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Greece can learn from Britain's fixed rate disasters

    At least we are not part of the Eurozone – though it was a close run thing in 1997 and 2003 when two attempts were made to push us into the system with all the travails that would have involved.

    The British advice in today’s crisis is that Greece should somehow find a way of staying in. But why?

    The assumption is that a whole variety of terrible thing will happen to Greece if it leaves. They might. This could include, we are warned, horrendous inflation, perhaps even on a Weimar scale. That is possible whether Greece stays or goes. But we ought to remember that the 1920s were, surprisingly, a period of relative prosperity for postwar Germany. The real damage was internal. It made those with savings, including those with insurances, suffer at the expense of those with debts. There was a point where a mortgage could be paid off at little more than the cost of a postage stamp. If you were cunning enough you could do reasonably well out of the great inflation though rarely if you were a creditor or saver. It is hardly surprising that those with savings are fleeing Greece.

    Britain's advice today concentrates on the perils of leaving... why not on the perils of trying to stay? We have such useful experience of becoming obsessed with fixed exchange rates.

    We can date this back to the early 1920s when Winston Churchill – much to his own surprise - was appointed Chancellor by Stanley Baldwin, as the wartime coalition broke up. One of the first questions he had to grapple with was should Britain go back to the gold standard abandoned when war broke out in 1914. He accepted the advice of the bankers, not industry. We went back to gold. Since the USA had most of the gold around, this was equivalent to accepting a fixed exchange rate against the dollar. British coal, a main export, rose and became almost unsaleable. The mine owners ordered longer hours and reduced pay. This caused the miners’ strike which led on to the General Strike of 1926. It was hardly a triumphant outcome.

    It was only in 1931 when Britain left the gold standard that the domestic economy resumed normal growth. We were not done with fixed rates. Lord Keynes returned from the 1944 Bretton Woods conference declaring for yet another fixed rate against the dollar. Our first devaluation inevitably arrived, this time in 1949. When Churchill came back to power in 1951, a highly secret plan was plotted at the Treasury to float the pound. In the event we kept the fixed rate. When Harold Wilson took up the reins of government in 1964, he was urged to devalue at once. However $2.80 sounded better and stronger, altogether more virile and Wilson had said in the heat of the election battle that devaluation was not on Labour’s agenda. This led unintentionally to Chancellor Jim Callaghan’s budgets being constantly driven by a desire to reassure the outside world that Labour was not red in tooth and claw. Labour back-benchers were understandably dismayed. It was not until 1967 that Wilson plucked up courage to devalue by 14pc. The economic outlook improved overnight.

    Still, it remained a fixed rate, surrounded by restrictions on capital movements, often petty. An LSE professor moving to the USA was told by the Treasury that allowing his silver teapot to accompany him was ‘ a special concession’. Then a wonderful thing happened (by chance of course). President Nixon abandoned the gold reserve rules and Britain like many other countries found their currencies floating – painlessly. One of Margaret Thatcher’s first moves on becoming Prime Minister was to abolish the substantial residue of control on capital. The pound soared.

    There was always the backdoor for single currency enthusiasts. The Exchange Rate Mechanism, or ERM, required that each member country should maintain its exchange rate relative to an average of other member countries. Thatcher resisted the plea of senior Tories including her Chancellor, Nigel Lawson and his predecessor Geoffrey Howe, that we join. It was in the last days of her power that she succumbed and announced in sepulchral tone more suited to a family death, that we would join.

    Her new Chancellor, Norman Lamont, confessed privately to having doubts.

    The new semi-fixed rate proved too high and the speculators led by financier George Soros, set about toppling sterling and making huge profits in the process. On what was named Black Wednesday the Bank of England raised interest rates from 10pc (already a grotesque level) to 12 and even, briefly, 15pc. But the game was up. Britain’s reserves were running out. Soros is reckoned to have made $1bn on the fateful day. Once we left the ERM economic affairs could return to normal. It proved a blessing. We were free again. Lamont set about rebuilding our reserves which proved easier than feared. Black Wednesday eventually proved Sunny Wednesday. Once again we found that leaving a fixed or semi-fixed exchange rate was a blessing.

    So we know a thing or two about such rates. When the opportunity came for Britain to join the euro at the invitation of our EU colleagues in 2003, we declined (luckily). We had finally had enough of this game. For Greece,  either staying or leaving has problems. At least it would makes sense to have the Greeks in charge of their own problems... maybe discovering their economic freedom as we did. We only know with absolute certainty that staying in means meeting debts which instinct and observation tells us they do not intend to pay.

    Perhaps a free Greece could surprise us. Perhaps their shipping and tourists industries will burst back into life if they leave the euro and resort to the devaluations which outside observers warn about. We can only offer lessons on the folly of fixed rates. There we are, alas, fully experienced.

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