THE 1967 DEVALUATION OF STERLING*
In 1992 it was 25 years since the Labour government of Harold Wilson, under pressure from the markets, had devalued Britain’s currency. Sir Alec Cairncross was involved in the devaluation as Head of the Government Economic Service from 1964 to 1969 and discussed the lessons to be drawn from that experience in The Economist
Devaluation is not a frequent event in Britain and has nearly always been somewhat traumatic. It was so in 1931, when the pound was allowed to float from $4.86 to $3.75 one week after devaluation and to a low of $3.25 two months later. It was so again in 1949, when the pound went from $4.03 to $2.80, a 30 per cent devaluation in which nearly all European countries felt obliged to take part, although not to an equal extent. The 1967 devaluation, from $2.80 to $2.40, followed a long struggle by Harold Wilson’s Labour government, elected in 1964 and re-elected in 1966, to maintain the parity at a time when the pound was widely thought to be overvalued. Five years later the authorities felt obliged to abandon the parity, and the pound entered on a float that lasted until 1990, when John Major, as chancellor of the exchequer, took the currency into the European exchange-rate mechanism at a parity of DM2.95.
These events took place in widely different circumstances: in 1931, in conditions of slump and world depression; in 1949, and to a lesser extent in 1967, in conditions of boom and full employment; in 1931, when the current account was in heavy deficit; in 1949, when it was more or less in balance. On all three occasions the government acted under pressure and late in the day. The parity was defended to the last, and devaluation was regarded as a catastrophe. Even in 1972, when the pound was allowed to float down by 10 per cent, the decision was a reluctant response to heavy pressure.
Chancellors invariably proclaimed until the last moment an inflexible adherence to the existing parity. In 1949 Sir Stafford Cripps repeatedly
* From The Economist, 14 November 1992 where the article was entitled ‘Devaluing the Pound’. I am grateful to Stephen Hope-Jones for editorial help and to the Editor for permission to reprint.