It was another world back then, but dangerous and changing fast. Economic collapse in the 1970s was a real fear.
In 1970, only a few large UK companies had recognisable treasuries focusing on strategy, transactions and risk management.
The Bretton Woods’ 1944 principle of fixed (equals low risk?) but adjustable (equals high risk?) exchange rates saw sterling devalued by 30% in 1949 and 14.3% in 1967.
In 1971, the US devalued the dollar and suspended convertibility (and so suspended Bretton Woods), imposing a 10% import tax, plus a wage and price freeze.
In 1972, West Germany, France, Italy and – for seven and a half weeks – the UK linked currencies in the ‘snake’.
US trade figures published in February 1973 saw FX markets closed on more than one occasion. The Bank of International Settlements (BIS) said the market was in disarray. The US dollar floated (ending Bretton Woods) with the market reopening on 19 March.
Until October 1979, UK exchange controls separated domestic and offshore sterling. Few companies had a second treasury centre outside controls
In early 1976, the Italian lira depreciated by around 43%, according to the BIS. Sterling soon followed – falling below $2 for the first time, with a low of 1.63 in October (BIS trade-weighted depreciation was around 40%). The UK agreed a $3.9bn International Monetary Fund loan, subject to conditions to keep sterling stable.
From the end of 1977 into the early 1980s, though, sterling was too strong. The dollar was seen as more excessively strong, with central banks seeking to weaken it.
Until October 1979, UK exchange controls separated domestic and offshore sterling. Few companies had a second treasury centre outside controls.
Annual CPI inflation was in double digits between 1974 and 1977 and between 1979 and 1981, peaking at 25%. The Bank of England’s official overnight interest rate varied in the decade between 5% and 17%.
Limited real-property mortgages were available. Equipment leasing was almost unheard of.
In 1970, clearing banks ‘marked’ overdrafts recallable on demand without notice. Trade was mostly financed by bills of exchange. Sterling debt with under two years’ maturity was reserved for the government.
By the mid-1970s, active foreign banks arrived and bank loans started.
Sterling bond investors spent most of the decade in a funk. Exchange controls meant no practical access to eurobond markets for UK firms.
The years 1973-5 saw many secondary banks fail and clearers’ standing questioned.
The London Stock Market declined by 73% from April 1972 to December 1974, bouncing back by around 60% early in 1975. New issues were not generally available through the decade.
We saw wage and price controls, strikes, power shortages, three-day weeks, swathes of nationalisations and domestic terrorism. The year 1974 saw two elections and 1979 the election of Margaret Thatcher.
Internationally, there was the resignation of US President Nixon to avoid impeachment, a large tally of wars and revolutions, and two oil crises – 1973’s OPEC quadrupling of oil prices and again after the Shah of Iran’s 1979 overthrow.
Do today’s treasurers have contingency plans to address risks and fluctuations of this magnitude?
Today, the pound collapses at 1.5%, according to mainstream media. A 40% fall is outside the memory or imagination of many. And there is little or no discussion on the impact of interest rates hitting 12%.
John Grout spent 12 years at British Leyland, ultimately deputy treasurer, four years in treasury, tax and corporate finance at BICC and 12 years at Cadbury Schweppes, seven of them as director of treasury and five as finance director global confectionery.
In his policy and technical role at The Association of Corporate Treasurers (ACT), he devoted himself to promoting treasury issues and lobbying on behalf of the ACT and corporates, memorably on the issue of corporates’ use of derivatives, once considered a highly controversial possibility.
John Grout is a retired corporate treasurer and finance director, and former policy and technical director of the ACT
This article was taken from the 40 Years Edition 2019 issue of The Treasurer magazine. For more great insights, log in to view the full issue or sign up for eAffiliate membership