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6 September 2019updated 07 Jun 2021 4:09pm

If Labour was in power, the press would be calling this a “run on the pound” already

By Jonn Elledge

Once upon a time, Brits wanting to communicate that they had money to burn would head, James Bond-style, to the casinos of Monaco. Such is the current exchange rate that today you could achieve much the same effect by telling your friends you’re going on a booze cruise to Calais. 

The pound has looked weak against the euro for some time now: for much of 2015, you could get €1.40 for your quid, but since the precipitous slide that followed the 2016 referendum, you’ve generally been looking at something closer to €1.10. With Boris Johnson talking up the prospect of no deal this week, the pound is off on its hell-ward journey once again, dropping around 3 per cent from €1.12 the day he took office to around €1.09 today.

And high summer, remember, is exactly the time when the British are most likely to feel the full pain of this shift. The reality on the ground, what’s more, often makes those official exchange rates look flattering. This morning, I learn from Facebook, a friend took €240 out of an airport cashpoint. It cost him £305 – an exchange rate of around €0.79 to £1.

All of which raises a question. At what point do we start calling this a “run on the pound”?

The answer, disappointingly for fans of government accountability and devastating headlines about Johnson, seems to be, “We won’t”. There’s no technical definition of a run on a currency, that I can find – it’s one of those “you know it when you see it” sort of phenomena – but it does seem to require two, connected features that sterling’s current travails lack.

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One is the speed at which the devaluation happens – we’re generally talking about a single day here. The other is that it becomes self-perpetuating: traders sell their sterling for fear its value is about to drop, which causes its value to actually drop, which causes others to sell… and round and round we go, like a particularly expensive ride on a helter-skelter.

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This is, broadly, what happened on the two occasions since the war that seem to qualify for the label of “run on the pound”. In 1967, concerns that sterling was over-valued led investors to sell, forcing the Wilson government to choose between propping it up through higher interest rates or using foreign reserves to, basically, buy more pounds; or accepting a devaluation. In the end, it opted for the latter, dropping the exchange rate nearly 15 per cent from $2.80 to $2.40 at a stroke.

Even more extreme was the devaluation under the Major government on the day in September 1992 that’s gone down in history as “Black Wednesday”, and which wrecked the Tory party’s reputation for economic competence for a generation. On that occasion, the government did temporarily hike interest rates, from an already high 10 to an even higher 15 per cent, in an attempt to keep sterling at the rate required for Britain to remain in the European Exchange Rate Mechanism. It didn’t work. Britain crashed out, and the value of the pound dropped 25 per cent against the dollar in a single day. 

What we’re seeing now is not nearly as dramatic as those events: the 3 per cent drop we’ve seen in the week and a bit since Boris Johnson took over has been comparatively stately. That’s largely because sterling now has a floating exchange rate, rather than a fixed one it had in 1967 and 1992: it finds its level over time, preventing the need for sudden dramatic sell-offs and crises. 

All that said, there are two reasons why this should be of limited comfort to the government. One is that big falls can still happen: in the weeks after the 2016 referendum, sterling dropped around 15 per cent against the dollar. In the event of a no-deal Brexit, this may very well happen again.

The other problem is that, even if devaluation is slower, voters will still feel the pain. At the time of the 1967 devaluation, Harold Wilson told the country that “the pound in your pocket” had the same value it did before. But if you were buying anything from abroad, it didn’t: imports had become more expensive. Half a century of globalisation later, a lot more goods and services involve imported components, and their prices go up when sterling’s value falls. So it’s very possible that your salary is now worth less than it was before the referendum: you don’t have to leave the country for devaluation to hurt.

Lastly, let’s be honest about this: if Labour was in power right now, the front pages would almost certainly be screaming about a run on the pound already.

In September 2017, then-chancellor Philip Hammond warned that a Corbyn government would lead to “a crash in the value of the pound, causing a shock wave of inflation”, and most of the press nodded sagely at his wisdom about the threat John McDonnell posed to the economy.

For the last three years, Hammond’s own party has presided over exactly that sort of a crisis – yet both the Tory party and its cheerleaders in the press seem remarkably relaxed about the pressure on hard-working British families. Funny that, isn’t it?