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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No, IDS, welfare isn't a path to wealth. Quite the opposite, in fact

Far from being a lifestyle choice, welfare is all too often a struggle for survival.

Iain Duncan Smith really is the gift that keeps on giving. You get one bile-filled giftbag of small-minded, hypocritical nastiness and, just when you think it has no more pain to inflict, off comes another ghastly layer of wrapping paper and out oozes some more. He is a game of Pass the Parcel for people who hate humanity.
For reasons beyond current understanding, the Conservative party not only let him have his own department but set him loose on a stage at their conference, despite the fact that there was both a microphone and an audience and that people might hear and report on what he was going to say. It’s almost like they don’t care that the man in charge of the benefits system displays a fundamental - and, dare I say, deliberate - misunderstanding of what that system is for.
IDS took to the stage to tell the disabled people of Britain - or as he likes to think of us, the not “normal” people of Britain -  “We won’t lift you out of poverty by simply transferring taxpayers’ money to you. With our help, you’ll work your way out of poverty.” It really is fascinating that he was allowed to make such an important speech on Opposite Day.
Iain Duncan Smith is a man possessed by the concept of work. That’s why he put in so many hours and Universal Credit was such a roaring success. Work, when available and suitable and accessible, is a wonderful thing, but for those unable to access it, the welfare system is a crucial safety net that keeps them from becoming totally impoverished.
Benefits absolutely should be the route out of poverty. They are the essential buffer between people and penury. Iain Duncan Smith speaks as though there is a weekly rollover on them, building and building until claimants can skip into the kind of mansion he lives in. They are not that. They are a small stipend to keep body and soul together.
Benefits shouldn’t be a route to wealth and DWP cuts have ensured that, but the notion that we should leave people in poverty astounds me. The people who rely on benefits don’t see it as a quick buck, an easy income. We cannot be the kind of society who is content to leave people destitute because they are unable to work, through long-term illness or short-term job-seeking. Without benefits, people are literally starving. People don’t go to food banks because Waitrose are out of asparagus. They go because the government has snipped away at their benefits until they have become too poor to feed themselves.
The utter hypocrisy of telling disabled people to work themselves out of poverty while cutting Access to Work is so audacious as to be almost impressive. IDS suggests that suitable jobs for disabled workers are constantly popping out of the ground like daisies, despite the fact that his own government closed 36 Remploy factories. If he wants people to work their way out of poverty, he has make it very easy to find that work.
His speech was riddled with odious little snippets digging at those who rely on his department. No one is “simply transferring taxpayers’ money” to claimants, as though every Friday he sits down with his card reader to do some online banking, sneaking into people’s accounts and spiriting their cash away to the scrounging masses. Anyone who has come within ten feet of claiming benefits knows it is far from a simple process.
He is incredulous that if a doctor says you are too sick to work, you get signed off work, as though doctors are untrained apes that somehow gained access to a pen. This is only the latest absurd episode in DWP’s ongoing deep mistrust of the medical profession, whose knowledge of their own patients is often ignored in favour of a brief assessment by an outside agency. IDS implies it is yes-no question that GPs ask; you’re either well enough to work or signed off indefinitely to leech from the state. This is simply not true. GPs can recommend their patients for differing approaches for remaining in work, be it a phased return or adapted circumstances and they do tend to have the advantage over the DWP’s agency of having actually met their patient before.
I have read enough stories of the callous ineptitude of sanctions and cuts starving the people we are meant to be protecting. A robust welfare system is the sign of a society that cares for those in need. We need to provide accessible, suitable jobs for those who can work and accessible, suitable benefits for those who can’t. That truly would be a gift that keeps giving.