Devaluation of the pound

Following rigorous attempts to control the balance of payments deficit through cost cutting and other measures during the mid-1950s; a relatively strong balance of payments enabled the government to declare the convertibility of non-resident sterling in December 1958. During 1960s, however, Britain suffered from persistent balance of payments problems, which tended to make it difficult for governments to defend the pound without heavy drains on reserves. These problems culminated in the devaluation of the pound under the Harold Wilson government in 1967.

By 1972 Britain's position in the world monetary system had substantially changed. In 1971 the US President, Richard Nixon, had made the dollar inconvertible into gold, effectively ending the Bretton Woods system and Britain was due to enter the EEC at the beginning of 1973. Furthermore, trade with Europe increased, while Commonwealth trade had become progressively less significant and the sterling area therefore less significant.

Edward Heath's Chancellor, Anthony Barber, having produced a generous budget in 1972, believed that balance of payments problems over the previous period had been primarily caused by adherence to unrealistic exchange rates. Nevertheless, in May 1972 Britain joined the 'German snake', which set exchange rate bands for the currencies of the six EEC founder states. Within weeks, however, the government was forced to withdraw, as a 'run' on sterling occurred in the money markets.

The pound was now allowed to float freely and quickly devalued. This brought to an end the sterling area, which had fixed the exchange rate of member countries against the pound.