As the UK woke up on Monday September 26, £1 was worth just $1.035, the closest that the pound and dollar had ever come to parity.
Since then, the pound has strengthened a little but some traders predict that the currencies will sooner or later reach equal value, and that the pound could even trade at below the $1 mark.
Over the past 70 years, the pound has gradually weakened against the dollar, and occasionally collapsed.
FT Edit has looked through the Financial Times archives to find out how we reported key moments for the pound, and to see how each plunge in value affected the British economy.
Last month was the 30th anniversary of Black Wednesday, on September 16 1992, when the markets bet against the pound, weakening it so much that Britain was forced to withdraw from the European exchange rate mechanism (ERM).
The ERM was set up to create monetary stability across the EU ahead of the introduction of the euro. Britain joined the ERM in 1990, when the pound was worth roughly $2, and agreed, for example, to maintain the value of the pound between 2.77 to 3.31 deutsche marks.
But there were worries about the effects on the British economy from the start. On October 9, the day after Britain joined, the FT’s front page spelled out market worries about whether the government would be able to curb rising inflation.
Two years later, traders led by George Soros correctly bet that the government would not manage to keep the pound from depreciating below the lower limits of the ERM. The pound would shed 7 cents in a day to $1.78, and would keep falling until February 1993 when it reached a low of $1.41.
But after Black Wednesday, the lower value of the pound boosted the competitiveness of British exports.
In September 1995, The FT dedicated a series of articles to exploring the revival of the motor industry, with John Griffiths commenting on the role trade played:
“Much of the recovery has been export led. In 1984, 186,000 cars were exported — 20 per cent of output. Last year they reached 620,000 — 43 per cent of the production total. This year on the basis of current performance, 750,000 should be exported, almost half the total car output.”
Writing passionately on exports in the diary of a private investor opinion column in August 1996, Kevin Goldstein-Jackson summed up the boom in trade:
“British companies have sold tortillas to Spain, bouncy castles to Egypt, tomato sauce machines to China, dartboards to Germany, bricks to Japan and Yorkshire pudding tins to Dubai.”
By 1997, the boom in the economy saw sterling trading back up at around $1.70, up 20 per cent from the low it reached following Black Wednesday.
But the devaluation of the pound carried with it a heavy political cost. John Major, who had since become prime minister, was resolutely defeated in the 1997 election by Labour’s Tony Blair.
On the five year anniversary of Black Wednesday, Philip Stephens reflected on how the currency crash had permanently damaged the Tory party by empowering the party’s Eurosceptic wing.
“It was the day that broke his [John Major’s] authority and split the Tory party. Whatever other reasons may be adduced for Tony Blair’s election victory, this was the moment that made it possible.”
Towards the end of 1980 the pound was approaching a high of nearly $2.50. But by 1985, the pound would sink to just $1.05, its lowest level before this year.
The turn-around roughly coincided with the arrival of Paul Volcker as chairman of the Federal Reserve. A few months after taking over, he announced a plan in October 1979 to cut the supply of dollars in a bid to fight inflation.
The FT’s Stewart Fleming and David Buchan’s front page article read:
“The Federal Reserve Board, with the explicit support of the Carter Administration, has launched a new attack on US inflation which is expected to push US interest rates above already record levels and, it is hoped, help revive waning international confidence in the dollar.”
As the Fed raised interest rates, investors flocked to the dollar and the pound fell steadily. It hit its lowest level in February 1985, when Volcker hinted that the Fed might intervene to start weakening the dollar.
Stewart Fleming and Philip Stephens captured the Fed chairman’s changing mood towards intervention.
“Mr Volcker told members of the House of Representative subcommittee on domestic monetetary policy: ‘I cannot say there has been any success [in intervention]. I think there is a question of whether actions have been forceful enough, including intervention.’
Mr Volcker’s comments, which sparked a burst of profit-taking in the dollar, were read in the markets as suggesting that the central bank might want to step up US participation in co-ordinated intervention. Last week Mr Volcker told a congressional committee that intervention was ‘a tool of limited influence, but we ought to stand ready to use it.’”
While a strong dollar had helped the US to cure the inflation of the early 80s, it was starting to do damage to other sectors, in particular trade.
In January 1985 Stewart Fleming wrote on the toll of a high dollar for the US economy: “Fears about the impact of the trade deficit on US industry have already sparked a more vigorous approach to international trade negotiations and signs of an intensification of protectionist pressures.”
In late 1985 the US, along with the UK and other developed countries, agreed at a meeting in New York’s Plaza hotel to devalue the dollar by globally coordinating sales of the currency.
Writing on September 24th 1985, the day after the meeting in New York, Philip Stephens reported on frantic selling of dollars in European markets.
“There was, as the foreign exchange manager of a leading US bank in Frankfurt commented, ‘only one sensible immediate reaction’ to the weekend announcement that the five most powerful industrial nations want to see a weaker dollar.
‘We all sold dollars and sold them quickly.’ ”
By December the Fed had sold an estimated $3.2bn, its biggest intervention in the currency market for five years. By early December the pound was back above $1.40.
By 1987 the Fed was trying to cushion the fall in the dollar and had turned to buying dollars again, the dollar’s weakness continued.
Patrick Harverson summed up the position in late 1990, just as the first Gulf war was raging:
“The feature of the past three months has been the weakness of the dollar, putting to the sword that great theory of foreign exchange markets: if there’s a whiff of war, buy dollars. The idea behind this theory has been that at times of great political upheaval and uncertainty, there is a ‘flight to quality’.
“There are several reasons behind the poor performance of the dollar, but the key technical factor has been interest rate differentials. More attractive short-term rates are available on the yen, the pound and the Deutsche mark.”
As they emerged from the Second World War, a host of countries agreed to fix their exchange rates against the dollar, and the US fixed the dollar to gold, in what was known as the Bretton Woods system.
While Britain’s exchange rate of four dollars to the pound was a point of national pride, hefty war debts and a growing trade deficit put downward pressure on sterling.
Dollars had become the world’s reserve currency, and were needed for most international payments, including for imports like food which British and European farms needed as they recovered from the war.
The FT’s leader column summed up the difficulties in December 1946:
“In the period January to October last, purchases of dairy produce from abroad cost us £96,000,000 and as much as half this amount had to be paid in “hard” currencies [mainly US dollars]. In the corresponding period of 1938, of a total dairy produce bill of £67,000,000, only £4,500,000 came from dollar countries.”
When the pound became convertible to dollars in July 1947 there was such a drain on dollar reserves that convertibility was suspended the following month. The effects of a high pound on the British economy meant that in 1949 the UK devalued the pound from $4.03 to $2.80.
Fewer than 20 years later, the pound was in trouble again. The UK was still importing more than it was exporting, and the Labour government of Harold Wilson was forced to devalue from $2.80 to $2.40 in November 1967. The FT’s front page laid out the case for devaluation.
One of the factors that spooked investors was the successive loans taken out by the Labour government as it tried to maintain the exchange rate, such as a $1bn loan from the IMF.
The political fallout for the Labour party and Wilson was damaging. The FT’s then economics editor Samuel Brittan recalls his first-hand experience with the public mood in 1968:
“My chief memory of the devaluation weekend a year ago is that for the first time in my life I was booed. A small hostile crowd had gathered outside Downing Street and the journalists who emerged were mistakenly regarded as being connected with Her Majesty’s Government. The precise words used were, ‘Out, out, out!’”
Wilson, in a speech the day after devaluation, would say that “the pound here in Britain, in your pocket or purse or in your bank” would keep its value, for which he was relentlessly mocked.
Devaluation would follow Wilson and Labour to the polls in 1970 where Wilson’s opponent, Tory leader Edward Heath, would on several occasions warn that voting for Labour would result in another devaluation. The Conservatives would win the election, relegating Labour to opposition until 1974.
