How could one devalue the pound?

A new Civitas report suggests devaluing the pound to boost exports. But can it work?

With fascinating timing, Civitas has released a report calling for the UK to devalue the pound. The author, John Mills, argues that Bank of England policy has been too heavily focused on keeping inflation at two per cent, and has instead lost sight of the more important priority, which is to promote full employment and a trade surplus (or at least balanced trade). He thinks that the best way to achieve those goals would be for the bank to chart a course which will reduce the value of the pound.

Mills argues that Britain should: sell sterling and buy foreign currencies; introduce more QE; lend directly to organisations capable of paying the money back from income flows, such as local authorities and housing associations; and "deliberately increase its spending in relation to its revenues to widen the foreign payments deficit temporarily, to assist in making the parity of the currency fall."

To call his argument balshy would be an understatement. He also steers clear of the msot important distinction, which is that between a floating and fixed currency. Most talk of "devalutions" occurs in the context of a fixed currency, like that which Britain had under the Bretton Woods system. Then, devaluations were real government policy; a decision was made to peg the pound to a certain number of dollars (for instance, in 1949, £1=$2.80), and the Bank of England guaranteed that rate. If the government decided it was too high, it would change the rate the Bank paid out at.

With a floating currency, the situation is very different. The bank can still spend pounds buying up dollars, and if it does so the exchange rate will indeed drop. But without a committment to keep the rate at the new devalued level, exports will briefly rocket, dollars will become pounds, and the whole thing will return to the market determined rate.

It is possible to enact that committment in a slightly different way; the bank could commit to buying a certain amount of foreign currency each month, for instance. This would certainly devalue the pound slightly, but it would also leave the nation open to the sort of extremely damaging speculation that caused Black Friday. A speculator has to be brave or foolish to take on a central bank committed to maintaining a fixed rate, but if the bank has already put a maximum on the amount of foreign currency it will buy, then it's a lot easier to enter a face-off. It's like having a staring competition with someone who has told you they blink every ten seconds no matter what.

Of course, it may be that Mills is suggesting a whole return to a fixed currency. If he is, then apart from the obvious question – fixed to what? – it does also feel rather like he's buried the lede. The return to a fixed currency would be a far bigger decision than the subsequent choice of what level to fix it at.

Mills claims that those who are opposed to his idea are people who value low inflation over high quality of life. Be that as it may, it does feel like he values his heterodoxity over quality. Or, to put it another way: Stop trying to be different, and start trying to be right.

Mount Washington Hotel, Bretton Woods, where the pound was fixed to the dollar in 1940.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty Images
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The buck doesn't stop with Grant Shapps - and probably shouldn't stop with Lord Feldman, either

The question of "who knew what, and when?" shouldn't stop with the Conservative peer.

If Grant Shapps’ enforced resignation as a minister was intended to draw a line under the Mark Clarke affair, it has had the reverse effect. Attention is now shifting to Lord Feldman, who was joint chair during Shapps’  tenure at the top of CCHQ.  It is not just the allegations of sexual harrassment, bullying, and extortion against Mark Clarke, but the question of who knew what, and when.

Although Shapps’ resignation letter says that “the buck” stops with him, his allies are privately furious at his de facto sacking, and they are pointing the finger at Feldman. They point out that not only was Feldman the senior partner on paper, but when the rewards for the unexpected election victory were handed out, it was Feldman who was held up as the key man, while Shapps was given what they see as a relatively lowly position in the Department for International Development.  Yet Feldman is still in post while Shapps was effectively forced out by David Cameron. Once again, says one, “the PM’s mates are protected, the rest of us shafted”.

As Simon Walters reports in this morning’s Mail on Sunday, the focus is turning onto Feldman, while Paul Goodman, the editor of the influential grassroots website ConservativeHome has piled further pressure on the peer by calling for him to go.

But even Feldman’s resignation is unlikely to be the end of the matter. Although the scope of the allegations against Clarke were unknown to many, questions about his behaviour were widespread, and fears about the conduct of elections in the party’s youth wing are also longstanding. Shortly after the 2010 election, Conservative student activists told me they’d cheered when Sadiq Khan defeated Clarke in Tooting, while a group of Conservative staffers were said to be part of the “Six per cent club” – they wanted a swing big enough for a Tory majority, but too small for Clarke to win his seat. The viciousness of Conservative Future’s internal elections is sufficiently well-known, meanwhile, to be a repeated refrain among defenders of the notoriously opaque democratic process in Labour Students, with supporters of a one member one vote system asked if they would risk elections as vicious as those in their Tory equivalent.

Just as it seems unlikely that Feldman remained ignorant of allegations against Clarke if Shapps knew, it feels untenable to argue that Clarke’s defeat could be cheered by both student Conservatives and Tory staffers and the unpleasantness of the party’s internal election sufficiently well-known by its opponents, without coming across the desk of Conservative politicians above even the chair of CCHQ’s paygrade.

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.