The pound is suffering its worst slide since 1931

In 1992 Gordon Brown himself said: “A weak currency arises from a weak economy which in turn is the result of a weak Government.”

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The pound is suffering its worst slide since Britain was forced off the gold standard in 1931.

Sterling dipped closer to parity against the euro, with the single currency now worth more than 95p for the first time ever. The pound’s fall came amid fast-growing disquiet about the fate of the UK economy and consumer sentiment next year.

The pound has now fallen by 23pc against a basket of other currencies, according to figures from the Bank of England. The fall is sharper than the devaluations in 1992, after leaving the Exchange Rate Mechanism, 1976, when the International Monetary Fund was forced to intervene, and 1949, when a host of countries slumped against the dollar.

The devaluation is only matched by the moment in 1931 when, under Ramsay MacDonald, the UK was forced to abandon the gold standard, plunging by more than 24pc against the dollar. The parallel is significant, since many economists have attributed the gold standard exit as one of the main reasons the UK enjoyed a relatively mild depression in the 1930s, while the US suffered mass unemployment and saw its economy shrink by a third.

The pound had fallen more than 1½ pence against the euro yesterday and was trading at 93.57 by late morning on Friday. Late last night it fell as low as 95p, with the pound buying €1.047.

Traders are increasingly convinced that the Bank of England will follow in the Federal Reserve’s footsteps and cut interest rates all the way to zero by early next year.

Such suspicions were underlined as the Bank’s deputy governor, Charlie Bean, said: “We have to recognise that [zero interest rates are] a possibility… the bank rate, is still at 2pc, so we still have some margin to go yet, but of course we may find ourselves getting them all the way to near zero.”

Shadow Chancellor George Osborne pointed out that in 1992 Gordon Brown himself said: “A weak currency arises from a weak economy which in turn is the result of a weak Government.”

Mr Osborne said the apparently relentless fall in sterling was “the verdict of the international markets on this Government’s economic record.”

Although some are warning of a full-blown sterling crisis, the Bank believes that the fall in the pound, provided it does not accelerate, could benefit the economy by pushing up exports and boosting UK revenues in the coming years.

It may also prevent rates from having to fall to zero, since a weaker currency tends to generate inflation. Importantly, investors are not shunning UK government bonds, indicating that they have not yet lost faith in the authorities’ ability to deal with the economic crisis.

However, Simon Ward, economist at New Star, warned that the depreciation would not necessarily be the boon politicians hoped. Although the economy recovered significantly in the wake of the ERM exit in 1992, he warned that this time around the UK banking sector’s reliance on foreign funding could prove an Achilles heel.

If the pound’s fall triggers an exodus of investors from the financial sector, he said, the UK could find itself in a similar position to Thailand, which had to submit to the IMF after the baht collapsed in 1997.

By Edmund Conway and Angela Monaghan
Last Updated: 12:27PM GMT 19 Dec 2008

Source: The Telegraph