The Cooking the Books column from the November 2016 issue of the Socialist Standard
‘Hard Brexit fears push sterling to a fresh low’ read the headline in the Times (7 October) reporting that the pound had fallen to its lowest level against the dollar for 31 years. Others are suggesting that it could eventually fall, ironically, to £1 = 1 Euro.
Until 1973 most of the world’s currencies were tied to a fixed rate with the US dollar and so also to each other. If a country wanted to change this it had to get the agreement of the IMF. Governments tried to avoid such a formal devaluation as this was regarded as a recognition that they could not control the part of the capitalist economy they presided over as they had claimed in order to get elected.
Such devaluations reflected a situation where a country’s exports were doing badly, generally because their prices were uncompetitive due to a higher than average rate of inflation. This resulted in more capitalist firms wanting to sell the country’s currency than to buy it (to pay for its exports). Governments tried to hold the fixed rate by using their reserves of other currencies to buy their own currency. When this couldn’t be kept up, they had no alternative but to seek the permission of the IMF to devalue, i.e., to lower its exchange rate with the US dollar and so with other currencies too.
When the Labour government was forced to devalue the pound in November 1967 the Prime Minister, Harold Wilson, famously declared that ‘it does not mean that the pound here in Britain, in your pocket or your purse or in the bank, has been devalued.’
This was technically true but disingenuous as, while a pound would still buy a pound’s worth of goods in Britain, one effect of devaluation is to raise the price of imported goods. As many of these are consumer goods or enter into their production, the effect is that ‘the pound in your pocket’ will eventually come to buy less than before the devaluation.
Nowadays, with floating exchange rates, governments don’t need to formally change the exchange rate of their currency. They can just let market forces decide what the exchange rate is by the demand for it. Because a falling exchange rate increases the price of imported goods governments do not necessarily always want this, so they still intervene in the currency market to try to keep the rate from falling.
On the other hand, when they want to try to increase exports, they let it fall. In fact, now that under WTO rules tariffs can’t be used as a weapon of economic competition, letting a country’s exchange rate fall has become a replacement. The euro, which in effect established a fixed rate of exchange between the currencies of the member-countries all renamed “euro”, is in part an attempt to prevent this kind of economic competition. One reason Britain stayed out was to be able to continue to use this weapon.
The current fall in the value of the pound was exacerbated by a rousing patriotic declaration by the Prime Minister at the Tory Party Conference that, with Brexit, Britain was to become an independent, sovereign nation again. To which the currency markets gave a decisive ‘that’s what you think’, illustrating yet again that no country can escape from the operation of the economic laws of world capitalism as well as reflecting the speculators’ assumption that, if Britain leaves the single market as well as the EU, British exports are likely to suffer.