Money Creation Supports Pound Value, Not Harms It

The UK's national debt has reached £3 trillion, sparking concerns about its impact on international exchange rates. However, an analysis of the pound's value against major currencies reveals that money creation has actually supported the pound, rather than harmed it.

A chart created by Claude AI shows the sterling exchange rate with both the US dollar and euro during the past century. The patterns are broadly similar, but trends are relatively clear: the value of the pound rose after 2004 due to a boom in UK stock markets, which attracted funds into the City of London.

The 2008 crash saw the exchange rate collapse against both currencies, but this was not caused by quantitative easing, which began in late 2009. Instead, it was the result of the City's failure. QE then stabilised and even improved the exchange rate from 2010 to 2016.

Further analysis shows that money creation boosted the exchange rate against the dollar from 2020 to 2021, but this effect was short-lived due to a subsequent sterling crisis triggered by Liz Truss's economic policies.

The author of this analysis suggests that politics, rather than monetary policy, has driven major changes in exchange rates. Money creation has stabilised and even improved the pound's value on several occasions, countering claims that it harms the currency.