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By Pöhl Monetary Research Group, 2 May 2013

This short account by the Pöhl Monetary Research Group (P.M.R.G) of the sterling’s post-war history begins with three ideas concerning money as such


From the giddy heights of the fourth floor of the Bank of England, the modern history of money is the history of concepts like these: of M0, M1, and M3; of credit counterparts; of incomes policy; Special Deposits Schemes; of money, exchange rate, and inflation targeting. It is also, in parentheses, a history of “boldness”, of “courage”, even of “heroism”: it is the history of the quiet resolve of those dedicated men, who, thanklessly and without reward, seek indefatigably to preserve the national interest against the outrageous zealotry of trade unionists and the craven expediencies of state politicians. In other words, it is the history of central bankers.


In the backroom drama of monetary administrators, the history of money is never a history of loss, damage, venality, and exploitation. Deflationary contractions in the monetary supply may lead to the collapse of industries, and inflationary expansion may lead to the evaporation of personal savings, but these are the result of “bad” macroeconomic policy, or, alternatively, of “external shocks”, never of money itself, which is after all just a token of value “artificially” preserved by the coercive authority of the state. The idea of “bad” and “good” monetary policy can find its criterion in those other macroeconomic “indicators” which monetary policy is meant to complement or to palliate: in output (GDP), revenue, employment, and so on. Money is to be managed prudently, as one “ingredient” in a successful, stable, high-growth capitalist economy. This is the most influential view of money.


In the wake of the crisis in 2008, two other ideas about money gained some public support. The earliest of these to enter circulation was the idea that money (in the form of “money capital”, or finance) was primarily responsible for the increase in indebtedness whose expanding risks led ultimately to the collapse of the international system of payments, generalized illiquidity, and massive, worldwide global immiseration. This view has been particularly widespread among popular anti-austerity movements – in the UK its most widely canvassed slogan has been “make the bankers pay”; similar expressions have no doubt been voiced across Europe. The final idea is that money – more than other tools of statist macroeconomics – has the capacity to be used to reform or even yet in some unspecified sense to revolutionize social life; and therefore to construct, as one advocate puts it, “a better capitalism […] where the creation and allocation of credit is driven […] by the long term interests of industry, people and the planet.”1 Both ideas have been particularly prominent in the UK, the first in consequence of the success of online-based political groups such as the Zeitgeist Movement; the second due to the existence of economic “think tanks” committed to community engagement projects. Though the conclusions of these two groups appear to exist in violent opposition to one another, each draws on the same means of argument. Money is to be bracketed out from the broader sphere of the capitalist economy, from its legal system, its property relations, its class antagonisms, and its methods of division, and addressed in isolation. Whether it is praised or arraigned – whether it is made responsible for what has come to pass, or treated as the “instrument” for a better tomorrow – it will invariably be treated on its own.


In argument with all three of the ideas set out above, we provide here a very brief account of the pound sterling’s post-war history, resituating the decline of the currency within the decline of the UK economy as a whole. We conclude with some remarks on the deliberate suppression of politics in the programmes of reform-minded economists. Money, we will argue, is appealing to economic reformists, because its action mimics the anti-capitalist politics whose central premises economics pretends to do without.


2. Sterling in the post-war period


The UK ended World War Two with a money supply that was triple the size of the supply in 1938. Inflation was kept down during the war mainly by means of the use of price controls, in conjunction with rationing. Public debts were notoriously high, and the trade balance was poor. When sterling-gold convertibility was introduced in July 1947, it led to such an enormous run on central bank reserves that the British government – with American permission – was forced to suspend the measure after just six weeks. The failure of this attempt by the US to recreate the international payments system of the nineteenth century in the interests of American industrial capital led immediately to the introduction of the Marshall Plan.2


In 1949 the persistence of UK current account deficits, that is, of debts owed to the UK’s main trading partners, led the Labour Chancellor Stafford Cripps to devalue the currency against the dollar by 30.5%. A contemporary report in The Times attempted to limit the political damage of this development by reassuring its readership that “[t]he Chancellor of the Exchequer has claimed that a rise in the price of bread should be the only immediate increase of importance among British retail prices”, though “he has also warned his hearers that the prices of articles made from raw materials bought with dollars will be affected in time.”3


In the following decades, the UK economy suffered significantly in competition with Japanese and German capital, and as soon as crisis conditions returned, the currency once again lost value. Another Labour government devalued in 1967, with a reduction of the exchange rate of sterling from $2.8 to $2.4. The devaluation was regarded by the Labour government as being too small to rebalance the British current account and therefore to avoid speculation on the pound. In order to “protect” the currency, the government abandoned its social concern, introducing prescription charges in the NHS, postpostponing the raising of school leaving age by four years, and cutting expenditure on roads and housing. As new revolutionary movements tore across France (UK ministers thought of them as “wage riots”), further measures were imposed, including indirect consumption taxes. These included “Purchase Tax, which was the predecessor to VAT, vehicle licence fee, betting tax, petrol duty, tobacco duty, wine and spirit duty”, an increase of “nearly a thousand million pounds, which was over twice the increase in any previous budget, including wartime.”4 At the same time, a “partial” block on conversion of sterling assets was “negotiated” with the members of the Sterling Area, the enormous group of colonial or ex-colonial countries who as net exporters of goods to the UK had accumulated sterling surpluses. The “agreement” of these countries to keep their holdings in Sterling was in reality extorted from them by the threat of a devaluation in their holdings, presaging the benefits that would later accrue to the United States in consequence of the “hegemony” of the dollar.5


The ‘preservation’ of the pound was assured by the impoverishment of the domestic working class and by the coercion of colonial or ex-colonial trading “partners”. Together these so-called “short term” measures permitted the British government time to defer a floatation of the pound or a strong block on Sterling convertibility. Floatation was undesirable for the government because it would have led to a loss of “credibility” on international markets, causing a further devaluation of the pound; while the Bank of England opposed what it called a “strong” block because this would have entailed placing controls on the reserves of countries more powerful than Botswana, Jamaica, and Pakistan. In the event the state’s hand was forced by the decision of the US to suspend convertibility at the end of 1972, and the Sterling was floated shortly thereafter.


The immediate result of the suspension of convertibility in the US was an expansion of money supply. Interest rates fell, and dollars were withdrawn from the US to be recirculated into the European financial system. (UK banks were especially well prepared for this, having removed controls on non-sterling denominated capital flows as early as the 1950s.) The result was a worldwide commodities boom in 1973, prior to the emergence of the long-term stagnation whose effects would extend like a shadow across the following decade.6 UK expansion even during this early upswing was extremely sluggish, at around 2.7% if one includes Q1 of 1973, the only quarter in which growth expanded at a high rate. Between 1971 and 1976, against the backdrop of enormous domestic inflation, the pound depreciated 44% against the dollar, and by the mid-70s the Labour government had abandoned its high-spending “Keynesian” attempt to purchase social stability and was attempting to regain monetary stability instead by union-endorsed wage restraint policies and by the negotiation of a £3.5bn loan with the IMF.7


From around 1975 onwards the Labour-controlled Treasury was introducing new systems of monetary policy, including especially the publication of monetary “targets”. These techniques had been rolled out in West Germany in 1974 under the guidance of Helmut Schmidt and were introduced in the US in 1975. They were a form of “practical monetarism”, rather than a direct expression of allegiance with the mechanical theoretical productions of Milton Friedman and Anna Schwartz (whose “k-percent rule” would establish a fixed annual rate for the expansion of the money supply to last for all time): but the class character of the techniques was communicated by their express purpose, which was to place what Executive Direction of the Bank of England John Fforde called an “’overriding constraint’ on the Government’s deficit and its funding,” which was understood to bear primary responsibility for inflation.8


Monetary targeting continued throughout the early 1980s under a variety of different systems, all of which were more brutal for the working classes than the previous method of administering austerity by means of “incomes policy”, or rather, by negotiation with compliant trade union bodies. The effects of deflationary monetary targeting were further amplified by increasing exploitation of the North Sea oil reserves, a great boon for working people who got to enjoy the capital inflows in the form of an appreciating pound, declining export competitiveness, scrapped factories, no jobs, and ruined industrial communities. The miners’ struggle in mid-decade, deregulation of capital controls and private bank lending, and the privatization of the majority of council housing stock are all too well known to require a lengthy exposition.


The 1990s and 2000s followed a similar course to the 1980s. A switch to exchange rate targeting during the last years of the 1980s led to a speculative attack on the pound at the end of 1992 and further devaluation, while (deflationary) restrictive fiscal policy and high rates of unemployment facilitated an (inflationary) “easy” monetary policy. The final outcome of all of this hardly needs to be mentioned. The point to carry forward is this, that throughout the post-war period the “defence” of the currency was also always an attack on the working classes, who were expected to accept their impoverishment, their exclusion from further education, their lack of acceptable housing, their inadequate medical care, and the rising prices of basic goods ranging from bread to tobacco, as nothing but collateral damage necessary for the preservation of “international credibility.”


2. Monetary Reform and Anti-Austerity


In the last four years, there has been a steady churn in proposals to solve the crisis without austerity. At first these largely centred on the necessity of stimulating demand in order to overcome the “downturn” in the business cycle. “Crisis” was understood as a collapse of business confidence, a depletion of animal spirits, a simultaneous downturn in the hearts of the “international business community”. However ill-advised the “credit binge” of the 1990s and 2000s may have been, the objective constraints it placed on global capitalist enterprise were downsized to nil from the moment that Labour Prime Minister Gordon Brown announced in 2008 the United Kingdom Bank Rescue Package, the part nationalization of failing banks, and the recapitalization of the illiquid financial sector. The worldwide financial crisis which developed in the wake of the emergency bailouts was the consequence not of public indebtedness but of the pusillanimity of political elites whose deference to private interests made them unwilling to face up to the truth, which was that economic growth, increased private sector activity, and sovereign deleveraging would only be achieved if state deficit spending was sustained, not allowed to die away down the narrowing corridors of fiscal retrenchment. Keynes’s macroeconomics, wrote the Keynesian think tank PRIME, show us “that an expansionary fiscal policy will lead to growth in activity and employment, so that, with spare capacity, high government expenditure reduces the deficit.”9


On these terms, expansionary fiscal policy increases “output”. “Output” is the standard macroeconomic term for GDP, which measures all (legal) annual income within a particular jurisdiction. This concept of “income” in turn encompasses a great number of objects, including company profit, workers’ wages, and capitalist revenue. The problem, as far as PRIME are concerned, is that a mode of production based on the exploitation of “subsumed”, quantifiable labour tends in periods of crisis to bring about a state of involuntary unemployment, or – and the phrase amounts to the same thing – of “spare capacity”. This means that the sum total of all three of these categories – profit, wages, and revenue – is lower than it might otherwise be. Under conditions where all capital is in use by the private sector, any state expenditure will only drive up demand for a fixed supply of goods, so that the extra spending will show up as inflation; but where capacity is going spare, state expenditure will leave price relations unchanged even as it ramifies throughout the economy, creating new income which will in turn be spent, and earned again, and spent again, and so on, in a virtuous cycle whose beneficial effects will encompass a rise in state tax revenues and a concomitant decline in public debts.10


The limitations of this theory of economic policy making are four-fold. The first three limitations are technical:


  1. It offers proposals for short-term policy tweaks which are meant to be reversed as soon as the economy pulls out of recession, a major problem when;

  2. it isn’t clear that “the recession” is capable of being brought swiftly to a close. The “empirical support” for the success of deficit-led fiscal intervention dates to post-war period and ends in the 1970s.

  3. The original statement of the theory argued that the “time-window” for policy implementation is relatively narrow, since the “output gap” in which its effectiveness is reposed tends to close as workers “lose their skills”. Thus the theory of human capital.


The fourth limitation is political. Many of us will be familiar with the anti-Keynesian argument that we “cannot go back” to the status quo ante, with our tails between our legs, in the hope of retrieving the Wirtschaftwunder of the mid-1990s; but the difficulty of this argument is felt most acutely of all by left Keynesians themselves, who know instantly that the status quo ante which fiscal fine tuning is meant to bring about is a status quo ante considerably posterior to the one associated with the great decline of the mid to late 1970s. Put differently, even if they were to be successfully implemented, Keynesian means no longer bring about Keynesian ends. In consequence the proponents of a “more rational” fiscal policy have no need to undergo a political metamorphosis in order to be shocked into a desire for action on a grander scale.


At this point we discover that the crisis of Keynesianism always takes the form of a theory of money. In the 1970s, as inflation ate away at the “gains” achieved by the working classes integrated in (or digested by) the social democratic state, it was the emergence of the theoretical system of Milton Friedman, and – more modestly, but also more insidiously – of the technique of monetary targeting, that led to the end of “full employment”, the “discrediting” of fiscal fine tuning, and the expurgation from the “mixed economy” of any element that would mitigate the brutality of the capital relation.11 Today, as the remedial utility of large-scale fiscal intervention comes to seem more negligible, it is again and again in theories of money -- in theories of its origins, its nature, its means of circulation, and its power – that radical reformist thinking seeks to hew out from “the economy” a new and inspiriting programme for change. In the last six months especially, the main desideratum of left reformism has been a redirection of quantitative easing schemes into “the real economy” where – it is alleged – they can effectively raise employment and spending “in the long term interests of industry, people, and the planet”: inflexibly in that order.12


Why does expansionary monetary policy acquire this role in left Keynesian economics, when its most common effect – inflation – has so often acted as a prelude to the repressive intensification of the authority of the bourgeois state? It would take too long here to waltz about in the footnotes of every think tank report in which such a policy is advocated, refuting the positions in detail. We conclude here by making a more general point. The idea that there is a “pure” economic solution to the crisis, to which we need only to add politics in order to bring it into existence, is an evasion universally accepted by “economists”. The person to whom this idea is addressed is expected to interpret it in a certain way. “Politics” is the mass movement, it is the enormous outrush of bodies into the streets, into the squares, into the assemblies. It is the sudden and breathtaking suspension of everyday relations of separation; the overcoming of repressive silence; the immediate and living sensation of unity. Politics is this, it has been this and it must be it again, from Budapest to Tahrir our spirit moves in the anticipation of it. But politics is not only this. The apparently innocuous or even yet modest idea that “pure” economics makes way for the mass politics that will bring it into effect does not in fact defer to politics so much as put it in its place, by denying to politics any jurisdiction over the central categories of capitalist social life, the most prominent of which is property. But property is not a barely economic category, is not an “instrument” in the toolkit of macroeconomics, because the interests who possess property will fight tooth and nail and to the last breath to defend the value of what they legally own. It is for this reason that the crisis is not subject to any global technocratic solution.



The real reason for the prominence of “monetary solutions”, ranging from the most dull-witted anti-semitic conspiracy theories to the most supercomplex monetary dynamic stochastic general equilibrium model, is this: money, more than any other economic category, promises to turn rich, difficult, problematic, and conflictual politics into simple, pure, bare-bones economics. The transformation isn’t merely an illusion, an idle notion, or a mirage shimmering in the desert of academic economics: money really does bring about this effect: because it is by means of inflation, a monetary phenomenon, that “policy elites” have sought to disguise the political act of expropriation as a natural “outcome” of economic development. “[W]orkers”, wrote Keynes, “will usually resist a reduction of money-wages”, but “it is not their practice to withdraw their labour whenever there is a rise in wage goods.”13 In the vision of benign inflation, abolishing the antagonistic interests of competing property owners – private, state, and “institutional” – economics overcomes by a kind of mimicry the problem of politics, which, if it really is to instate new and more equitable conditions of social life, truly will have to confront, fearlessly and without compunction, the irrational system of competing proprietorial interests whose political antagonism is the limit and boundary to any rational, human solution to the social crisis. Economics attempts to limit politics by a conceptual overprivileging of the only economic category whose operation can mimic radical politics. Whether or not academic “monetary solutions” actively propose an inflationary agenda, the historical appeal of money for reformist economics remains the same.


The history of sterling post-1945 is a history of attempts by the representatives of the British “national interest” to arrest the vertiginous tumble of the UK down the league tables of geopolitical influence and prestige, by the usual means of rising inequality, upswelling costs of living, and ballooning deprivation. The claim that it is the same object, money, which will lift the burden of responsibility from the shoulders of our politicians, is defensible in the highly limited sense that it expresses the desire for a rational means of coordinating human relationships. And yet the radical reformism of monetary theory disguises the true obstacle to that better way, which is not prohibited by bad economics but by a political economy in which gridlock, temporising, procrastination, and inertia are guaranteed by a competition of interests whose supersession cannot be “political” first and “economic” later but must be both at once: just as capital itself is.


When economists promise to work miracles with money, they promise in theory the gains that will only be won in truth by the conscious action of a mass movement acting against capitalist social relations defined in their fullest sense. But the premiss of that promise, which is really a kind of narcissistic mimicry, is a refusal to see that mass movements have no time to stand in front of a mirror. “Monetary reform”, in any case, is nothing but a fine layer of fog on the glass.





2See Barry Eichengreen, Globalizing Capital (New Jersey: Princeton University Press, 2008).

3The Times, 1 October, 1949.


5Michael J. Oliver, Arran Hamilton, ‘Downhill from devaluation: The battle for sterling, 1968–72’, The Economic History Review, 60.3 (August 2007), pp. 486–512.

6Details in Armstrong, Glyn, Harrison, Capitalism Since World War II: The Making and Breakup of the Great Boom (London: Fontana, 1984).

7The IMF attributed the “snail-like response” of the UK economy to “the disincentive effects of very high marginal taxation, the continuing control of prices and dividends, the tendency of successive governments to support or nationalize faltering private enterprises, and a variety of other factors of a similar nature.” Its report goes on to attribute the special circumstances of the UK economy to its overreliance on demand-side measures to stimulate consumption, which, it said, have added to “balance of payments difficulties” by “provoking capital outflows and increasing domestic inflationary pressures.” “Wage and price inflation” have gone hand-in-hand, their path prepared for them by the “lax” hand of state-led demand-management policy. A shift to export-led growth is to be achieved by stopping both in their tracks. See the papers published on the website of the UK treasury,

8Anthony Hotson, ‘British Monetary Targets, 1976 to 1987: A view from the fourth floor of the bank of England’, p. 3. (

9Prime’s report demonstrates very well the terrible intellectual poverty of traditional Keynesian analysis by using post-war data to prove that the debt went down every year until 1975 – 1976, i.e., a fact which no reader of the report is likely to deny. See p. 22. (

10Other “economic” theories argue differently: but this is not a comprehensive review of bourgeois economic theory. Suffice it to say here that triumphant wittering about the velocity of circulation is neither original nor conclusive. Arguments about the velocity of money were a recurrent theme in the writings of seventeenth-century “economists”, and no theory has yet given an conclusive account of the conditions under which circulation can be made to speed up or slow down. One reason for this is that such an account could never be straightforwardly “economic.”

11This is not to suggest that Milton Friedman bears even an iota of responsibility for the crisis of the mid-1970s, which was evidently a crisis immannent to the process of capital accumulation as it was established worldwide. Bourgeois economists help bourgeois citizens to profit from global crises; they do not invent them.


13Keynes, The General Theory of Employment, Interest, and Money, ch .2. (