BRITAIN had endured exchange controls for two generations when Margaret Thatcher came to power in 1979 with an agenda of liberalisation. But removing the controls was deemed so risky that it featured only as a long-term aim of the new government, to be achieved cautiously and step by step.

Within a few months, however, Sir Geoffrey Howe, Lady Thatcher’s first Chancellor, had abolished controls at a stroke. In doing so, he swept away the whole bureaucratic apparatus of controls that faced anyone wanting to change more than a minimal amount of capital into foreign currency or even families wanting dollars or francs for a luxury holiday.

Passports no longer had to be presented at bank counters so that permitted currency allowances could be checked and entered. A special market in investment dollars disappeared overnight and the Bank of England dispensed with an entire large office building as well as those who had toiled inside it.

The circumstances bore some comparison to China’s dilemma over the yuan today, although for very different reasons. The Conservatives came to power with a determination to beat inflation by controlling the amount of money directly by use of interest rates. They put interest rates up from the already emergency level of 12 per cent to 14 per cent and later 17 per cent.

The new ministry’s plans had by then been upset by Opec doubling the price of crude oil at a time when inflation was rampant in the industrial world. The UK was just starting to produce oil from the North Sea at this time and speculators seized on the opportunity to treat sterling as a petrocurrency. The average value of sterling against other currencies rose by 16 per cent in six months.

Against this background Sir Geoffrey abandoned his cautious long-term plan to liberalise controls and abolished them straight away. The idea was to generate the fall in sterling that previous Chancellors had feared would occur if people, businesses and institutions were entirely free to take their money out of the country. This fall would have eased the damage the high pound and interest rates were doing to business.

Relief was, in the event, shortlived. Sterling soon bounced up again. Abolishing exchange controls did not just free Britons to sell. It raised confidence among foreigners in sterling and in the economic credentials of the Government. In future it would be a free currency floating at a genuine level. So ending controls encouraged as many people to buy as it allowed to sell and laid the way for a rise in inward investment.

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