What did and did not happen
There was no worldwide financial crash in 1967. Stock markets in most countries were generally firm that year, banks did not fail in large numbers, and no global depression followed. The “financial crisis” of 1967 was a more specific event: a crisis for the British pound, which was devalued on 18 November 1967, and the wider strain that this put on the system of fixed exchange rates and the gold price. Its significance lay in what it showed about the weakness of the postwar monetary order, and it reached a turning point in March 1968.
The system under strain
After the Second World War, the Bretton Woods system tied the world’s major currencies to the US dollar at fixed rates, while the dollar was linked to gold at 35 dollars an ounce. The arrangement worked while the United States held large gold reserves and ran surpluses. By the 1960s that was changing. American deficits abroad, driven by military spending and overseas investment, meant that more dollars were held outside the country than the US gold stock could easily cover. The pound, as the second major reserve currency, was in an even weaker position.
Britain had run recurring balance-of-payments problems for years. Governments responded by raising interest rates, cutting spending and imposing controls, each time defending a rate of 2.80 dollars to the pound. Many economists and financial markets doubted that the rate could be held indefinitely.
Sterling in 1967
Early in 1967 conditions seemed to improve, and some of the earlier pressure eased. But the position was fragile. The Six-Day War closed the Suez Canal and unsettled Middle East oil and shipping, which added to doubts about Britain’s trade position. Exports were not growing as hoped, and a dock strike from September disrupted shipments and made the trade figures look worse. In October, the trade deficit figures disappointed markets, and sales of sterling accelerated.
The Wilson government had long insisted it would not devalue. By November, supporting the pound required heavy drawing on reserves and borrowing. On 18 November 1967, the government announced a devaluation of sterling from 2.80 dollars to 2.40 dollars, a cut of about 14 percent. An international credit package, including support from the International Monetary Fund, was arranged to steady the position. The Chancellor, James Callaghan, left the Treasury soon afterwards and was replaced by Roy Jenkins. In a broadcast the next day, Prime Minister Harold Wilson tried to reassure the public that the pound in their pockets was not worth less at home, a phrase that was widely quoted and often criticised later. The pound devaluation was a personal blow for Wilson, who had long argued against it, and it came days before President de Gaulle announced his Common Market veto on British membership.
From sterling to gold
The devaluation did not end the pressure. Instead it raised a question that mattered for the whole system: if the pound could not hold its rate, could the dollar? Investors and speculators began buying gold in large quantities, expecting that its official price might one day be raised.
Since 1961, the main central banks of the United States and several European countries had cooperated in the London Gold Pool, selling gold in London to keep the market price near the official 35 dollars. France had left the arrangement in 1967, which made the others carry more of the load. After the November devaluation, demand surged, and the pool lost large amounts of gold in the following months. In March 1968, the pool was closed. A two-tier system followed, in which central banks kept trading with each other at the official price, while the private market price was left to float.
The response of governments
Governments did not stand still. At the annual meeting of the International Monetary Fund in Rio de Janeiro in September 1967, finance ministers agreed on the outline of a new form of reserve asset, the Special Drawing Right. It was intended to supplement gold and dollars as the world’s trade grew, and the first allocations were made in 1970.
Other responses were more limited. Several countries devalued alongside Britain, among them many Commonwealth and trading partners, while others, including West Germany and France, held their rates. In January 1968 the United States announced tighter controls on capital leaving the country.
What it meant
The 1967 crisis did not cause the end of the postwar monetary order, but it exposed its fragility. The fixed-rate system survived the crisis of 1967-68, and ended in the early 1970s, when the United States suspended the dollar’s convertibility into gold in August 1971. Sterling’s decline, moreover, was a visible sign that Britain’s role as a world financial power was shrinking. The relevant lesson from 1967 is less a story of panic than a story of managed strain, where each government tried to avoid a break that the system could not avoid forever.