If you think 2016 is a rocky year, take a look at 1848, the last time sterling was worth as little internationally as it is now.
There is an upside to the pound’s dramatic slump of course. It means that exports are likely to increase, as countries outside our own can more readily afford our more manufactured output.
Unfortunately, that’s more or less the only good news there is. On the debit side is the fact that Britain as a nation no longer makes enough for that to make a huge difference. Our economic well-being has essentially been bet on continuing open access to European and world markets. The strategy was reliant on keeping border open – both practically and symbolically. The massive over-reliance on services to bring in tax receipts – and financial services based in the City especially – is not a sound economic policy. But beware anyone who talks up the fall in the value of the pound. The major immediate result will be inflation caused by an increase in materials prices. This in turn is going to squeeze living standards in a serious way soon, and there wasn’t really any wiggle room in the first place.
Whilst in the immediate aftermath of the vote to leave the EU the economic apocalypse didn’t arrive – the IMF even said that their warnings had been overstated in the wake of Brexit – that doesn’t mean that worse economic conditions aren’t still in the pipeline.
So is the dramatic fall in the £ the beginning of the end? 168 years is a long time; it all sounds pretty bad. Well, the phrase ‘168 year low’ is actually rather misleading.
It infers that it was 168 years since the pound was worth as much as it is now on international money markets. A quick glance at the graph shows that that isn’t the case. Instead 1848 was when the measurements started to be taken. The latest low is just the latest expression of a much the longer-term trend of the decline in value of sterling. Given that in 1848 the pound was the global reserve currency and Britain was at the height of its imperial pomp, being currently lower in value than then shouldn’t really be a surprise.
The occasions of the two long-term structural readjustments to the sterling’s value are clear from the graph. Both come from intentional government devaluations of the pound. One was in the immediate aftermath of World War Two, which had left Britain in tatters economically, and the other was in 1967 and ended Britain’s lingering belief that it remained an imperial power. Both appear as sharp falls on the graph because devaluation had to be made officially and deliberately against other international currencies. This was a requirement of the post-war Bretton Woods economic system, which fixed all currencies against the US dollar. That system was dismantled suddenly in 1971 by the ‘Nixon Shock’: the unilateral withdrawal of the dollar from the system and gold-convertability, which instantly brought Bretton Woods crashing down.
Following the Nixon Shock currencies were not traded at fixed exchange rates, as previously. Instead all currencies became ‘fiat currencies’, that is their values against each other depended day-to-day on how they fared on the international money-markets. This explains why in the graph the decline of the pound has been more erratic, with some rises as well as falls. The overall trend, though, is clear: the value of the pound is heading in one direction only. Down.
That all seems pretty bleak, but only if you accept the central contentions of global economic orthodoxy. One is that a strong currency is a good thing. Another is that economic growth is the only legitimate aim of political AND economic policy. The first is a symptom of a thinking that economic competition between countries is wholly positive, whilst it is actually fundamentally unhelpful in helping address the structural inequality in the global system. The second assumption – that all growth is good – is totally incompatible with living on a planet of finite natural resources.
So instead of looking at this graph despairingly, it might be worth acknowledging that this is what is happening now, and has been happening for a long time. The only way to get back to a 168-year high would be to re-conquer 1/2 the planet and enslave huge swathes of its population. I suggest there might be better alternatives, if only we look around for them.