Historic fall of pound marks Britain’s decline

Mark O'Neill October 04, 2022 09:23

“Why should we not form a secret society with but one object, the furtherance of the British Empire and the bringing of the whole world under British rule, for the recovery of the United States, for making the Anglo-Saxon race but one Empire? What a dream, but yet it is probable; it is possible.”

This was what Cecil Rhodes, one of Britain’s leading imperialists, wrote in Kimberley, South Africa in 1877. Within 20 years, the Empire comprised 25 per cent of the globe’s land surface and the pound was the world’s leading currency.

In 1929, the U.S. dollar replaced sterling as the global currency for the first time. On July 22, 1944, the Bretton Woods Agreement set the value of one pound at US$4.03. Last Monday (September 26), the pound fell to a historic low of US$1.03. It ended the week at US$1.11.

In the second quarter of this year, the GDP of India overtook that of Britain to become the fifth largest in the world, after the United States, China, Japan and Germany. How symbolic that the “jewel in the crown”, the most important country in the British Empire, should surpass its former master.

The fall of the pound is bad news for thousands of Hong Kong people and companies who own property, businesses and other assets in Britain, keep savings in sterling and for those who work in Britain and send money home to support family members here.

The fall of the pound mirrors the decline of Britain.

The cause of the most recent fall was a mini-budget by new Chancellor of the Exchequer Kwasi Kwarteng on September 23, in which he announced sweeping tax cuts costing 45 billion pounds without explaining how he would finance them. This followed an energy support programme costing 150 billion pounds announced earlier by new Prime Minister Liz Truss.

Financial markets showed their anger by selling sterling, gilt yields surged and the International Monetary Fund (IMF) issued a scathing public rebuke.

“The new Conservative administration is gambling with British people’s money, pensions and homes,” said the Financial Times in an angry editorial last Thursday. “Governments cannot flout due process, independent oversight and economic expertise.”

In the face of this, the Bank of England launched a programme last week to buy 65 billion pounds of bonds. It aims to stop a spiralling crisis in government-debt markets. It helped to push the pound up for the rest of the week.

Peter Wilson, a British financial consultant in Hong Kong, said that nobody knew how low the pound would fall. “Once the markets have lost confidence in a currency, that confidence is gone.

The British government may have to ask for help from the IMF as it did after withdrawing from the European Rate Mechanism in September 1992. It would be an enormous loss of face.”

He said that leaving the European Union in 2016 was an economic disaster for Britain. “Why would a foreign company put a factory or European headquarters in UK when it can put them in an EU country? All the UK offers is access to the UK market only. The City of London is shrinking. Staff and divisions have moved to Frankfurt, Paris, Amsterdam and Dublin. Britain’s manufacturing base has shrunk greatly over the last 30 years.”

The proponents of Brexit promised trade deals with major countries, independent of Brussels who governs the trade policy of EU countries. Since Brexit in June 2016, Britain has signed new trade agreements with Australia, New Zealand and Singapore – but not with the largest economies of China, India, Brazil or the United States.

In October 2021, the UK government's Office of Budget Responsibility calculated that Brexit would cost four per cent of GDP per annum over the long term, because of reduced access to the EU, the largest single market in the world with 450 million consumers, and the movement of capital and people out of the UK to EU countries.

According to official British figures, the UK government gross debt reached £2,365.4 billion at the end of March this year, equivalent to 99.6% of gross domestic product (GDP). It is expected to surpass 100 per cent of GDP by the end of this year.

The British Chamber of Commerce forecasts a recession for the UK, with three consecutive quarters of contraction between the second and fourth quarters of 2022. It expects the economy to grow 3.3 per cent this year, 0.2 per cent in 2023 and one per cent in 2024.

It blames rising energy costs, a decline in household spending and real wages; weaker export prospects and a pessimistic global economic outlook; poor investment conditions and weakening business confidence and cashflow.

If Cecil Rhodes would be turning in his grave to see the pound at this level, Napoleon Bonaparte would be delighted. This is what he said: “Your meddling in continental affairs, and trying to make yourselves a great military power, instead of attending to the sea and commerce, will yet be your ruin as a nation. Britain is a nation of shopkeepers.”

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Mark O'Neill

A Hong Kong-based writer, teacher and speaker.