British Indignity : The Pound: Pride Goeth Before a Fall

The British pound was once as strong a national symbol as the queen or the Royal Navy. For generations, the pound, backed by gold and silver bullion in the vaults of the Bank of England, was a benchmark against which other currencies were measured.

In the outposts of empire--Shepheards’s Hotel in Cairo, the Raffles in Singapore--the pound reigned supreme. It was the reserve currency for dozens of countries, not only in the empire and the Commonwealth but in many others whose currencies were linked to the pound.

On the eve of World War II, the pound was equivalent to $4.68, and people who remember that find it difficult sometimes to get used to the new pound, a pound that is now valued at only $1.12. Already, some New York hotels are giving only a dollar for the pound.

Powerhouse No Longer For many, this is yet another reminder that Great Britain is not as “Great” as it used to be. It is no longer the powerhouse of the world; even its monetary mystique has passed into history.

This has not come about overnight. All through the six bruising years of World War II, the pound held relatively firm against the dollar. When the war ended, the exchange rate was $4.03.

The first major devaluation came in 1949, when the rate fell to $2.80. Like the empire itself, the pound has been on the decline ever since, with only an occasional--and temporary--upswing. A crowning indignity came the other day, when the Soviets announced that the pound is now worth only 1 ruble--though it continues to bring up to 5 rubles on the Soviet black market.

Almost as if to underscore the decline of the pound, the British treasury is replacing the classic green-paper banknote, which bears the likeness of Queen Elizabeth II on one side and that of Isaac Newton on the other, with a coin not much larger than the British penny. And not surprisingly, the coin has proved to be highly unpopular.

Londoner Complains

“It just doesn’t seem like a pound,” one Londoner was heard to complain at a supermarket.

Actually, the pound came in coins before it was a banknote. Beginning in about AD 775, the Saxon kingdom in England issued a coin stamped with a star and known as the “sterling,” the Old English word for star.

The coin was minted in silver 240 coins to the pound--and large transactions came to be reckoned in “pounds of sterlings,” later shortened to “pounds sterling.”

After the Norman conquest in 1066, the pound was divided for accounting purposes into 20 shillings and 100 pence. In medieval Latin, the words for pound, shilling, and pence were libra, solidus and denarius, which gave rise to the symbols “,” “s” and “d” that are still in use.

In time, the British shifted to the gold standard and, with the introduction of paper money, the pound note could be redeemed in gold. In the 19th Century, London became the world’s leading financial center.

Sterling became the reserve currency for many countries, not only those in the British Empire but also many others in Scandinavia, the Middle East and the Far East. These countries maintained their currencies in a fixed relationship with the pound sterling and tended to keep their foreign exchange reserves in the form of sterling balances in London.

A Labor Party government undertook the devaluation of 1949 and another, under Harold Wilson, engineered the next one, reducing the pound to $2.40 in 1967. Headlines of the day screamed “Crisis!” and the chancellor of the exchequer had to go to the International Monetary Fund to negotiate a loan.

In 1970, Conservative Prime Minister Edward Heath allowed the pound to float, to seek its own value in relation to other currencies, and it has been doing so ever since.

In March, 1976, it fell below $2 for the first time, and by October of that year it stood at $1.56.

After that, the pound began picking up strength. In the wake of the 1979 election victory of Prime Minister Margaret Thatcher and the Conservative Party, it was being quoted at $2.45 in October of 1980.

Since then, however, it has declined steadily, losing 20% of its value against the dollar in just the last year.

The continuing plunge of the pound has prompted Ladbrokes, the bookmakers, to quote odds of 6 to 4 that the pound will reach parity with the dollar by February.

Still, the pound’s declining value against other currencies does not sadden all Britons. Tourist-related business is booming, and British exporters find their products much more competitive in the international marketplace.

Americans are pouring into London to take advantage of the cheap pound. The London Tourist Board said Wednesday that the city is expecting a record 85,000 U.S. visitors in January, 20% more than last year. Harrods, the famed London department store, reported that the first two days of its January sale generated a 21% increase in business over the same period last year.

The Daily Mail quoted Texan Katherine Holter as saying: “It’s like Hong Kong. You’re the new bargain basement of the world.”

Three years ago, many British industrialists were complaining bitterly about the high value of the pound, and some companies whose products depended on their competitiveness with foreign goods actually went out of business because they were unable to match foreign prices.

George Russell, managing director of British Alcan Aluminium, remarked on the current troubles of the pound, “Compared to what I was facing three years ago, this is a joy ride.”

John Allenby, joint managing director of Lansing Bagnall, a manufacturer of forklifts, said, “We are acutely aware that every drop in the pound gives us an opportunity which we don’t want to miss.”

A leading Conservative, William Clark, chairman of a parliamentary finance committee, said the government should not shore up the pound nor use its precious foreign exchange to defend the pound.

However, columnist Jon Akass observed in the popular Daily Express, “The one-dollar-pound would be a numbing blow at our self-esteem and, in the subsequent gloom and recriminations, the government’s authority could be imperiled.”

While most economists and industrialists regard this reaction as based more on emotions than economics, in some political circles there seems to be a lingering feeling that the $1 pound could have a negative impact on the Thatcher government. The pound has been a symbol of national virility, and the Labor Party may well try to use “the dollar pound” as an anti-government slogan in the next election.

A thoughtful Londoner, a professional man who usually votes as an independent, put it this way:

“I don’t care what the economists say. When you see the pound come down to the same rate as the dollar, it’s simply humiliating.”