Letter: Devaluation without inflation

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The Independent Online
Sir: George Stadler told us yesterday (15 July) in your letter columns that a 'very large devaluation' would involve 'almost certainly driving Britain's inflation rate back into double figures in one to two years' time'.

While he and many people may believe this, there is no historical evidence to justify any such proposition. What is a 'very large devaluation'? In 1931, we devalued by 24 per cent. During the next two years prices fell by 2.1 per cent and 2.2 per cent while real incomes rose by 1.0 per cent in 1932 and stayed static in 1933.

In 1949, we devalued by 30 per cent. Retail prices rose 2.9 per cent in 1949 and 2.8 per cent in 1950. Only in 1951, after the outbreak of the Korean war which brought in train a huge increase in world commodity prices, did inflation rise to 9.7 per cent per annum. Meanwhile real wages again grew.

In 1967, we devalued by 14 per cent. Retail prices rose by 2.5 per cent in 1967, 4.7 per cent in 1968, the year of very widespread international industrial and student unrest, and 5.4 per cent in 1969. The real wage rose 3.2 per cent in 1968 and 2.2 per cent in 1969.

In 1972-73 sterling depreciated by 16 per cent. Inflation fell in 1972 to 6.8 per cent from 7.9 per cent in 1971, and rose to 8.4 per cent in 1973. It was a year or two later that the oil price explosion drove up British inflation rates to unprecedented levels. In both 1972 and 1973 the economy grew by more than 5 per cent.

During the middle Eighties the pound fell by about 30 per cent against the deutschmark, while inflation fell and the economy grew fast enough to win the Conservatives the 1987 election. It was only after the election, when monetary policy was tightened and interest rates and the exchange rate rose sharply, that inflation began to increase strongly.

Why did devaluation, on all these occasions, not produce the major increase in inflation that economists and others are so prone to predict? It was not because import costs did not rise. Of course they did. The reason was that the impact of higher import costs on the price level was largely offset by the disinflationary effects of lower interest rates, and higher more extensive and efficient use of industrial and commercial capacity as the economy expanded.

Both the weakness of our trade figures and my extensive experience of selling British-made goods overseas indicate to me that sterling is overvalued by a very large amount, and that we need a devaluation of a third or more. On all past performance, this would dramatically improve our export competitiveness, while not increasing inflation much, if at all. Those who believe otherwise ought to look carefully at our experience with previous devaluations before dogmatically declaring that devaluation is necessarily inflationary.

Yours faithfully,


London, NW1