Behind me the kitchen radio reported strife in the Lebanon, sectarian murders in Northern Ireland … a run on the pound … a collapse of England’s cricketers in Australia, nothing out of the ordinary.
John Bowen, The McGuffin (Hamish Hamilton, 1984)
It was snowing in Frankfurt am Main in March 1995. I know because I was there, with a small team from the Guardian. I would rather have been at home in London – my wife was pregnant with our first child and, while she was quite safe behind the security locks and police patrols of the Barbican Estate, I would have liked to be with her. But duty called and, as a long-standing low-key Germanophile, I decided to make the best of being back in the BRD.
So, I remember the snow and some other aspects of the trip, too: a rather forlorn banner over the central Römerplatz advertising an event entitled ‘“Im Falschen Körper”: Transsexuelle Menschen in Deutschland’; I didn’t make that one but I did see the exhibition ‘The Rothschilds: A European Family’ at the Jewish Museum, and reviewed it for the paper. Elsewhere during the visit, I found my German was so bad that I accidentally ordered a pig’s stomach for lunch, believing it to be a dish of sausages (both menu items began with the word ‘Frankfurter’). My boss, a co-religionist of the Rothschilds, sportingly wished me ‘Guten Appetit!’, although the sight and smell must have revolted him. I went also to a (genuine, not fake) Irish pub in the old-town Sachsenhausen district and, calling home, commented that you could trust the bloody Irish to install the only payphone in the city that took (comparatively rare) two-mark coins instead of (very common) one-mark pieces. My wife took this slur on her compatriots with her customary good humour.
Ah yes, the mark. The mighty mark. The ‘DM’.
Germany’s one-time super-currency looms largest of all in my recollection of that assignment. One wintry morning I was heading out of our utterly characterless business hotel, en route to the U-Bahn station, when I was stopped short by the figures on the electronic exchange rate display at the reception desk. The DM was trading at just a smidgeon above two to the pound. The ten-bob mark was in sight.
Let’s put that in context. Just two-and-a-half years earlier, the Treasury and the Bank of England had spent billions defending an exchange rate nearly 50 per cent higher, DM2.95. Earlier still, and on my second visit to Germany, in December-January 1978-79, sterling had bought very nearly four marks, despite the fact that, back home, the Winter of Discontent cast a long shadow over the British economy.
Thanks to Professor Werner Antweiler of the University of British Columbia – who has compiled sterling-mark rates going back to 1948, birthdate of the German unit – I can confirm that 1995 as a whole did see the low point of the pound’s value as measured in marks. From an average DM2.4835 in 1994 it fell to DM2.2616 in 1995 before recovering to DM2.3477 the following year.
By the eve of the euro’s launch in 1999, sterling had bounced back, on average, in 1998 to DM2.9142.
The exchange rate is a long-standing interest for me; the fascination has something to do with its position in that border country where the State abuts the City, where politics comes hard up against economics, where finance meets diplomacy and where Britain is linked to, and trades with, the outside world. My first (modest) publication was concerned with exchange rate policy, specifically about the follies of trying to use the external value of the pound to guide domestic economic management.
So anyway, what was going on in the first quarter of 1995 to prompt currency-market players to ditch sterling and pile into the mark? In terms of economic and social turmoil in the UK: not a lot. Suspected serial killer Fred West was found hanged in his prison cell, the Queen visited Belfast to mark the IRA ceasefire of the previous year, and Manchester United striker Eric Cantona was fined a total of £30,000 and suspended from the game for several months after a ‘kung-fu style attack’ on a fan. Not obvious triggers for a run on the pound.
The truth is rather more prosaic. Germany had relatively high interest rates, while Britain – sprung from the confines of the European Exchange Rate Mechanism (ERM) in September 1992 – was no longer required to match them. Indeed, as it had become obvious, in 1994, that lower rates and a once-more-floating pound would not, after all, return Britain to the inflation of the 1970s – or even of the 1989-90 period – borrowing costs were slashed with abandon, from 15 per cent on Black Wednesday to 6.75 per cent by early 1995.
Nor was the British economy yet seen to have fully recovered from the short, sharp recession of the early 1990s. Thus there was only a limited ‘growth story’ to tempt funds into sterling assets. Another reason to prefer the mark.
Back home, few seemed even to have noticed that the pound/DM rate was at an all-time low. Ten years earlier, rather more people had taken note of the fact that sterling had fallen to another apparent nadir, this time against the dollar, with which it came very close to parity in January 1985. But then, many Brits were fond of holidaying in Florida; the pound’s travails may actually have affected them. (A curious by-product of sterling’s steep slide that year was, in part at least, to rescue Les Misérables, a show hated by the London critics at its opening in 1985 but adored by the American tourists pouring into London on the back of the strong dollar who, in those pre-internet days, knew nothing of the blizzard of bad notices.)
Other than the ‘Orlando vacation’ factor, this, too, was a national humiliation most people could live with, including the prime minister. Bernard Ingham, Mrs Thatcher’s spokesman, hinted to the media that £1/$1 was a prospect that the government faced with equanimity.
In terms of textbook economics, things were all working pretty much as they should. A floating exchange rate moves up and down and households and businesses, in turn, make decisions in light of that. This, again in turn, influences the exchange rate.
For example, let us say that sterling declines against the euro: Brits take fewer (more expensive) continental holidays and buy fewer (ditto) continental goods; while the reverse effect is seen in the UK, whose goods are now in greater demand (because they cost less when priced in euros) and more Europeans take cheaper holidays in Britain. In time, these reactions will prompt an upward revaluation of the pound against the euro.
Only – only – when finance ministers and central bankers try to jam this delicate piece of machinery with ERM-type fixed-currency schemes do we find ourselves back on the not-so-merry-go-round of forced devaluations, ‘humiliating’ exits from ‘currency bands’, and demands for grey-faced politicians to resign as a ‘matter of honour’.
The late Enoch Powell was an early advocate of floating currencies. Why, he asked, did we fret so about the balance of payments? The trade balance was solely a by-product of the exchange rate. Give me an overvalued currency, he said, and I will give you a trade deficit. Give me an undervalued currency, and I will give you a trade surplus.
Textbook stuff, as I say. But this is where we come to sterling’s little secret. It isn’t true. Not for the UK, anyway. The pound, floating after its summer 1972 exit from the European currency ‘snake’ (an early version of the ERM) until ERM entry in October 1990, and floating again from September 1992 until the present day, has delivered not an improving but a deteriorating current account picture. Since 1984, we have been in deficit every single year, clean through the ERM period and out the other side.
Only in 1997, in the wake of the 1995 sterling/mark slide, did Britain even come close to balance, and even then we missed. Since then the rake’s progress has continued, through boom and also through bust. So great, it seems, is our determination not to pay our way in the world that no currency movement can deter us.
Of course, to ascribe such a motive to the country as a whole is misleading. While our low level of household savings may reflect the sum total of individuals’ reluctance to live in a prudent fashion, there are other factors at work. One is the ingenuity of the financial services industry in devising new forms of credit with which to allow people to fund their import-buying spree. Another is the wiping out of great swathes of British industry, shrinking the range of domestic goods and products available to buy.
Worse, though much of the money paying for the current account deficit is borrowed, the rest is raised through the time-(dis)honoured route of selling the family silver. So next time you wonder why foreign investors own Heathrow Airport, Cadbury, Boots, Jaguar, Asda and many others – that’s why.