The Floating Pound (1972)

From the August 1972 issue of the Socialist Standard

The Government's decision to float the pound is yet another confirmation of the Marxian theory of inflation. Floating the pound means that the government is not using its gold and foreign currency reserves to maintain a fixed exchange rate between the pound and the dollar £1=($2.60 till 23 June). As a result the exchange rate of the £ (which is but its price on the foreign exchange market) can, depending on demand, float up or down — but in practice under present circumstances definitely down. The “Times" estimates that when, after a few months, a fixed exchange rate is restored it will be around £1=$2.40 (or its equivalent), an effective devaluation of between five and ten per cent.

Devaluation, according to the Marxian analysis, is an official recognition that due to the over-issue of a paper currency the amount of gold represented by a pound-note has been reduced. Acting on false Keynesian doctrines, successive British governments, Labour and Conservative, have denied that, given a certain level of production and trade, only a definite supply of inconvertible paper money (i.e. paper money not convertible into gold on demand) should be issued if prices were to be kept reasonably stable. And that, if more money than this amount was issued, the inevitable result would be a depreciation of the currency or, what is the same thing from another aspect, inflation (rising prices). Instead they have followed the advice of Keynes to “let the money supply look after itself* and via the Bank of England have provided government departments with the money needed to maintain their expenditure and to subsidize private capitalist industry.

In the last quarter of 1971, for instance, Britain’s money supply was expanded at an annual rate of 25 per cent! (The Times, 9 March, 1972). Only recently have a few academics come to realise what Marx, and indeed many of the bourgeois economists of his day, knew: that the inevitable result of oversupplying an inconvertible paper currency is depreciation and inflation.

For a trading State like Britain this can cause difficulties. For inflation (at least if it proceeds at a faster rate than in other exporting countries) raises the price of exports and makes them uncompetitive on the world market. At the same time imports increase because of the lower prices of foreign goods. The result is a balance of trade deficit, leading to a balance of payments crisis. Also, and this is partly what seems to have happened to Britain this time, export prices can be uncompetitive because of a lower-than-average productivity. The international bankers obviously know all this and have decided to express their lack of confidence in the official gold content of the £ by selling their holdings.

When this happened in 1967 the Labour government gave in (as it had to), devalued the £ and, at the insistence of the international bankers, abandoned their programme of social reforms and imposed a wage freeze. This time a Conservative government has given in, but in a roundabout way: floating the £ for a few months so that it can find its own exchange rate is in effect only a slow-motion devaluation.

What devaluation is supposed to do (as long as other countries don’t devalue as well, of course) is to bring the devaluing State’s internal price level in line with the world price level; its export prices fall and imports from abroad become more expensive; the deficit on the balance of trade disappears and the crisis is solved — until the next time.

For the capitalists devaluation is a policy aimed at restoring the profits they lost through their goods at home and abroad being uncompetitive. But what about the workers? In Britain, which imports much of the food consumed by the working class, it means a rise in the cost of living which can only be recouped by determined action to raise money-wages too. This will inevitably bring the workers into conflict with the government made even more determined to resist wage demands by a desire to regain the confidence of the international bankers. Could there be any more obvious proof that capitalism cannot work in the interest of the vast majority the class of wage and salary earners?