Support 100 years of independent journalism.

  1. Business
  2. Economics
13 April 2012

How could one devalue the pound?

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

By Alex Hern

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.

Sign up for The New Statesman’s newsletters Tick the boxes of the newsletters you would like to receive. Quick and essential guide to domestic and global politics from the New Statesman's politics team. The best of the New Statesman, delivered to your inbox every weekday morning. The New Statesman’s global affairs newsletter, every Monday and Friday. A handy, three-minute glance at the week ahead in companies, markets, regulation and investment, landing in your inbox every Monday morning. Our weekly culture newsletter – from books and art to pop culture and memes – sent every Friday. A weekly round-up of some of the best articles featured in the most recent issue of the New Statesman, sent each Saturday. A weekly dig into the New Statesman’s archive of over 100 years of stellar and influential journalism, sent each Wednesday. Sign up to receive information regarding NS events, subscription offers & product updates.
I consent to New Statesman Media Group collecting my details provided via this form in accordance with the Privacy Policy

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.