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Old Money: the pound in your pocket

Addressing the nation on television in November 1967, British prime minister Harold Wilson announced the devaluation of the pound and famously declared that "it does not mean that the pound here in Britain, in your pocket, has been devalued."

by Professor Richard Roberts, King's College London

Fine, so long as you didn’t consume imported produce, buy overseas goods or take holidays abroad. The "pound in your pocket" haunted Wilson ever after. And his administration lost the subsequent general election.

Wilson’s 1967 devaluation was one of eleven substantial sterling depreciations between the end of the First World War and today. They occurred in a variety of political and economic contexts, under a succession of exchange rate regimes.

The pound exited the gold standard and floated in 1919 and again in 1931. It devalued twice under the post-war Bretton Woods fixed exchange rate system, in 1949 and 1967, and then floated in 1972 contributing to the collapse of Bretton Woods. In 1992 sterling departed the European Exchange Rate Mechanism (ERM). There were also big depreciations while a floating currency in 1939, 1976, 1981-85 and 2007-09. 

The pound’s 2016 post-Brexit shock slump is the latest episode, taking the exchange rate to an historic low against a basket of trading partners' currencies.

At its pre-High Court, pre-Trump exchange rate of $1.21:£1, sterling was down 17% since the June 23 Brexit referendum. This exceeded 1967’s 14.3% devaluation, though the descent has been spread over several months rather than overnight.

But the fall is smaller than any of the other nine depreciations of the pound against the dollar, as measured from the pre-crisis level to the trough of each episode. Four of them were in the 20%-30% range: 1972-75 (22%); 1976 (23%); 1992-93 (26%); and 1919-20 (29%). A further four were in the 30%-40% range: 1939-40 (30%); 2007-09 (30%); 1949 (31%); and 1931-32 (33%). 

In a class of its own was the 55% slide from 1981 to 1985, which saw the pound almost touch parity with the dollar. 

The average amount of sterling’s decline in the 10 past depreciations before 2016 was 29%. If the historical episodes are a guide, it would appear that the pound has further to fall before it touches bottom.

Devaluations and currency crises are distinctly bad news for incumbent political administrations.

An international study of 200 devaluation episodes during the Bretton Woods era from 1947 to 1970 found that in the aftermath of a depreciation crisis, 30% of governments lost office within the following 12 months compared to 14% in a control group without a currency crisis. 

In other words, a currency crisis in a country suggested that its administration would be more than twice as likely to lose power than one where there was no such crisis.

Employment prospects among finance ministers appear even worse, with no fewer than 60% losing their job in the year following the currency crash. 

A follow-up study for the years 1971-2003 found that in the post-Bretton Woods era a currency crisis coincided with a 45% higher rate of a political leader losing his job. Financial upheavals discredit the reputation for economic competence of the party in power. 

Britain’s historical experience fits this pattern in spades, though on each occasion other factors to a greater or lesser extent determined the outcome of the subsequent general election.

The 1931 sterling crisis involved a split in the Labour party and a devastating poll defeat. The devaluations of 1949 and 1967 also occurred on Labour’s watch with subsequent electoral defeats.

Sterling’s forced float in 1972 was followed by the Conservative Party's loss of power, as happened to Labour after the 1976 IMF crisis. The reputation of John Major’s Conservative administration never recovered from the pound’s humiliating exit from the European Exchange Rate Mechanism in 1992.

And most recently the financial crisis of 2007-08 was followed by the loss of the 2010 election by Gordon Brown’s administration, an electoral outcome replicated virtually across the board in the countries that experienced a financial crisis in 2008.

But there is a notable exception. Despite sterling’s 1981-85 mega-slide Margaret Thatcher was returned to Downing Street in both the 1983 and 1987 general elections.

The numbers, on balance, seem to suggest that sterling’s recent depreciation could hurt Theresa May’s administration at the next election. But for many commentators, the depreciation is just the job for UK exports, economic growth and therefore the longevity of the government.