The British Economy - Essay Example

Topic: The British Economy Compare And Contrast the Causes and Effects of Britain's Sterling Devaluations In 1949 and 1967 The devaluation of sterling's in 1949 and 1967 are significant to the British Economic History. The world biggest imperialist power Britain was dead set against sterling's role from early age. Its conscious comings and goings were made to encourage the use of the sterling all over the empire as a way of simplifying transactions. Within the post war age it was bound to facilitate the other countries to be kept sterling reserve by the independent countries. Britain has devaluated sterling as its strategy. Devaluation of 1949 caused as a direct effect of world war-II and the devaluation of 1967 caused to keep sterling reserve by other countries. Style: Harvard Grade: 1st class Pages: 6 Content Page Abstract: 1 Content Page 2 Background of 1949 Devaluation: 3 Reason of 1949 Devaluation 4 Reasons of Devaluation of 1967: 5 Comparison of Effects of Devaluations 1949 & 1967: 6 Conclusion: 9 Abbreviations 9 Bibliography: 10 Background of 1949 Devaluation: Eichengreen, B. (1995) stated that Britain's sterling devaluations in 1949 were a continuation of the effect of World War-II. After the war both Britain and Germany imposed exchange control. In 1949 Britain joined the NATO1, when it was a founding member of the UN. The most important significance of the year in world politics was rise of the CPG2 in China. Chinese Communist Leader Mao Zedong and Soviet President Joseph Stalin signed a Sino-Soviet Treaty that endow with economic and military aid from the Soviet Union to the new state of communist. Simultaneously the Chinese Nationalists established a new regime in the island of Taiwan after defeated on mainland by the military forces of Communists. Britain was concerned in this region foe colonial economic interest with Hong Kong. 3 Clement, P. (2006) mentioned that the Labour Government was in the power at the period of devaluations in 1949 and endorsed a political agenda entrenched in collectivism such as nationalisation of industries and state tracked economy. Both wars had learnt the lesson of the potential benefits of greater state attachment. The post war economy emphasise the future direction and was by the Conservatives. Nevertheless, the initiatives of nationalisation were not successes due to lack of more degree of understandings the economic management emerged. The economy practiced theories of Keynes and sustained state involvement such as state direction rather than state ownership. Reason of 1949 Devaluation Kaplan, J. J. and Schleiminger, G. (1989) added that both the world wars had serious effect on the British Empire. The Indian independence in 1947 has introduced decolonisation and the wave of independence followed in many countries of the British Empire. Colonies helped the British Empire in the wars with commitment of independence. British power was failed to resist the tide of independence that began within the Labour Government4 and sustained up to the Conservatives.5 With the exclusion of Suez Crisis, the Conservative government introduced a central feature of foreign policy expression with wind of change. Raghuram, G. R. and Zingales, L., (2003) and Schenk, C. R., (1994) agued that the breakdown of Empire, war expenditures and the material losses incurred in the both world wars had seriously injured the Britain economy. The prime effect was that British long-established markets were altering as Commonwealth states and finished mutual trade measures with regional countries other then Britain. Secondly the preliminary growths made by Britain in the world economy were relatively turn down to repairing some of countries infrastructure was gravely damaged in war. As well as they reclaimed a stake in world markets.6 Thirdly the British economy had shifted its structure to a service sector economy other then its industrial origins that caused some regions economically depressed. Finally part of political consensus supported Welfare State as a world role for Britain all that needed funding by taxes. People asked for an optimistic economy in order to provide the taxes. All these caused the devaluation of 1949. Reasons of Devaluation of 1967: Floud, R. and Johnson, P. (2004) mentioned that in sixties Britain's sterling policy aimed to promoting the use it as a reserve currency to managing sterling's turn down. The renovation in sterling policy was a measurement of a progression in Britain's global role containing reduced overseas defense strategy, drifting apart from the USA, European integration and decolonisation. British governments guarded in the policy options by framework not only to sterling holders but also to European partners and USA. Pollard, S. (1992) stated that throughout sixties there were series of negotiations along with the G10 including the IMF. The aim of the negotiations was to finding a solution for the global monetary system by the way to swap reserve currencies overall both the US Dollar and sterling. Thus British government and Bank of England had caught in a holding model though longer-term global solutions oh their devised problems.7 Crafts, N.F.R. & Woodward, N. (1991) argued that the devaluation of 1967 encouraged turned out to be a long term process of dropping sterling's reserve role. Most of the countries look forward to diversification of their reserves due to failure of Britain to protecting the external value of overseas sterling reserves. To overcome this threat of reserves Britain was forced to sign the Basle Agreement8. Basle Agreement strengthened a construction of mutual reassurance to the Britain's creditors for future value of reserves in sterling. Thus, this initiative conserved the amount of sterling in overseas reserves and at the same time it manifests the conclusion of voluntarily kept sterling reserves. In significance of the devaluation of sterling in 1967, the Basle Agreements were established as an analysis to emphasise the longer-term expansion. It also supported how overseas sterling area states would shape their final structure of monitory system and how to negotiate with Britain and her European partners. This has demonstrated that the British faced an assortment of crises in the Bretton Woods scheme during sixties as a prospect to acquire bilateral support for the turn down of sterling as a reserve currency. MacDonald, D. H., (1968) suggested that the strategy was based on the view that sterling was important to the functioning of the international monetary system and was therefore a joint responsibility. This logic led to the negotiation of multilateral support through the BIS first to forestall devaluation in the early 1960s, and then to manage the diversification of reserves after the devaluation.9 Comparison of Effects of Devaluations 1949 & 1967: Toniolo, G., & Clement, P. (2005) indicated that the effect of 1949 devaluation primarily affects Britain's trade balance. It indicated a large difference among the value of its exports in relation to its imports. Devaluation of 1949 reduced the value of Britain's Pound Sterling in terms of other currencies. Following the devaluation, Britain had to exchange more of its own currency to get hold of a certain amount of foreign currency. Consequently, the price of import goods rose and domestic products were more attractive to consumers as it takes less foreign currency to buy with a devalued currency. The price of the Britain's exports turn down making them more advantageous to foreign consumers. Holtfrerich, C. L., (1999) indicated that an effective of 1949's devaluation had reduced Britain's imports and raise world demand for its exports depending on consumer and manufacturers responsiveness to price adjustments. Improvement in Britain's balance of trade would cause an increase in the new inflow of foreign currency and would help strengthen a Britain's overall balance of payments account. Effects of the 1949's devaluation caused on the actual elasticity of the supply and demand for traded commodities. The additional elasticity of demand for imports and exports, the greatened the effects of the 1949's devaluation would be on the Britain's trade deficits. Thus it affect its balance of payments the less elasticity of demand, greatened the needs of devaluation would be eradicated with in a given imbalance. In spite of its limitations, devaluation of 1967 represents the British hopes to support for sterling in opposition to diversified by the OSA and the reinforced sterling's role.. The Bank of England recommended that 'all possibilities be explored of extending the scope of any renewed Arrangement to include an element of longer-term credit.' 10 On the other hand, refrain to correct Britain's unremitting balance of payments troubles and strategy to use diplomacy to try to impose a 'brake' on the diversification process. Gradually it aimed to represent the most talented way to accomplish medium and longer-term funding for the sterling balances. From the early January 1967, Britain began to test over a regeneration of the Group Arrangement and got the consciousness of the BIS11 that this was e possible implement with little change in terms. The renewals were agreed with modest discussion in March 1967. In August and September 1967, reasoning a call on participating countries the BIS had drawn $75m and $150m respectively. Similarly, it was settled that the Britain could draw any amount of 80% of the cost to reserves which was previously negotiated only 50%. Simultaneously in October, $100m in advance of the devaluation and in November $525m in the get up of the devaluation as total drawing of its maximum. Governors of BIS agreed to another renewal of Group Arrangement with the Bank of England in February 1968. The new proposals aimed to substitute the existing facilities by a further permanent arrangement as it necessitate. By March 1968, the complete facility was draw. The contribution of French was entirely paid back by the end of November 1968. However, reimbursement to other countries continued up to September 1969, when Britain repaid $75m monthly basis to countries in equal proportions.12 Further, in October 1967, the BIS approved bilateral support for a credit line of $250m from European central banks to repay the IMF. Moreover, Israeli-Egyptian war and Suez crisis had negatively affected the British reserve position. The BIS played most important role to negotiate bilaterally with the central banks to raise the funds and to keeping confidence of these banks. Consequently, IMF began to pressure the British government to conform appropriate domestic measures for longer-term solution. The table above shows the cumulative historical Devaluation rate of Britain between 1967 and 1949 13 Conclusion: The Britain was imperialist power resistant sterling's role from early age. Its conscious endeavors were made to encourage the use of the sterling all over the empire as a way of simplifying and regularising transactions. During the post war age it was liberalised to be kept sterling reserve by the independent countries. Thus, Britain has devaluated sterling as its strategy. Devaluation of 1949 caused as a direct effect of world war-II and the devaluation of 1967 caused to keep sterling reserve by other countries. Abbreviations SDR : Special Drawing Right IMF : Inter national Monetary Fund BIS : Bank of International settlement G10 : Group of Ten BEA : Bank of England Archive, London. Bibliography: BIS (1954), Twenty-fourth Annual Report, Bank for International Settlements, Basel, 14 June 1954. Clement, P. (2006), Central Bank Cooperation at the Bank for International Settlements and the Transition from A State-Led To A Market-Led Financial System, 1950s-1970s, Working Paper, BIS. Crafts, N.F.R. & Woodward, N. (1991), The British Economy Since 1945, Oxford University Press. Eichengreen, B. (1995), The European Payments Union: an Efficient Mechanism for Rebuilding Europe's Trade: Europe's post-war recovery, Cambridge: Cambridge University Press. Eichengreen, B. (1993), Reconstructing Europe's Trade and Payments, Manchester: Manchester University Press. Floud, R. and Johnson, P. (2004), The Cambridge Economic History of Modern Britain, 4th ed., Hodder Arnold. Horrell, S. (2000), Living Standards in Britain 1900-2000: Women's Century, National Institute Economic. Holtfrerich, C. L., (1999), Monetary Policy under Fixed Exchange Rates (1948-1970), Oxford: Oxford University Press. Jacobsson, P., (1958), Some monetary problems: International and national, Oxford: Oxford University Press. Kaplan, J. J. and Schleiminger, G. (1989), The European Payments Union, Financial Diplomacy in the 1950s, Oxford: Clarendon Press. MacDonald, D H (1968), Conversation in Basle with Bridge. BIS Historical Archive Registry Files, Bank of England Policy, Volume 3 & 4. Pollard, S. (1992), The Development of the British Economy 1914-1990, Hodder Arnold, ISBN: 0340561858 Raghuram, G. R. and Zingales, L., (2003), The great reversals: the politics of financial development in the twentieth century, Journal of Financial Economics: 69. Schenk, C. R., (1994), Britain and the Sterling Area, from devaluation to convertibility in the 1950s, London: Routledge. Toniolo, G. (2005), Central Bank Cooperation at the BIS 1930-1973, Cambridge University Press. Toniolo, G., & Clement, P. (2005), Central Bank Cooperation at the Bank for International Settlements: 1930-1973, Cambridge: Cambridge University Press. Read More