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.
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