Extracts from a note sent to Prime Minister Winston Churchill by the Paymaster-General Lord Cherwell, 18th March 1952 (PREM 11/137)
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18th March 1952
"Setting the Pound free"
I have been rather anxious about your remark last week that you looked forward to the day when we could "free the pound" which the Cabinet decided against a fortnight ago. I hope nothing I said suggested that this should be reconsidered before the Sterling Area is in surplus and has rebuilt its reserves. To do so when in deficit would I am sure be a terrible mistake.
Our fundamental problem is that the Sterling Area is spending more than it is earning. We have to put that right by exporting more and importing less. No monetary tricks can overcome this hard fact. Indeed I remain convinced that the Banks plan would make our problem much more difficult, and might well have disastrous effects in the next few months.
It is at first sight an attractive idea to go back to the good old days before 1914 when the pound was convertible and strong and we never had dollar crises. No doubt the bankers honestly believe that, if only the pound could be left to market forces, with the Bank of England free to intervene when necessary by varying the Bank Rate at their discretion, all would be well. The country's economy, they think, would be taken out of the hands of politicians and planners and handed over to financiers and bankers who alone understand these things. Perhaps the bankers are even taken in by anodyne phrases like "the gold reserves ceasing to take the strain of the deficit".
But I hope you will be under no misapprehension about what it all means. It means that, whenever our exports fail to pay for our imports, the value of the pound will fall until imports diminish.
(a) because the prices of imported food mount so high that people cannot afford to buy,
(b) because imported materials cost so much that firms stop buying and close down their factories; those thrown on the dole will have to eat less, thus reducing further the demand for imports.
Now we are in deficit nearly every year. We are the world's largest debtor. There is little faith in the pound which has lost two-thirds of its gold value in 20 years. Imports are cut to the bone. The people will not accept mass unemployment.
To rely frankly on high prices and unemployment to reduce imports would certainly put the Conservative Party out for a generation. Even a Government with a large majority could not survive such a sudden, complete reversal of policy.
Sterling, I repeat, cannot be made strong by financial manipulation. It is the real things that count - more steel mills in Britain, more ship loads of British manufactures crossing the Atlantic, more Australian farmers growing wheat and meat for England, more cotton plantations in the Colonies. That is the way to make sterling strong. It is a hard way and it will take time. But it is the only way. I trust we shall not allow ourselves to be persuaded that there is a painless, magical way - by leaving it all to the Bank of England.