continue shoring up the pound with low interest rate loans. An agreement was reached to devalue the pound
versus the dollar in order to boost UK competitiveness, help create a two-way currency market, and speed up a
return to convertibility.55 In September 1949, the pound was devalued by 30% versus the dollar.
Competitiveness returned, the current account improved, and by the mid-to-late 1950s, full convertibility was
restored.56 The charts below paint the picture.
The currency move, which devalued sterling debt, did not lead to a panic out of sterling debt as much as one might
have expected especially in light of how bad the fundamentals for sterling debt remained. That is because a very
large share of UK assets was held by the US government, which was willing to take the valuation hit in order to
restore convertibility, and by Sterling Area economies, such as India and Australia, whose currencies were pegged
to the pound for political reasons.57 These Commonwealth economies, for geopolitical reasons, supported the
UK’s decision and followed by devaluing their own currencies versus the dollar, which lessened the visibility of
the loss of wealth from the devaluation. Still, the immediate post-war experience made it clear to
knowledgeable observers that the pound was vulnerable to more weakness and would not be able to enjoy
the same international role it had prior to World War II.
2) The Failed International Efforts to Support the Pound in the 1950s and
1960s and the Devaluation of 1967
Though the devaluation helped in the short term, over the next two decades, the pound would face recurring
balance of payments strains. These strains were very concerning to international policy makers who feared that a
collapse in the value of sterling or a rapid shift away from the pound to the dollar in reserve holdings could prove
highly detrimental to the new Bretton Woods monetary system (particularly given the backdrop of the Cold War
and concerns around communism). As a result, numerous arrangements were made to try to shore up the
pound and preserve its role as a source of international liquidity. These included the Bilateral Concerté (1961-
64), in which major developed world central banks gave support to countries via the Bank of International
Settlements, including multiple loans to the UK and the BIS Group Arrangement 1 (1966-71), which provided
swaps to the UK to offset future pressure from potential falls in sterling reserve holdings.58
In addition to these wider efforts, the UK’s status as the head of the Sterling Area let it mandate that all trade
within the Sterling Area would continue to be denominated in pounds and all their currencies would be pegged to
sterling. As these economies had to maintain a peg to the pound, they continued to accumulate FX reserves in
sterling well after other economies had stopped doing so (e.g., Australia kept 90% of its reserves in sterling as late