Tuesday, 30 April 2013
The Crisis of the Sterling
In an international sense, the 'Golden Years' weren't quite so great. Sterling had major problems. Although as a whole the world is booming, external problems in the British economy were starting to show. The fastest area of trade growth between major economies was in manufactured goods, yet Britain's share of manufactured trade fell from 25% in 1950 to 11% in 1970. The balance of payments was also perceived as weak because of its volatility. Visible trade was constantly in deficit and invisible trade in surplus, but the magnitude of these fluctuated a lot meaning there was never a consistent surplus. It was weakened further by the Sterling balances.
Sterling balances is the term given to debts accumulated during the Second World War. This figure stood at roughly £3.5 billion by 1950. The gold and foreign exchange reserves covered roughly 1/5th of this, although this figure was increasing. In 1957 exchange controls were removed and there was a danger than holders of the pound would sell up. The government needed to strengthen their reserves in order to stop this run on the sterling from occurring. It needed to run a persistent balance of payments surplus.
The government needed to resolve Britain's balance of payments problems. It had three routes to go down: protectionism, devaluation or deflation and 'Stop-Go'. Protection would've been opposed by the US and other members of GATT and EFTA, therefore that option was ruled out. Devaluation took place in 1949 to $2.80 as a war adjustment, but any further devaluation was difficult because of being part of the fixed exchange rate system of Bretton Woods. It would also conflict with the Sterling Area. The Sterling Area was what laid behind and held together the Commonwealth. It also supported the City of London's position as a global financial centre. Devaluation of the sterling would cause a collapse of the Sterling Area and would be unfavoured electorally. The final choice was the route taken. Bouts of deflation would be implemented to cut imports to improve the balance of payments position. However, the way the government went about it ultimately failed. They were too timid with their squeezing of the economy because they wanted to protect their full employment objectives and therefore foreign currency reserves stayed low and the sterling crisis continued.
One of the main issues Britain had was that state spending abroad was offsetting all private sector surpluses in the 1960s. The state was spending nearly £200 million a year in aid to the Commonwealth and £313 million in overseas military spending. Without this being cut any attempt to improve the balance of payments would be in vain.
Eventually, the Sterling had to be devalued. The Balance of payments crisis just prior to 1967 was the last straw and the Sterling was devalued to $2.40. Military spending was also cut back. There was some short term success from this, the balance of payments was in surplus by 1969 but it didn't last long as inflation and wage rises meant any gains were soon wiped out. The Sterling Area gradually faded away after this. It just could no longer be maintained with the decline of Sterling as a global currency. The empire was also in the process of breaking up as Commonwealth countries were beginning to gain independence and demand their own currency to complete this process. The demise of Britain was in full swing.
To conclude, we can say that during the 60s and 70s it was realised that the British economy was no longer in a position to support a global currency. The balance of payments was a persistent problem for the economy because of a wrongly held belief that Sterling was still a major currency. The problems did not end with the 1967 devaluation.