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In 1949, Britain devalued the pound sterling by 30%. This was a major world economic event given that the pound was and still is one of the major currencies in the world. In fact, 9 other countries followed suit then. They were Australia, India, South Africa, New Zealand, Eire, Denmark, Norway, Egypt, and Israel. Interestingly, several among those who devalued were former British colonies.

Given that savings are destroyed in a currency devaluation, it should be interpreted as a disaster and outrage. Yet, this move was praised as a constructive step (http://century.theguardian.com/1940-1949/Story/0,,105127,00.html).

What factors led to the devaluation of pound sterling in 1949 by 30%?

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Regretfully, I am unsure how this could be adequately answered in less than a full-year economics course. Perhaps if you were to demonstrate some knowledge of basic economics, so as to not require re-presentation of the fundamentals, this could be reopened. –  Pieter Geerkens Dec 12 '13 at 6:37
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@Pieter Geerkens: The answerer can assume that the reader has basic economics knowledge so that he need not explain every single sentence. A description of the economic conditions and significant historical events that led to the devaluation should be sufficient. The historical context for the devaluation is more relevant than going into the basics of economics when answering this question. –  curious Dec 12 '13 at 6:41
    
@Pieter Geerkens: I believe I do have some knowledge of basic economics. To demonstrate some knowledge of basic economics in a question will bore the reader. –  curious Dec 12 '13 at 9:12
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Summary of a summary: When you have fixed exchange rates, you'll sometimes have to adjust them based on economic conditions, since the market can't do that itself. In fact if you don't, sooner or later reality will force you to. –  Lennart Regebro Dec 12 '13 at 9:13
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@Lennart Regebro: Thanks! This short comment is already a good answer. The Swedish and Asians(Thais, Indonesians, Koreans) in the 1990s could have avoided the sudden devaluation had they learnt from the British experience in 1949. Floating currencies devalue more slowly because realities change slowly, unlike fixed currencies. I am wondering ... does this mean that for countries that adopt floating exchange rate will never suffer a sudden devaluation of >20% overnight? Is there a historical precedent when a floating currency suffer a drop of >10% overnight? At least not that I know of. –  curious Dec 12 '13 at 9:25

2 Answers 2

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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Exactly, I think you've hit the nail on its head here. Britain ended the was victorious but saddled with huge war debts and virtually insolvent. The most pressing debts were actually to its former colonies and dominions (e.g. India) and domestic - and they were valued in pounds. Whereas the best and last financial hope for Britain lay in American aid - value in dollars. Hence the devaluation was little short of inevitable. There's more background on this here: bbc.co.uk/history/british/modern/marshall_01.shtml –  Felix Goldberg Dec 13 '13 at 10:23

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.

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