The Political Economy of Exchange Rate Policy-Making

The Political Economy of Exchange Rate Policy-Making

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The Political Economy of Exchange Rate Policy-Making From the Gold Standard to the Euro Steven Kettell

Steven Kettell 2004 Softcover reprint of the hardcover 1st edition 2004 978-1-349-51493-9 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2004 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N. Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin s Press, LLC and of Palgrave Macmillan Ltd. Macmillan is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 978-1-349-51493-9 ISBN 978-0-230-50352-6 (ebook) DOI 10.1057/9780230503526 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Kettell, Steven, 1973 The political economy of exchange rate policy-making : from the gold standard to the euro / Steven Kettell. p. cm. Includes bibliographical references and index. ISBN 978-1 4039 2071 0 (cloth) 1. Foreign exchange Government policy Great Britain. 2. Gold standard Great Britain History 20th century. 3. Great Britain Economic conditions 20th century. I. Title. HG3943.K48 2004 332.4 5 0941 dc22 2004043620 10 9 8 7 6 5 4 3 2 1 13 12 11 10 09 08 07 06 05 04

For my son, Elliott

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Contents Acknowledgements Preface List of Abbreviations viii ix x 1 Introduction: Themes, Schemes, and Exchange Rate Regimes 1 2 The Political Economy of Exchange Rate Policy-Making 10 3 Contextualising the Return to Gold 33 4 The Return to the Gold Standard 57 5 The Golden Shield 78 6 The Collapse of the Strategy 101 7 Britain s Membership of the Exchange Rate Mechanism 119 8 Britain and the Single European Currency 145 9 Conclusion: Exchange Rate Policy-Making Reconsidered 163 Notes 173 Bibliography 192 Index 205 vii

Acknowledgements This book is based on Ph.D. research conducted at my time in the Department of Politics and International Studies at the University of Warwick from 1999 to 2003, and which was funded by ESRC award number R00429934243. My acknowledgements and thanks must go first of all to Tony Tant at the University of Plymouth, whose enthusiasm and verve whetted my appetite for further study, to Werner Bonefeld at the University of York, without whom this project would never even have started, and to Wyn Grant at the University of Warwick, for all the useful help and advice given throughout the duration of the thesis. I would also like to extend my thanks and appreciation to all my colleagues at the Department of Political Science and International Studies at the University of Birmingham, especially Peter Kerr, Colin Hay, Matthew Watson, and David Marsh, whose comments and advice on the writing of this book (whether consciously intended or otherwise) have all been gratefully received. A very special mention must of course go to Peter Burnham, who supervised the Ph.D. thesis, who was at all times an invaluable and seemingly limitless source of comments, ideas, and reflections, and for whose guidance and assistance I shall remain deeply indebted. I would also like to extend many thanks to all the archive staff at the Modern Records Centre for their patience, assistance, and file-finding-finesse, and as well as to Amanda Watson at Palgrave, and Shirley Tan at EXPO whose help, advice, and relaxed attitude at all stages of this project have been much appreciated. A big thank-you must also go to the Trades Union Congress, to the Confederation of British Industries, and to the Bank of England for granting their kind permission to access and cite their archives. On a personal level, I would also like to take this opportunity to express the incalculable debt, both financially and emotionally, that I owe my parents Dot and John for all their help and support throughout the years. The greatest thanks of all however, must go to my wife, Marie, to whom I shall be forever indebted in a way that words can never express. viii

Preface This book examines the political economy of exchange rate policymaking from a theoretical and an empirical perspective. It argues that conventional means of understanding this subject are problematic, and it develops an alternative framework of analysis based on an open Marxist methodology. This contends that exchange rate policymaking needs to be analysed and understood as a component part of a wider governing strategy that is made by the core executive with a view to containing class struggle, to providing favourable conditions for capital accumulation, and to ensuring a sufficient degree of governing autonomy for the pursuit of high political aims. These theoretical claims are empirically substantiated through an examination of three key episodes of exchange rate policy-making in Britain: the return to the gold standard in 1925, membership of the Exchange Rate Mechanism from 1990 to 1992, and the present situation concerning New Labour s attitude towards the single European currency. In contrast to traditional interpretations of these episodes, these are seen to have been designed to address long-term economic and political difficulties in the British state through the imposition of financial discipline and through the depoliticisation of economic conditions and policy-making, and with the exception of the single currency are also considered to have been relatively successful in achieving these aims. ix

List of Abbreviations ABCC BE CBI EAC EC ECB EEA EMU ERM EU FBI FRBNY G7 GDP ILP LRD MAIE MAGB MFGB MPC MRC MTFS NCEO TNA TUC TUCGC Association of British Chambers of Commerce Bank of England Confederation of British Industries Economic Advisory Council European Community European Central Bank Exchange Equalisation Account Economic and Monetary Union Exchange Rate Mechanism European Union Federation of British Industries Federal Reserve Bank of New York The Group of Seven Industrialised Nations Gross Domestic Product Independent Labour Party Labour Research Department Manchester Association of Importers and Exporters Mining Association of Great Britain Miners Federation of Great Britain Monetary Policy Committee Modern Records Centre Medium Term Financial Strategy National Confederation of Employers Organisations The National Archives Trades Union Congress Trades Union Congress General Council x