Factbox: A History of UK Currency Crises and Crashes

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Britain’s coins dive into water in this illustrative image, October 26, 2017. Picture taken October 26, 2017. REUTERS/Dado Ruvic/Illustration

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LONDON, Sept 26 (Reuters) – The British pound plunged to a historic low on Monday morning as international investors reacted to plans by the country’s new prime minister and finance minister to cut taxes and increase spending to cushion the rise in energy prices.

The currency fell as low as $1.0327 at one point. read more It has fallen by almost 8% since Thursday and by 21% since the start of the year, a rate that is similar to the monetary crises that have marked post-war British history.

These panic attacks often involved attempts to keep the pound fixed against other currencies, which is no longer an issue for the floating pound.

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However, the vast sums of wasted reserves and damage to national pride have always weighed heavily on the governments of the time.

Below are key episodes of Britain’s monetary drama since World War II:

VOTE ON BREXIT, 2016

The pound collapsed by 8% the day after the British electorate voted to leave the European Union. It had already been falling for about a year and hit a low of $1.145 in early October 2016, a 28% drop from peak to trough.

BLACK WEDNESDAY, 1992

At a turning point in its membership of the European Union, Britain withdrew from the exchange rate mechanism – a system designed to reduce currency fluctuations before the launch of the euro – in September 1992.

This led to a sharp devaluation of the pound and, although the economy eventually prospered, it damaged the Conservative Party’s reputation for economic management, culminating in the landslide election defeat of Prime Minister John Major in 1997.

In a bid to prop up the pound, the government raised interest rates to 15% and the Bank of England sold $40 billion in reserves in the months leading up to Black Wednesday.

Britain has also used creative accounting to hide the scale of its foreign exchange reserve losses, such as in a 12.5 billion pound “secret negative futures book”.

In 1997, the Treasury said the final cost of the debacle was over £3 billion.

SUPER DOLLAR, 1985

The pound started the 1980s at $2.30, but by early 1985 had hit an all-time high of $1.05. Faced with the surge of the American currency inflated by global trade imbalances, parity with the dollar – once unthinkable – has become a real possibility.

Although the government raised interest rates to prevent further decline, some of the pound’s decline was self-inflicted.

A media briefing in January 1985 by Prime Minister Margaret Thatcher’s press secretary, intended to reassure the financial markets, backfired.

“Things weren’t helped by press reaction which confused the fact that the government had no specific target for the pound with complete uncertainty about its level,” a minister complained. , according to cabinet minutes released years later.

Eventually, the pound rose against the dollar after the world’s five major industrial nations at the time entered into the Plaza Accord in which they agreed that the US dollar was overvalued and would take steps to weaken it.

IMF CRISIS 1976

In the mid-1970s, the British economy was in dire straits. Attempts to fuel a boom at the start of the decade led to a severe crisis a few years later, exacerbated by an oil crisis.

Inflation peaked at 25% in 1975 and the newly floating pound was in freefall, eventually hitting a record low of $1.58 in October 1976.

A dismal set of government borrowing forecasts suggested Britain may no longer be able to pay its own bills, forcing Finance Minister Denis Healey to seek outside help from the International Monetary Fund – a prestige blow of Britain as a major economic power.

At $3.9 billion, the loan was the largest ever from the IMF and came at the cost of deep cuts in public spending.

Healey later lamented that government borrowing turned out to be much better than expected, raising questions about whether the loan, which was prepaid, had really been needed.

1967 DEVALUATION

Successive Conservative and Labor governments struggled to contain spending in the 1960s, putting pressure on the pound, which was pegged at $2.80.

By 1967 the pressure became irresistible, but disagreements within government and with the BoE – which opposed reducing the value of sterling as an easy way out of Britain’s troubles – meant devaluation was wrong. managed.

Investors knew the game was over in November 1967 when Finance Minister James Callaghan chose not to confirm or deny in Parliament whether talks of a devaluation or emergency loan were taking place.

The BoE had no choice but to burn its reserves for a day until the devaluation to $2.40 was officially announced by Labor Prime Minister Harold Wilson for whom the pound was a national status symbol .

He was ridiculed for telling the public that the pound “here in Britain, in your pocket”, would be worth no less after the devaluation.

($1 = 0.9358 pounds)

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Reporting by Andy Bruce and Marc Jones; Editing by Hugh Lawson

Our standards: The Thomson Reuters Trust Principles.

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