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The government announced last night it was lowering the exchange rate so the pound is now worth $2.40, down from $2.80, a cut of just over 14%.
The decision came after weeks of increasingly feverish speculation and a day in which the Bank of England spent £200m trying to shore up the pound from its gold and dollar reserves.
In a radio and television broadcast this evening, the Prime Minister said devaluation would enable Britain to " break out from the straitjacket" of boom and bust economics.
The only alternative, he said, was to borrow heavily from governments abroad - but the only loans on offer were short-term ones.
The government inherited an £800m deficit from the Conservatives when it was elected three years ago.
Mr Wilson said Labour had managed to reduce the deficit, but the cost of hostilities in the Middle East, the closure of the Suez Canal and the disruption to exports through the dock strikes had contributed to the strain on sterling.
He said: "Our decision to devalue attacks our problem at the root and that is why the international monetary community have rallied round.
"From now the pound abroad is worth 14% or so less in terms of other currencies. It does not mean, of course, that the pound here in Britain, in your pocket or purse or in your bank, has been devalued.
"What it does mean is that we shall now be able to sell more goods abroad on a competitive basis."
The government hopes a boost for British exports in turn will lead to increased production and more jobs at home.
The bank lending rate has been raised to 8% and there will be cuts of £100m in defence spending and in some capital expenditure programmes.
Although there are likely to be increases in the cost of some goods imported from abroad, such as certain foods, the government hopes this will not feed into excessive wage demands.
Conservative leader Edward Heath has also appeared on television to reply to Mr Wilson's broadcast.
He accused the Labour Government of failing in one of its foremost duties - to safeguard the value of the country's money.
He said: "Having denied 20 times in 37 months that they would ever devalue the pound, they have devalued against all their own arguments."
Harold Wilson became the butt of cartoonists, comics and impressionists with his assertion that the "pound in your pocket" would not change value.
His decision was fiercely criticised during debates on devaluation in the Commons and Lords. Letters released under the 30-year rule reveal he also faced opposition from his deputy, George Brown.
Chancellor James Callaghan had consistently opposed devaluation. He stayed in the job long enough to participate in the debate on devaluation and then resigned on what he said was "a point of honour".
Mr Callaghan went on to become Home Secretary and later leader of the party and prime minister in 1976-79 during which time he presided over another economic crisis and the Winter of Discontent.
He was replaced as Chancellor by Roy Jenkins who introduced a series of unpopular indirect taxes in the 1968 budget and a bill restricting wage rises to 3.5% proved equally unpopular.
The economy was beginning to pick up by 1970 and Labour's fortunes in the polls were reviving, prompting Mr Wilson to call an election - but it was Conservative Edward Heath who won.
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