Secret papers: Bitter wrangle over that pound in your pocket

Some of the bitterest wrangling during 1967, within the Cabinet but more especially between the Government and its officials, concerned the need to devalue the pound.

This step was eventually taken on 18 November, with great reluctance by Harold Wilson, when the pound's fixed exchange rate against the dollar was reduced from $2.80 to $2.40. The Prime Minister famously, and misleadingly, told the nation that "the pound in your pocket" was not worth any less.

The Government had gone to great lengths to try and avoid devaluation, one memorandum from Wilson to James Callaghan, then chancellor, warning of "dire" consequences. Apart from the admission of economic failure, the Prime Minister was worried that other countries would respond with competitive devaluations of their own.

However, from Britain's application in May 1967 to join the Common Market, a lower value for the pound was widely expected. Capital drained out of the country, depleting the foreign currency reserves so much that by November the Government had had to borrow nearly $5bn. A disastrous set of figures for the balance of trade in October made the decision to devalue inevitable.

On 17 November, the day before the announcement, Wilson wrote to Lyndon Johnson, the US President, informing him of it. He expressed relief, writing: "The removal of a certain poison from the system purges the whole system itself." The move was accompanied by measures to squeeze demand at home in a bid to reduce the trade deficit. Labour MPs were in uproar over spending cuts and tax increases amounting to pounds 500m.

This was not enough for the Bank of England, however, which feared that devaluation would trigger inflation. Leslie O'Brien, then governor, sent a letter to the Chancellor calling for even tougher measures.

He refused; it was left to his successor, Roy Jenkins, to introduce further cuts the following year when the pound once again came under pressure to devalue.

- Diane Coyle

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