What factors led to the 30% devaluation of pound sterling in 1949?
score:5
This is a fascinating question. There are short, simple answers:
The great devaluation of 1949 - 30% Post war, Britain was heavily indebted to the USA. Despite a soft loan agreement with repayments over fifty years, the pound remained once again under intense pressure In 1949 Stafford Cripps devalued the pound by over 30%, giving a rate of $2.80 The Saturday Economist
Unfortunately, those don't reveal much.
There are also lengthy answers filled with editorial opinion that perhaps aren't illuminating to those who aren't familiar with either the political or economic predjudices of the author.
At the time, Britain was a signatory to the Breton Woods System, under which all the signatory nations attempted to peg their exchange rates relative to one another. In order to maintain the relationship between exchange rates, Britain had to buy and sell pounds sterling, using the gold and silver reserves stored at the Bank of England.
Why was there pressure on the pound sterling? Simply people wanted less Pounds Sterling and more dollars; they were selling Pounds Sterling to buy dollars. In order to prop up the value of the Pound Sterling the BoE was forced to buy Sterling. (Currency is a good like any other; when there are more sellers than buyers, the price falls; when there are more buyers than sellers, the price rises. If you want the price to rise, you're going to have to pay more than market price for the good). BoE had no other currency reserves, so it had to trade specie (gold & silver) for currency (Pounds Sterling). There is a limit to how long they can do that.
The problem with the Breton Woods System (if I can try to express it in a few sentences) is that the political goal of managing exchange rates was divorced from the real meaning of the exchange rates. Britain could no longer maintain the unrealistic value of the pound sterling and had to devalue.
The value of money is ultimately what you can buy with it. If I want to buy British goods, I need to pay in Pounds Sterling. If I want to buy American goods, I need to buy in US Dollars. If American goods are more desireable than British goods, I'll sell my Sterling to buy dollars. Treaties among politicians are helpless against the force of the invisible hand.
Upvote:5
I think the loss of British Empire about that time had something to do with that. If you have fiat currency, valued primarily on the perception of your total assets, and you loose a large portion of those assets, you'd better voluntarily adjust your exchange rate or face devaluation due to loss of trust in your currency by other players.
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