成人快手

On devaluation

• Evan Davis | Small Change |
• 19 Nov 07, 11:39 AM

This week marks 40 years since . (You may have seen some of the archive coverage over the past couple of days.)

How appropriate that we are marking this anniversary now, one of the most famous episodes in British economic history.

Of course, there are lots of other notable episodes in history - the 1931 devaluation, the 1949 devaluation and the 1992 devaluation all come to mind.

But 1967 has a special place. It was the one that saw Harold Wilson famously draw the distinction between the falling value of the pound abroad, and the stable value of the pound at home - the pound in your pocket.

He was sort of right in that distinction incidentally, but not quite right. Devaluations only work when they make people feel a little poorer. Because whatever they do, they have to stop us spending quite so much on foreign goods by making them more expensive.

Now this is a good time to reflect on devaluations because next year we might see our currency fall quite sharply again.

To see the similarities between the sixties and now, we have to understand what a devaluation does.

Back then, we worried a lot about the trade deficit, and devaluations were seen as a way of improving our trading position. The falling pound raises import prices and cuts export prices.

But there's another way of describing the effect of a devaluation, more relevant to our economy today. Falling currencies are the best way an economy can reorient itself from away consumption towards saving.

In fact, the trade deficit is often just an expression of too much spending and borrowing... and not enough saving.

Falling currencies, rising savings and increasing exports are often all part of one and the same thing.

A country that saves more probably has a falling currency. Why? Because if we all choose to save, we lend money to foreigners rather than borrowing it from foreigners, so we buy foreign currency to lend - the pound falls.

You can think of a falling currency as either helping the trade deficit, or increasing savings. They're often the same thing.

Now that's what our economy needed in the 1960s, and it's what it might need now.

Back then, we couldn't afford to keep spending, so we had to increase exports to keep the economy moving. Today, the same is true. We've borrowed and spent enough. If we ask who then can buy our output, it's foreigners. That'll probably take a lower pound now, as it did then.

Of course, the pain of successive devaluations means we have now decided not to join any fancy currency fixing schemes - we'll fix the pound against the price of eggs using an inflation target. Not against the price of Dollars or Deutschmarks.

But just because we don't have a fixed rate pound to devalue, doesn't mean the pound can't fall anymore.

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