Interactive Investor

The 100-year decline of the British pound from five to one dollar

12th October 2022 11:21

by Alice Guy from interactive investor

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Britain was once a superpower and sterling was the currency to own. But the years have not been kind, and its reputation on financial markets is shredded. Near a record low and still facing the very real prospect of parity with the dollar, we chart the pound’s long decline from global superstar to international laughing stock. What, if anything, can be done do restore credibility to the once proud UK currency?

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One hundred years ago sterling was king of the hill. Britain was riding high on the world stage and one pound would buy you an incredible five dollars. Anyone travelling to the US with pounds in their pocket would have felt rich.

But like my home team Ipswich Town, the years have not been kind to sterling. Its decline from global reserve currency has been matched only by the triumphant march of the dollar as the new dominant force following the Second World War.

Slipping from undisputed world champion to mid-table mediocrity, the pound is now in danger of relegation below parity with the dollar. During the recent budget crisis, it would have bought you just $1.03. Even now it trades at only $1.10 and major risks to its credibility remain.

Sterling weakness can affect inward investment into the UK, and political decisions made so soon into Liz Truss’ administration have seriously damaged Britain’s reputation on global financial markets. Those reputations are easy to lose and much harder to win back.

Watch just how the UK currency has fallen from grace

1920s and 30s: worldwide dominance

In the 1920s and 30s the pound was top dog, worth around five dollars each.

Spiralling unemployment during the Great Depression caused a run on the pound in 1931 and the government was forced to abandon the gold standard and let the pound float freely.

But Britain’s economy recovered more quickly than the US. A fight between the pound and the dollar for haven status continued throughout the 1930s and 1940s up till the 1950s.

Second World War: saddled with debt

The Second World War was a massive turning point for sterling. The pound slumped from $5 to $3.25 at the outbreak of war and ended the period six years later with a huge debt pile, much of it owed to America. The government devalued the pound in 1949 from $4.03 to $2.80, a massive reduction of over 30%.

1950s to 70s: slipping down the league

From the 1950s, the pound’s time as global reserve currency was nearly up, slipping from 81% of global reserves in 1945 to 58% in 1950, 35% in 1960 and 11% by 1970. The greenback took over, and 85% of worldwide reserve currency was held in dollars by 1970.

In 1967, another big devaluation reduced the value of the pound further, from $2.80 to $2.40, with prime minister Harold Wilson famously claiming that this did not mean the “pound here in Britain, in your pocket” was worth less. Although, of course, the pound in your pocket was worth less if you wanted to buy dollars or anything imported from the US!

In the 1970s, high inflation and an anaemic economy led to another sterling crisis as the government struggled to meet its economic commitments. A £2.3 billion rescue package from the International Monetary Fund (IMF) in 1976 sent the pound to an historic low of $1.59.

1980s and 90s: rocky ride

In the 80s and 90s, the pound went on a rollercoaster ride. With the dollar ever more popular, sterling slumped to $1.09 in 1985, before climbing to a high of $2.00 in the early 1990s.

Another day, another crisis, and in 1992, a collapse in the pound became known as Black Wednesday. It forced the UK government to withdraw from the European Exchange Rate Mechanism, which guaranteed a minimum price for sterling. The pound crashed 15% to $1.51.

2000 onwards: increasing dollar strength and kami-Kwasi budget

After a brief comfort break in the early noughties, sterling’s depressing decline continued. In 2008, investors rushed to buy dollars as a haven asset following the financial crash. The 2016 Brexit vote was a further hammer blow, dumping sterling down 11% to a 31-year low, from $1.50 to $1.33.

In 2022, sterling’s descent resumed as increasingly bearish sentiment caused the dollar to soar. Amid fears about both inflation and recession, the pound had slid from $1.34 in January to $1.13 by mid-September.

On 23 September 2022, new chancellor Kwasi Kwarteng’s expansionary and largely un-costed mini-budget, gave an already jittery City the collywobbles, pushing sterling down to $1.03. While there’s been a slight recovery since, chatter about dollar parity, or worse, has not gone away.

This is only the latest chapter in a 100-year story of decline which has seen the pound deflate to nearly one-fifth of its original value. In 1922, with the pound riding high, $1,000 worth of dollars cost just £205, whereas today you would need to dig deep and pay £892 to buy $1,000 of the greenback.

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