In 2025, headlines warned that Britain could be heading towards a 1976-style International Monetary Fund (IMF) bailout – a brutal year for sterling. We’re looking back over a full century of UK currency crises and what might happen in 2026.
This article isn’t personal advice. Past performance isn’t a guide to the future. If you’re not sure what’s right for you, ask for financial advice.
The stable years
Sir Isaac Newton is best known for studying falling apples and ‘discovering’ gravity. He’s less well known for putting Britain on the gold standard. But on 22 December 1717, in his role as Master of the Mint, he placed an upper limit of the value of gold relative to silver.
In practice, this meant the pound had slipped onto the gold standard at 3 pounds, 17 shillings and 10.5 pence per ounce. Gold would remain at this price – bar a break during the Napoleonic wars – until the start of World War I.
Churchill and “Hell”
World War I shattered this stability.
Almost all countries except the US effectively came off the gold standard at the start of the war. In the years afterwards, many countries wanted to return to it but did so in an uncoordinated fashion.
In 1925, New York took the title of the world’s largest city from London. Around this time, the US dollar overtook sterling as the leading reserve currency. The UK’s role as a financial centre was under threat as the government discussed a return to the gold standard.
Reginald McKenna – former Chancellor of the Exchequer – advised Winston Churchill, the then Chancellor, that “There is no escape, you have to go back, but it will be hell”.
Churchill announced the return to the gold standard at the pre-war level in his April 1925 budget. One pound was worth $4.86. Sterling was widely believed to be overvalued at this level and a period of austerity followed to bring about the deflation necessary to protect Britain’s gold reserves.
By September 1931, amid the Great Depression, the pain proved too severe. Britain abandoned the gold fix, with sterling plunging by around 30%.
Call the IMF!
After World War II, the Bretton Woods system brought greater stability to the world’s economies. Exchange rates were fixed to the US dollar, which was tied to gold, with some flexibility. This allowed world trade to recover.
However, Britain experienced persistent current account deficits and falling reserves, leading to a series of currency crises.
By 1976, following President Nixon’s closing of the gold window in 1971, the world’s currencies were no longer linked to gold. Jim Callahan’s Labour government was facing another currency crisis due to twin current deficits – Britain was spending more overseas than it was earning, and the government was spending more than it was getting in tax revenues.
With unemployment already high, the cabinet were divided on plans to cut spending, which would risk yet further job losses. Market confidence suffered and the pound fell sharply.
Famously, the Chancellor of the Exchequer, Denis Healey, turned back from Heathrow to deal with the crisis, calling on the IMF for financial assistance. The cabinet agreed to the spending cuts demanded by the IMF programme, bringing the crisis to an end.
The Plaza Accord
In 1979, with US inflation rampant, Paul Volker was appointed Chair of the Federal Reserve (Fed). Under his leadership, the Fed ramped up interest rates, breaking a decade-long inflation cycle – and causing recessions in 1980 and 1982.
President Reagan pursued a growth agenda. As confidence in the US grew, investors piled in, enticed by low stock prices and still-high interest rates. This caused the dollar to soar against global currencies, including the pound.
By 1985, there was a consensus among global governments that the strong dollar was harming all parties.
On 22 September, finance ministers and central bankers from the US, UK, West Germany, France and Japan met at the Plaza Hotel in New York. They agreed to intervene and reverse this strength. This policy – the Plaza Accord – was highly successful in weakening the dollar. 1985 marked a low for the pound against the dollar.
Black Wednesday
A third of a century ago, on 16 September 1992, Black Wednesday, the pound plunged in value leading to its exit from Europe’s Exchange Rate Mechanism (ERM).
In 1990, Britain had joined the ERM a decade after it’s eight founding members. The then Fed chair Alan Greenspan helped persuade a reluctant Margaret Thatcher that this could be the “spine” of her economy, along the lines of the gold standard.
This turned out to be accurate, as in 1925, Britain joined at too high an exchange rate. Inflation was above that in Germany, the country that effectively set rates for the whole system.
Economic imbalances rose and, in 1992, markets – and George Soros in particular – sniffed an opportunity. When the pound came under pressure, the Chancellor of the Exchequer Norman Lamont raised rates to 12%, then to 15%, before abandoning the ERM – all in just one day.
21st century
Two things change before the turn of the century.
On 8 October 1992, three weeks after Black Wednesday, Britain introduced an inflation target – a new spine for UK policy. And, on 6 May 1997, four days after the Labour party ended 18 years of Conservative party rule, Chancellor Gordon Brown announced the independence of the Bank of England.
One thing didn’t change – the UK’s fraught relations with Europe. On 23 June 2016, Britain voted to leave the European Union. Sterling dropped 10% overnight, the largest single-day fall in over 30 years.
Higher inflation is the single biggest driver of lower currencies over the long run. Inflation has spiked four times in the UK over the last 25 years, with each peak higher than in the Euro-zone.
However, much of the difference has been due to one-off factors – the fall in the pound in 2008 and 2017, higher VAT in 2011, and the energy price mechanism in 2022. These aren’t structural issues that mean that higher inflation should persist. And average UK inflation has been in line with the US since the turn of the century.
Outlook for sterling
100 years ago, the pound was reluctantly handing the baton to the US dollar in the race to be the world’s reserve currency. As the UK shrank as a share of the global economy, this created natural sellers among foreign central bank reserve managers. Today, central banks are diversifying away from the US dollar – although the gold price is the most obvious beneficiary, not other currencies.
Since the pound’s low point in 1985, central banks across the developed world have adopted inflation targeting. This has led to a convergence in both inflation rates and interest rates – two key drivers of currency movements. The period of UK exceptionalism – an exceptionally weak currency – was over.
When the UK joined both the gold standard and the European ERM at too high an exchange rate, this added to existing imbalances that ultimately led to a currency correction.
Today’s inflation targeting regime is different.
Yes, tightening is still necessary when inflation and inflation expectations are too high. But, in contrast to these prior regimes, there is no necessity to bring absolute price levels back down after a burst of inflation, like the 2021-23 episode.
Today, the UK twin current account and budget deficits have led to fears of a 1976-style crisis. But there are major concerns about government borrowing across the developed world – and currencies are a relative thing.
The political cost of a crisis is clear. Labour lost the next election after the 1976 episode, in 1979. The same was eventually true for the Conservatives after 1992, at the next election in 1997.
In our view, an IMF programme today would undoubtedly recommend a hike in at least one of the big three taxes, breaking a Labour manifesto promise.
We see sterling as a barometer on Rachel Reeves’s ability to balance the need for fiscal prudence, economic growth and honouring political pledges.
Valuations matter over the long term, much less so over the year.
Today, the US dollar is overvalued against sterling, the euro and the yen. But this is a minor ingredient in the recent weakness of the dollar, which has largely been driven by the significant shifts in US policies.
If this summary leaves you unclear on our forecast for the pound, you’ve read it right. Currency markets are inherently hard to predict. From 1925 to 1985, the pound was a one-way bet. Today, we don’t see a major valuation imbalance, interest rate disparity, or difference in economic outlook relative to other countries that makes sterling stand out – one way or the other.