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Why the British Pound Continues to Sink

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Over the centuries, British leaders have often gone to extraordinary lengths to guard the pound’s value, viewing its strength as an indication of the country’s economic power and influence. King Henry I issued a decree in 1125 ordering that those that produced substandard currency “lose their right hand and be castrated.”

Within the Nineteen Sixties, the Labour government under Harold Wilson so resisted devaluing the pound — then set at a hard and fast rate of $2.80, high enough to be holding back the British economy — that he ordered cabinet papers discussing the concept to be burned. In 1967, the federal government finally cut its value by 14 percent to $2.40.

Other economic crises thrashed the pound. Within the Seventies, when oil prices skyrocketed and Britain’s inflation rate topped 25 percent, the federal government was compelled to ask the International Monetary Fund for a $3.9 billion loan. Within the mid-Eighties, when high U.S. rates of interest and a Reagan administration spending spree jacked up the dollar’s value, the pound fell to a then record low.

The pound’s dominance has been waning because the end of World War II. Today, the worldwide economy is experiencing a very tumultuous time because it recovers from the aftermath of the coronavirus pandemic, supply chain breakdowns, Russia’s invasion of Ukraine, an energy shortage and soaring inflation.

As Richard Portes, an economics professor at London Business School, said, currency exchanges have enormous swings over time. The euro was value 82 cents in its early days, he recalled, and folks referred to it as a “toilet paper” currency. But by 2008, its value had doubled to $1.60.

What might cause the pound to revive isn’t clear.

The Truss government’s economic program has forcefully accelerated the pound’s slide — the most recent in a series of what many economists consider egregious economic missteps that peaked with Brexit.

Much relies on the Truss government.

“The plunge within the pound is the results of policy selections, not some historical inevitability,” said Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics. “Whether it is a latest, grim era or simply an unlucky interlude relies on whether or not they reverse course or are kicked out at the following election.”

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