closer to the purchasing power parity of European currencies’. 2 Despite 1 Leads and lags occur when importers and exporters adjust terms of payment when foreseeing a devaluation. This is explained in more detail later. 2 Claudio Borio and Gianni Toniolo, ‘One Hundred and Thirty Years of Central Bank Cooperation: A BIS Perspective’, in One Hundred and Thirty Years of Central Bank Cooperation, ed.

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  The IMF and European Economies

  Crisis and Conditionality

  • Chris Rogers(Author)
  • 2012(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  One such scheme, advocated by Lord Kaldor, involved applying an industrial value for the pound sterling as part of a dual exchange rate system. This would operate by devaluing the industrial pound by a given percentage relative to the pound sterling, with the receipts of British exporters exchanged at the sterling rate and payments by importers of goods made at the devalued industrial rate. 16 In principle, such a system would allow Britain to reap ‘all the benefits of a devalu- ation by x per cent on our trade balance without the disadvantage of a falling pound on internal costs.’ 17 While intellectually appealing, there is little evidence to suggest a scheme of this kind was considered a feasible alternative to depre- ciation, and indeed there were concerns about international reaction because the scheme was in all but name an import surcharge/export Establishing Program Ownership 1 77 subsidy applied differentially to identical goods on the basis of national origin. 18 Although the IMF and the European Economic Community (EEC) had tolerated a similar scheme operated by France in 1971 follow- ing monetary reforms, it was ultimately decided by the Chancellor that such a scheme was not suitable for Britain and would be accepted only grudgingly overseas (Wass, 2008, p. 97). As such, attention was also paid to the potential of more traditional import restrictions on the grounds that they also carried an intuitive appeal in terms of their ability to offer a way of reducing imports while avoiding domestic price inflation. However, there was also a considerable stigma attached to formal import restrictions, which carried additional objections on the grounds that their imposition could equally have a counter-intuitive effect, contributing to an erosion of British industrial efficiency by removing incentives for British firms to invest.

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  Sterling in Decline

  The Devaluations of 1931, 1949 and 1967

  • A. Cairncross, B. Eichengreen(Authors)
  • 2003(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The United Kingdom was thus in danger of running out of dollars as a result of settling its deficit in 'hard' currencies and at the same time of running up equal or larger inconvert- ible balances in 'soft' currences through the sale of 'unrequited' exports. It was necessary to make the soft currencies harder and the hard currencies softer; there could be no more effective way of doing this than by making hard currencies dearer in terms of soft currencies. This in turn could best be brought about by devaluing sterling against the dollar and inducing other countries to devalue their currencies simul- taneously. Rest of world \ Dollar area \ /Gold and dollar deficit The 1949 Devaluation of Sterling 141 4 From this point of view, the British balance of payments was largely irrelevant to the case for devaluation since what was in question was the value of the dollar rather than the value of the pound. The issue was not how to restore British trade to balance, since it already was in balance, but how to respond to the so-called dollar shortage. At some stage this response would have to include currency realignments. It would, how- ever, have been premature to embark on these when exports were rising strongly but there was nothing in hand to permit a redirection of exports to dollar markets. 5 Except in the papers prepared for the meeting of the Economic Policy Committee of 1 July and in the memoranda by the Economic Section, there does not seem to have been a careful weighing of the pros and cons in a submission by officials, much less at a meeting of minis- ters. In the last resort, it was the loss of reserves that settled the matter. Although the Economic Section had given thought to the choice of rate, it was largely a matter of accident that $2.80 rather than $3.00 to the pound was the rate selected. The significance of getting other countries to move simultaneously was rarely stressed.

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  Exchange Rate Alignments

  • J. Mills(Author)
  • 2012(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  1 This happened despite far above average inflation in Britain over this period, thus enormously decreasing the country’s competitiveness. In consequence the real exchange rate – allowing for varying inflation rates in different countries – rose by 25 per cent, with calamitous results for British industry. Another telling example comes from the early part of the Reagan presidency, when the USA drove up the nominal value of the dollar by no less than 60 per cent against the Deutsche Mark (from DM1.83 to DM2.94) between 1979 and 1985, 2 although the inflation rates in the two countries were similar. Governments can also bring down the external value of their curren- cies if they want to do so. Between 1982 and 1989 – albeit aided by the balance of payments surplus the Japanese economy was then accumu- lating – the nominal rate for the US dollar against the yen fell by an astonishing 45 per cent (from ¥249 to ¥138), while the rate for the dollar against the Deutsche Mark went down by 38 per cent (from DM2.84 to DM1.76) in just four years (1984–8). 3 Much more recently, UK author- ities did nothing to arrest a fall in the trade-weighted value of the pound as much as 28 per cent between 2007 and 2009, though the rate since then has strengthened somewhat. 4 Of course, there is a limit to the extent to which governments can resist market pressures, as the USA discovered when the dollar was devalued at the beginning of the 1970s. There is still, however, considerable scope for monetary authorities in any country to choose whether they want to be at the high or the low end of the range of possibilities the market will accept. 24 Exchange Rate Alignments Nor does a longer perspective do anything to improve monetarist theory’s credibility. One of the most striking cases of a successful devaluation was that of France at the end of the 1950s.

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  Who Adjusts?

  Domestic Sources of Foreign Economic Policy during the Interwar Years

  • Beth A. Simmons(Author)
  • 2020(Publication Date)
  • Princeton University Press

    (Publisher)

  When surplus countries did so (as the United States did in 1933), it only made it all the more difficult for those who remained on gold. Yet, currency depreciation was a live option whenever countries suffered 1 Cmd. 1667, 1922, Part II, Report of the Second Commission (Finance), and Cmd. 1650, Resolutions Adopted by the Financial Commission of the 20th and 29th of April 1922, Resolu-tions 4, 5, 8 and 11(6). 2 By contrast, post-World War II economic theory emphasizes not only the role of currency devaluation in restoring the balance between trading partners, but also the domestic expenditure switching effects of devaluation that channel resources into the traded-goods sector. Postwar conceptions view depreciation or devaluation as modes of economic adjustment with both internal and external distributive consequences. Devaluations are often advocated by the international financial community as part of a broader adjustment package both to improve the balance of trade and to channel investment toward the export sector. During the interwar years, only the French devaluation of 1936 approached international consensus on the need to devalue. I know of no other major case in which a negotiated devaluation took place. DEVALUATION 107 severe balance of payments deficits, and it was often difficult to avoid in the face of surging capital outflows. To avoid depreciation would require a credible commitment to stabilize domestic prices via monetary stringency and a bal-anced government budget. The credibility of such a commitment was sensitive to domestic political conditions, as evidenced by the negative effects of politi-cal instability, labor unrest, politically controlled central banks, and left-wing participation in governance on capital flows and/or the current account.

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  In Search of Stability

  Economics of Money, History of the Rupee

  • Sashi Sivramkrishna(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  This could then force an even greater devaluation. The only option left was to impose controls on the external outflow of capital. This, however, would plant the seeds for black markets in foreign exchange to develop; this is illustrated in Figure 9.1. Here we consider the home currency to be sterling and foreign currency as the dollar. Initial equilibrium is at £0.5 = $1. When sterling is devalued to £0.6 = $1, an excess supply of $ accumulates as reserves (Bank of England would buy these dollar). However, if on account of this devaluation, expectations of further devaluations are raised, then there will be an increase in the demand for dollars (D $ shifts). Now the equilibrium rate should be above £0.6 = $1, but supply is restricted to Q 0 (even if the central bank stops buying dollars). With this level of supply, rationing of the excess demand will be necessary. Furthermore, for this level of supply, buyers are willing to pay up to £0.7 = $1, which becomes the black market rate for foreign exchange. Figure 9.1 : Devaluation and Emergence of Black Markets Although there were many who believed that the road to recovery lay in more open economy policies including stable exchange rates as well as free trade of goods and international movement of capital, there were many who believed that addressing issues pertaining to the internal economy, in particular deflation and unemployment required the immediate attention of the state. Franklin Roosevelt was one amongst the latter; he spoke about ‘the fetishes of international bankers’ and their obstinate pursuit of policies that were targeted at maintaining exchange rates (Singleton, 2011, p. 107). Instead, Roosevelt was keen to pursue policies that would raise domestic demand and real output. These policies prevailed. However, by 1934, the US changed its posture towards adopting protective policies and moved towards greater free trade and even acknowledged the importance of reciprocity in trade negotiations

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  Mexico's Economy

  A Policy Analysis With Forecasts To 1990

  • Robert E. Looney(Author)
  • 2019(Publication Date)
  • Taylor & Francis

    (Publisher)

  8 The 1976 Devaluation of the Peso Currency devaluation is one of the most dramatic-even traumatic-measures of economic policy that a government can undertake. It always generates cries of outrage and calls for the responsible officials to resign. For these reasons alone, governments such as Mexico's are reluctant to devalue their currencies or even admit they are overvalued. 1 Because of the associated trauma, which arises because the many economic adjustments associated with devaluation are crowded into a relatively short period, governments have come to regard currency devaluation as a measure of last resort. Presumably, they are always prepared to stabilize the economy through monetary and fiscal policies in order to stave off a devaluation. The Government's Stabilization Program Stabilization programs are intended to eliminate the causes of inflation. Depending on the circumstances of each case, they may have to arrest inordinate wage increases, put an end to excessive credit expansion, or reduce budget deficits by cutting expenditures, by increasing direct or indirect taxes, by raising the tariffs of state enterprises, or by discontinuing subsidies previously granted. Further-more, a stabilization effort should correct the distortions iiuroduced by inflation. During 1975 and 1976, government attempts at stabilization were most effective in reducing credit expansion Measures to Restrict Credit A number of factors were also at work to restrict the expansion and availability of credit: (I) the international monetary and financial situation; (2) the relative decline of resource intake by the private 109 110 1976 Devaluation of the Peso banking system; (3) the deficit in the federal budget; (4) the compulsory bank reserve requirements; and (5) the anti-inflationary policy initiated by the government.

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  In the Balance

  • Winston S. Churchill(Author)
  • 2020(Publication Date)
  • RosettaBooks

    (Publisher)

  I come to my third point, my third reality, upon this issue of devaluation and it centres upon the word ‘truth’. Whatever the currency experts may say—and they say all sorts of things and with learned grimaces change their views very frequently—but whatever they may say, the true exchange value between pound and dollar, or between all other currencies and the dollar or the pound, the true one is the right one; and the one at which we ought to aim. In the present circumstances if the Chancellor of the Exchequer felt it necessary to devaluate the pound to a fixed figure, I think it was right to go the whole hog; and that it was better to cut down the rate of exchange to this level in the hopes of a later revival than to take half measures which would soon have been overtaken and overwhelmed by the true and real forces which are relentlessly at work.

  Now the matter is done, and when we have had to give up our exchange position which we had maintained so long I feel entitled to take a fresh view. I am all for a free market and a true market. As I told the House two or three years ago, it is only a false and untrue market officially supported that breeds a black market. A sham market can no more escape a black market than a man can escape from his own shadow. Therefore I should myself have been more inclined, had I been in any way responsible, to set the pound free under regular and necessary safeguards and control—[Laughter ]—certainly, and accept the results, than to the present rigid method of pegging the exchange at the very lowest rate which anyone could possibly conceive.

  The Chancellor of the Exchequer argued at some length against this yesterday, and it is obvious that anything that is free or largely unregulated is obnoxious to the Socialist mentality. But this was what we did in 1931—the last time we had to clear up the Socialist financial mess—[Interruption

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