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Why the British pound continues to sink

Over the centuries, British leaders have often gone to great lengths to protect the value of the pound, viewing its strength as a sign of the country’s economic might and influence. King Henry I issued a decree in 1125 ordering that those who produced poor quality coinage “lose their right hand and be castrated”.

In the 1960s, Harold Wilson’s Labor government was so resistant to devaluing the pound (it then set a fixed rate of $2.80, high enough to slow the British economy) that it ordered cabinet papers discussing the idea to be published. . Burned. In 1967, the government finally cut your value by 14 percent to $2.40.

Other economic crises hit the pound. In the 1970s, when oil prices soared and Britain’s inflation rate exceeded 25 percent, the government was forced to borrow $3.9 billion from the International Monetary Fund. In the mid-1980s, when high US interest rates and the Reagan administration’s spending spree sent the value of the dollar soaring, the pound fell to an all-time low.

The pound’s dominance has been waning since the end of World War II. Today, the global economy is experiencing a particularly tumultuous time as it recovers from the aftermath of the coronavirus pandemic, supply chain failures, Russia’s invasion of Ukraine, energy shortages and skyrocketing inflation.

As Richard Portes, an economics professor at the London Business School, put it, currency exchanges have huge swings over time. The euro was worth 82 cents in its early days, he recalled, and people referred to it as a “toilet paper” currency. But by 2008, its value had doubled to $1.60.

What could cause the pound to revive is unclear.

The Truss government’s economic program has sharply accelerated the pound’s decline, the latest in a series of what many economists see as egregious economic blunders that peaked with Brexit.

Much depends on the Truss government.

“The pound’s decline is the result of political decisions, not historical inevitability,” said Ian Shepherdson, chief US economist at Pantheon Macroeconomics. “Whether this is a bleak new era or just an unfortunate interlude depends on whether they change course or are pushed out in the next election.”

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