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Last Updated: Thursday, 15 November 2007, 00:04 GMT
Living with a two-dollar pound
By Vincent Duggleby
Presenter, Money Box Live

Vincent Duggleby
Vincent Duggleby recalls a different era nearly 30 years ago

The pound is trading at its highest level against the US dollar for more than 26 years. Let's take a look back over turbulent times for Britain's currency.

It was a very different financial world 26 years ago when the pound was last trading around $2.10.

The idea of flying to the USA for a holiday, let alone for a long weekend shopping trip, was still a novelty.

For Conservative Chancellor Sir Geoffrey Howe, the pound's strength was the consequence of opening up Britain's economy to make it more competitive.

For years the country had been dubbed "the sick man of Europe" and Sterling had been regarded as a weak currency.

Back in the 1930s, it had been worth as much as $5, but in 1949 the post-war Labour government were forced to devalue from $4.03 to $2.80.

As Tory Prime Minister Harold Macmillan's "never had it so good" 1950s drew to a close, the pound was again becoming vulnerable.

And it was again devalued in 1967 to $2.40 by James Callaghan, chancellor in Harold Wilson's government - although Mr Wilson told the nation "it does not mean that the pound in your pocket is worth 14% less than it was".

Floating currency

The next challenge came in the early 1970s when the Bretton Woods world of fixed exchange rates became unsustainable and, in 1972, the pound was floated.

People rushed to sell their jewellery and other valuables

At first it held up well, but then the Middle East oil crisis, balance of payments deficits, rising inflation and militant trade unions began to take their toll.

By the time Labour Chancellor Denis Healey went cap in hand to the International Monetary Fund in September 1976 for a loan, the pound stood at $1.63.

In fact, the pound's recovery was well established before the Conservative election victory in 1979 as the dollar was now seen to be overvalued and, significantly, it was no longer convertible into gold.

As a result the value of gold, officially set at $42 an ounce, was soaring towards a record high of $850, set in January 1980.

There were extraordinary scenes in London's Hatton Garden as people rushed to sell their jewellery and other valuables before a decline set in, which was to last for a quarter of a century.

Exchange controls

Although Chancellor Sir Geoffrey Howe's 1979 budget is best remembered for cutting the top rate of income tax from 83% to 60%, he also raised interest rates to a record level of 17% in November 1979, which sent sterling to a high of nearly $2.40 by the end of 1980.

Freddie Laker in 1997
Freddie Laker opened up cheap trips to New York in the 1970s

His decision to also relax exchange controls came as a big surprise.

Tight restrictions on spending money had made it very difficult for people to take foreign holidays to more exotic destinations, and to buy shares in foreign companies - paying the so-called dollar premium rate -or second homes overseas on a scale we now take for granted.

At one point, people could not take more than 50 cash abroad, even for an ordinary family holiday somewhere like France.

You even needed to have your passport stamped by the bank when you collected the cash.

Sir Geoffrey's decision to do away with the old regime saw personal travel allowances raised from 500 to 1,000 a trip, and the limit on property purchases went up to 100,000.

The 1980s

But as interest rates began to ease, the pound also fell back.

Within five years the value of the pound had halved again

Unemployment went up by more than one million in the 1980-81 fiscal year and 364 economists wrote an open letter to the Chancellor roundly criticising his policies.

When Sir Geoffrey delivered his final budget in 1983 the pound was down to $1.51.

His successor, Nigel Lawson, suffered the consequences of a sustained anti-inflation campaign by the US Federal Reserve under Paul Volcker.

And in January 1985 the pound hit its all-time low of $1.03, prompting President Ronald Reagan's memorable comment: "It is not the dollar that is strong; it's other currencies that are weak."

So, within five years the value of the pound had halved again.

Eventually the US agreed the strong dollar was not helping world trade. Following the Plaza Accord the pound gradually recovered, despite a blip after Mr Lawson quit as Chancellor in 1987.

Relative stability

When John Major replaced Mrs Thatcher as Prime Minister in November 1990, the pound - by now in the Exchange Rate Mechanism - stood at $1.98.

But subsequent problems were the result of the Deutschmark parity set at 2.95DM.

In September 1992, the pound crashed out of the ERM, and its level against the dollar slumped to $1.50.

For the next 10 years it traded within a relatively narrow range from around $1.50 to $1.70, with "stability" the watchword of Chancellor Gordon Brown.

The move back towards $2 mark began in 2004, but with the Bank of England now signaling lower interest rates going forward, how long it will stay above that level is anybody's guess.

With a mountain of consumer debt on both sides of the Atlantic it may well be that in future currency levels rather than interest rates will have to take more of the global economic strain.

Graph of pound v dollar

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