"A weak currency arises from a weak economy, which in turn is the result of a weak government." - Gordon Brown, 1992The then Shadow Chancellor's words in the wake of Black Wednesday, have come back to haunt him in recent months, as he has presided over a similar devaluation of Sterling. Black Wednesday refers to the 16th of September 1992, when the Conservative government was forced to withdraw the Pound from the semi-pegged exchange rate system known as the Exchange Rate Mechanism (ERM). The similarity can be seen in the charts below, which show the value of the Pound against the US Dollar falling from over 2.00 to around 1.40 during the winter of 1992/3 and the second half of 2008:
Indeed Black Wednesday is not the only historical parallel which can be drawn. In 1949, Clement Attlee's government devalued Sterling by 30% (despite repeated assurances that it would not do so). In 1967 the Wilson administration devalued Sterling again, prompting the Prime Minister to deliver his famous "pound in your pocket" speech in an attempt to reassure an uneasy electorate. In 1976 the Callaghan government went cap-in-hand to the International Monetary Fund after Sterling plunged to record lows, amidst fears over the size of the budget deficit.
Sound familiar? Politically the similarity between all these Sterling crises is that the government in power did not survive the next election. Economically the reasons behind the crises vary - the big question now is what happens next?
There is a growing opinion (albeit retrospective) that the events of 1992 were in fact of great benefit to the UK economy, and represented a macroeconomic turning point. The weak Pound allowed exporters to pull the UK out of recession, and we entered a period of stable and low inflation, low unemployment and steady economic growth. Indeed some economists now refer to the 16th of September 1992 as "White Wednesday".
Of course, past events are not a perfect guide to the future, and it would be dangerous to try to forecast upcoming movements in today's unique economic circumstances based on a period of history. However, both the Bank of England and the government have spoken in recent weeks of their hope that Sterling's weakness will help export businesses to lead the recovery (or at least soften the blow of the downturn). Sterling continues to be in the doldrums at present, with no economic recovery evidenced in the data as yet. Indeed it is not entirely clear whether Mr Brown will be the latest Labour Prime Minister to ask the IMF for a bailout.
Until the situation becomes clearer, we expect foreign exchange markets to remain volatile. To find out more about the MSN Currency Service, visit the MSN Currency Centre, or call 0117 311 3252.
Will history repeat itself once more? Whatever the outcome, stay informed and be ready to act.
