Currency Wars 1: How did WW2 massacre the pound?
On September 19, 1949, the pound-sterling plummeted from 4,03 dollars to 2,80 dollars, making a 4 pence loaf of bread 6 pence for the everyday shopper — a baffling 50% jump within two weeks.
Only four years after the WWII, the pound has dropped by 30%, one of the most substantial declines in history. But how did one of the major currencies meet such a dreadful fate? Let’s take a look.
- In the late 1920s, Winston Churchill readopted the gold standard at its pre-war state of $4.86 against the dollar — a 10% overvalue that placed considerable pressure on UK’s exports and its economy.
- In 1931, the UK finally left the gold standard, and the floating pound dropped 24%.
- Though confidence in the currency has been slowly regaining, investor fear for conflict in Europe, the economic slump in England and the eventual outbreak of World War II forced the Bank of England to peg the pound to the dollar at $4.03 in 1940.
- Britain’s victory in WWII left the country broke in a time when it was desperate to turn its industrial base back into civilian use after six years of conflict.
- On July 1 to July 2, 1944, world leaders came together to New Hampshire to derive a stable monetary system to help them rise out of the war-torn chaos. They eventually came up with the Bretton Woods Accord, which dictated that all participating countries had to be pegged to the American dollar, which was pegged to gold at a rate of $35 per ounce (The Gold Standard).
- However, even with the new rules, the pound was significantly less popular than the dollar, not to mention that Britain itself was also heavily indebted to the USA after the war despite a soft-loan agreement.
- At the same time, Britain’s trading partners in sterling block (namely its colonies) wanted consumer goods that England cannot supply due to its focus on war supplies still, thus driving them away to the USA for their consumer needs and further weakening the British economy. By then, most national banks wanted dollars and not pounds.
- So on September 18, 1949, the sheer pressure from the enormous postwar balance of payment deficit and debt repayment to the US sunk the pound by 30%.
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February 24, 2015