The 1967 Sterling Devaluation: Cutting the Pound to $2.40

At half past nine on the evening of Saturday 18 November 1967, the British Treasury issued a short statement announcing the thing the government had spent three years insisting it would never do. From Monday the pound would be worth $2.40 instead of $2.80, a cut of 14.3 per cent. Bank Rate would go from 6.5 per cent to 8 per cent, the highest since the outbreak of the First World War. Britain would draw $1.4 billion from the International Monetary Fund and had lined up roughly $3 billion of central bank credit besides.

Saturday evening was chosen because the foreign exchange markets were shut. Dealers in London had spent Friday watching the Bank of England buy sterling at the floor of its Bretton Woods band, $2.78, in quantities nobody in the room could recall seeing before. What the Bank spent that day has never been published in full; the official reserve figures for November were doctored by a book-keeping device that shifted borrowed money into the headline number, a manoeuvre the Treasury had used before and would use again.

Harold Wilson had been Prime Minister for three years and one month, and every month of it had been spent defending a number.

The Unmentionable

Labour won the general election of 15 October 1964 with a majority of four. Within days Wilson, his Chancellor James Callaghan and his Economic Affairs Secretary George Brown met to consider what to do about a balance-of-payments deficit the outgoing Conservatives had left running at what Labour promptly publicised as £800 million for the year. Three men decided, without consulting the rest of the Cabinet, that the pound would not be devalued. The subject was then closed so thoroughly that Whitehall papers referred to it by euphemism. Officials who needed to discuss it in writing called it the Unmentionable.

Reasons for the decision were partly economic and mostly not. Sterling was still a reserve currency. Around £3 billion of overseas sterling balances sat in the accounts of Commonwealth governments, oil states and colonial currency boards, held there on an implicit British promise about value. Devaluation would impose a capital loss on every one of those holders and might set off the liquidation the Treasury had feared since 1945. Alec Cairncross, who watched the period from inside the Treasury and wrote the standard account of it with Barry Eichengreen, judged that the deeper motive was political memory: Labour had devalued in 1949 under Stafford Cripps and had lost office in 1951, and Wilson was determined not to lead what he called the party of devaluation twice in a generation (Cairncross and Eichengreen, 1983).

So the government chose the alternative, which was to defend $2.80 with everything else available. A 15 per cent surcharge went on imported manufactures on 26 October 1964. Bank Rate was raised to 7 per cent on Monday 23 November, breaking the convention that rate changes came on a Thursday, precisely so that the markets would read it as an emergency. Two days later the Bank of England assembled $3 billion of credit from eleven central banks and the Bank for International Settlements.

Three Years of Defending a Number

Each rescue bought months rather than years. A seamen's strike from 16 May to 1 July 1966 stopped exports at the docks and triggered another run, and on 20 July Callaghan announced £500 million of deflation with a six-month freeze on wages and prices. Growth was cut deliberately in order to hold a parity, which is the trade every fixed-rate country eventually faces and which Britain took four times in three years.

Catherine Schenk's history of sterling's long retreat sets out how much of the defence depended on other people's willingness to keep helping. Central banks that lent to Britain were not being generous; they were protecting the dollar, because sterling was the outer rampart of the Bretton Woods system and a sterling devaluation was widely expected to turn speculators towards gold and then towards the dollar itself (Schenk, 2010). That reading proved accurate within four months.

Then came two shocks the Treasury had not modelled. Israel and its neighbours fought the Six-Day War in June 1967, and the Suez Canal closed on 6 June, adding weeks and freight costs to every cargo routed between Britain and Asia. In September a dock strike began in Liverpool and spread to London, and it ran into November. Exports that should have been loaded sat on quaysides while the trade figures were compiled.

Publication of the October trade returns on 13 November produced the worst monthly gap on record. Three days later Callaghan, answering a question in the Commons, declined to repeat the standard denial that devaluation was under consideration. Markets are literal readers. Selling on Thursday and Friday was heavy enough that by Friday evening the Cabinet had been told the reserves could not survive another week.

The Pound in Your Pocket

Wilson broadcast to the nation on the Sunday evening, and the sentence he chose became the most quoted thing he ever said.

"It does not mean, of course, that the pound here in Britain, in your pocket or purse or in your bank, has been devalued."

Read strictly, the claim was true: a pound note still bought what a pound note bought that morning, and the price of imports would take months to work through. Read as the public read it, the sentence denied the obvious, and it was reported for years afterwards in the compressed form of "the pound in your pocket" as an example of a politician explaining away a defeat. Wilson's own memoir treats the broadcast as a necessary reassurance against panic and never quite concedes the damage it did to his standing (Wilson, 1971).

Devaluation on its own would have achieved very little. Cutting the external price of British goods raises demand for them, and that demand can only be met if resources are taken out of domestic consumption first. A package accompanied the new parity for exactly that reason.

Defence commitments east of Suez were reviewed in the weeks that followed and cut in January 1968, and prescription charges came back. Deflation delivered by a Labour government in the middle of its term did not go unnoticed on its own benches.

Who Followed the Pound Down

Sterling was not only Britain's currency. Roughly a dozen countries moved their own rates within days, and which ones moved revealed how much of the old sterling area still functioned.

Ireland devalued by the identical 14.3 per cent, holding the one-for-one link with sterling it would keep until 1979. New Zealand went further and cut by 19.45 per cent, using the moment to correct a competitiveness problem of its own. Spain devalued the peseta by the same 14.3 per cent within two days. Denmark took a smaller cut. Hong Kong produced the most awkward sequence: the colonial government devalued the Hong Kong dollar by 14.3 per cent on 20 November, faced immediate protest from a population whose savings had just been written down, and revalued by 10 per cent on 23 November, leaving a net cut of under 6 per cent and a three-day episode still remembered locally as the dollar crisis.

Australia declined to follow at all, and the refusal mattered more than its size. Canberra had shadowed sterling since the nineteenth century; choosing the dollar instead in November 1967 signalled that the sterling area was now a legal arrangement rather than a monetary one. France, West Germany, Japan, Canada and South Africa all held. The countries that followed were those whose trade ran through Britain or whose reserves were held in London, and there were fewer of both than there had been a decade earlier, a decline the Suez confrontation of 1956 had accelerated by demonstrating what British dependence on American financial goodwill was worth in a crisis.

Callaghan Out, Jenkins In

A Chancellor who has spent three years promising not to devalue cannot easily administer a devaluation. Callaghan offered his resignation, and on 30 November he and Roy Jenkins exchanged jobs: Callaghan to the Home Office, Jenkins to the Treasury. Jenkins arrived to find the parity changed but the payments problem intact, and told colleagues the country faced what he described as two years of hard slog before the trade account turned.

He was close to right on the timing and understated the difficulty of the first year. Trade balances follow a J-curve after a devaluation, because import contracts are priced in foreign currency and repriced immediately while export volumes respond only as orders are placed and filled. British import costs jumped in the first quarter of 1968 while export volumes had barely moved, so the visible trade deficit got worse before it got better, and every month of worsening invited another attack on the new rate.

Pressure duly arrived somewhere else. Speculators who had bet correctly against sterling turned to the next fixed price in the system, and in the first two weeks of March 1968 the London Gold Pool sold several hundred tonnes trying to hold gold at $35 an ounce. On 15 March the London gold market closed at Washington's request, and by 17 March the pool was abandoned in favour of a two-tier arrangement with a free market price alongside the official one. Sterling's devaluation had knocked out the first support of the Bretton Woods architecture, and the structure lasted three more years.

Jenkins raised taxes by £923 million in his Budget of 19 March 1968, the largest peacetime increase Britain had seen. Sterling came under attack again in November that year, answered with a scheme requiring importers to deposit half the value of their goods with customs for six months. The Basle Group Arrangement of September 1968 finally addressed the sterling balances directly, offering holders a dollar-value guarantee on most of their reserves in exchange for undertakings to keep them in sterling — the problem that had made devaluation unthinkable in 1964, solved a year after devaluation happened.

What $2.40 Bought

Public reaction in the first weeks ran to volunteerism rather than anger. On 1 January 1968 five typists at Colt Heating and Ventilation in Surbiton offered to work an extra half-hour each day without pay to help the export drive, their employer publicised it, and within a fortnight the gesture had become a national campaign under the slogan I'm Backing Britain, complete with Union Jack shopping bags and a Bruce Forsyth single. Robert Maxwell ran a competing Buy British effort from his publishing house. Enthusiasm outlasted its own logic by a few months and collapsed when newspapers reported that a batch of the campaign's promotional T-shirts had been manufactured in Portugal.

The current account moved into surplus during 1969 and stayed there through 1970, and the surplus was large enough that Jenkins was able to repay a substantial share of the borrowings. Wilson lost the general election of June 1970 anyway, four days after a monthly trade figure came out unexpectedly bad.

Judgements on the episode have moved in one direction over time. Cairncross's later Treasury history argues that the 1964 decision was defensible on the information then available and indefensible by 1966, when the seamen's strike package showed how much output the defence was costing and how little it was buying (Cairncross, 1996). Barry Eichengreen's account of the international monetary system makes the structural point: a country with an open capital account, a fixed parity and a domestic political commitment to full employment is holding three things that cannot all be held at once, and the market decides which one goes (Eichengreen, 2008).

Britain spent three years, roughly £1.5 billion of borrowed reserves and two rounds of deliberate deflation proving the arithmetic. The rate chosen in 1967 lasted under five years. When the pound floated in June 1972 it began the slide that carried it to $1.5675 on 28 October 1976, in the crisis that brought the IMF to London with conditions attached to a $3.9 billion loan — a negotiation Callaghan conducted from Downing Street, nine years after the Saturday night that cost him the Treasury.

Jenkins had argued for devaluation before he was given the department that had to carry it out, and his memoir returns less to the policy than to the way it was withheld from the Cabinet that was supposed to decide it (Jenkins, 1991). A change in the external value of the currency, reaching every contract Britain had written with the outside world, was settled in October 1964 by three men in a room — and then defended for three years by everybody else.