The decision
On Saturday 18 November 1967, the British government announced that the pound would be devalued from $2.80 to $2.40. The exchange rate had been fixed at $2.80 since 1949, when an earlier Labour government had devalued from just over $4. The new rate meant that the pound lost about 14.3 percent of its value in dollar terms ($0.40 on $2.80), while the dollar became about 16.7 percent more expensive in pounds.
The announcement was the end of three years in which Harold Wilson’s government had repeatedly said it would not devalue. Wilson and his Chancellor, James Callaghan, feared that devaluation would be seen as a failure of Labour economic management, as it had been in 1949, and they were also worried about the position of sterling as a reserve currency held by many countries. Instead they relied on borrowing from other central banks and the International Monetary Fund, on tax rises and on spending restraint.
Why the pressure built
The root problem was the balance of payments. Britain regularly imported more than it exported and spent large sums abroad, including on military garrisons overseas. The Labour government had inherited a big deficit in 1964, and it responded with a series of measures, including an import surcharge in 1964 and a harsh package of deflationary policies in July 1966, which included a wage and price freeze. The deficit narrowed and for a time the position looked better.
Several shocks in 1967 undid the progress. The Six-Day War in June closed the Suez Canal, which disrupted shipping and raised costs, and the associated Middle East tension unsettled currency markets. Exports suffered from the effects of the earlier squeeze on the economy and from a strike on the London and Liverpool docks in the autumn, which delayed shipments and drew in imports. Trade figures published in the autumn were bad, and traders began selling sterling in large amounts. Speculators believed that a fixed rate could not hold, and holders of sterling balances, including foreign governments, moved their money.
The Bank of England spent large sums of its reserves defending the rate in the days before the announcement. According to accounts of the period, Callaghan and Wilson were reluctant until the last moment, but it became clear that the reserves could not withstand more losses.
The package
Devaluation was combined with a set of measures intended to make it work. Bank Rate was raised sharply, to 8 percent, to support the pound. The government arranged a large loan, reportedly around $1.4 billion, from the International Monetary Fund, along with support from other central banks. In the following weeks and months it promised spending cuts, higher taxes and limits on credit, intended to shift resources into exports and away from domestic consumption. Devaluation by itself would only help if home demand was held down, so that goods were available to sell abroad.
Roughly a dozen or more countries, mostly in the sterling area, devalued by similar amounts or less, to avoid being priced out against British goods, although the numbers given differ between accounts.
Wilson’s broadcast
On the Sunday evening, Wilson went on television to explain the decision. He said, in effect, that the change did not mean that the pound in people’s pockets, purses or bank accounts had been devalued at home. The remark was meant to reassure the public that prices would not jump overnight. It was heavily criticised at the time, and is often cited as the sentence that damaged his reputation. In fact, the devaluation did raise the cost of imported goods, and the austerity that followed made the claim hard to defend. Some commentators have argued that the line has been remembered unfairly, since the point he was making was narrowly about the internal value of the currency, but it remained a political liability.
Consequences at home
Callaghan resigned as Chancellor soon afterwards, after a short period of manoeuvring, and moved to the Home Office. His place was taken by Roy Jenkins, who adopted a tough approach in the 1968 budget. In January 1968 the government announced major cuts in public spending, including a decision to withdraw British forces from east of Suez, which was a significant step in the end of Britain’s role as a global military power. The earlier British withdrawal from Aden was completed at the end of November 1967, a coincidence of timing that fits the wider pattern of retrenchment.
Devaluation helped, but not immediately. Imports remained high at first, and exports took time to respond. The balance of payments improved in 1969, and Jenkins was able to report a surplus. The government’s reputation, though, did not fully recover, and Labour lost the 1970 general election.
Consequences abroad
The devaluation shook confidence in the postwar system of fixed exchange rates. If sterling, the second most important reserve currency, could not hold its parity, speculators asked whether the dollar’s link to gold could survive. Gold buying surged, which placed the London Gold Pool under strain, and within months the arrangement collapsed. A few days after the pound’s fall, on 27 November, French President Charles de Gaulle publicly rejected British membership in what became known as the Common Market veto, partly citing the weakness of the pound, which compounded Wilson’s difficulties.
Assessing it
Historians still debate whether the government should have devalued earlier, in 1964, when it first came into office. Wilson’s defenders argue that he had good reasons to avoid it at the time, including the political risk and the possible knock-on effects on other countries. Critics say that years of defending the rate through deflation cost jobs and growth that a prompt change would have saved. The dates and figures in this article are well documented, though some of the details of the loans and of the number of other countries that followed Britain vary between sources.