Following the US dollar
Since leaving gold, there have been several attempts to peg the value of the pound to other currencies, initially the US dollar.
Under continuing economic pressure, and despite months of denials that it would do so, on September 19, 1949 the pound was devalued by 30%, from 4.03 dollars to 2.80 dollars. The move prompted several other governments to devalue against the dollar too, including Australia, Denmark, Ireland, Egypt, India, Israel, New Zealand, Norway and South Africa.
In the mid 1960s the pound came under renewed pressure since the exchange rate against the dollar was considered too high. In the summer of 1966, with the value of the pound falling in the currency markets, exchange controls were tightened by the Wilson government. Among the measures, tourists were banned from taking more than 50 pounds out of the country, until the restriction was lifted in 1970. The pound was eventually devalued by 14.3% to 2.41 dollars in November 1967.
A worse crisis followed in 1976, when it was apparently leaked that the International Monetary Fund (IMF) thought that the pound should be set at 1.50 dollars, and as a result the pound fell to 1.57 dollars, and the government decided it had to borrow 2.3 billion pounds from the IMF. At its lowest, the pound stood at just 1.05 dollars in February 1985.
Following the German Mark
In 1988, the Thatcher government decided that the pound should "shadow" the German Deutsche Mark, with the unintended result of a rapid rise in inflation as the economy boomed due to inappropriately low interest rates.
Following the European Currency Unit
In another change of tack, in 1990 the Thatcher government decided to join the European Exchange Rate Mechanism (ERM), with the pound set at about DM 2.90. However the country was forced to withdraw from the system on Black Wednesday (September 16 1992) as an international group of speculants led by George Soros exploited the fixed exchange rate by speculating on the interest rate differences between Britain and Germany (earning several billion dollars in the process).
Black Wednesday saw interest rates jump from 10% to 12%, and then to 15% in a futile attempt to stop the pound falling below the ERM limits, costing the country tens of billions of pounds as the exchange rate moved to DM 2.20.
Following inflation targets
In 1997, the newly elected Blair government caused a surprise when Gordon Brown handed over control of the currency to the Bank of England. The Bank is now responsible for setting its base rate of interest so as to keep inflation within a range set by government.
As a member of the European Union, the UK has the option of adopting the euro as its currency. However the subject remains politically controversial, not least since the UK was forced to withdraw from its precursor, the European Exchange Rate Mechanism (see above).
The Pound did not join the Second European Exchange Rate Mechanism (ERM II) after the euro was created.
On the value of British money
In 1999 the House of Commons Library published a research paper (PDF document) which included an index of the value of the Pound for each year between 1750 and 1998, where the value in 1974 was indexed at 100.
Reading this document, one is struck by the fact that the value of the Pound remained remarkably constant for the whole of the period until the First World War, allowing for inflationary fluctuations in wartime and with many periods when prices declined. The value of the index in 1750 was 5.0, increasing to a peak of 16.0 in 1813 before declining very soon after the end of the Napoleonic Wars to around 10.0 and remaining in the range 8.5–10.0 at the end of the nineteenth century. The index was 9.6 in 1914 and peaked at 24.8 in 1920, before declining again to 15.5 in 1933 and 1934 – prices were only about three times higher than they had been 180 years earlier.
Inflation really kicked off during and after the Second World War – the index was 20.0 in 1940, 32.9 in 1950, 46.4 in 1960, 68.2 in 1970, 243.0 in 1980, 458.5 in 1990, and 592.3 in 1998.
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