Britain and the Sterling Area: From Devaluation to Convertibility in the 1950s

BRITAIN AND THE STERLING AREA

Whilst there has been much work on the British economy in the post-war period, most of this has focused on the domestic economy. In the absence of detailed research, myths have flourished about the external economic situation. The chief of these is that Britain, deluded by past grandeur, arrogantly attempted to retain an international role to which it was no longer suited or equipped. For many this is illustrated by the persistence of the sterling area, a group of countries which because of their strong colonial, cultural and trading ties with the UK stabilised their exchange rates with sterling and held a large part of their foreign reserves in sterling. It has become accepted that this had a detrimental effect on sterling liabilities, international trade, long-term capital flows and Britain’s exchange rate policy. This book challenges each of those assumptions and finds that in every instance the negative impact was less than has been implied. It begins by showing that sterling balances were less volatile than has been thought and thus less a threat to the central reserves in London. A closer examination of the volume and direction of British overseas investment and the returns on this capital overseas undermines the assumption that this investment drained the lifeblood away from domestic industry. It has also been argued that the sterling area shielded British industry from the full impact of international competition and contributed to its loss of competitiveness. In fact, Britain was both unable and unwilling to form a discriminatory bloc with the sterling area in the 1950s, and the overseas sterling area became more competitive for UK exports as the enthusiasm for continued discrimination weakened after 1952. To complement current work on the British domestic economy in the post-war period it is necessary to examine external economic policy. Whilst considerable work has been done on Britain’s relations with Europe and with America, the complexities of the sterling area have remained obscure. The present volume makes a significant contribution to unravelling the strands of British external economic policy in the post-war period. Catherine R.Schenk was awarded her BA and MA at the University of Toronto, and her Ph.D. at the London School of Economics. After two years at Victoria University of Wellington, New Zealand, she now works on international economic history at Royal Holloway College (University of London).

ii

Books published under the joint imprint of LSE/Routledge are works of high academic merit approved by the Publications Committee of the London School of Economics and Political Science. These publications are drawn from the wide range of academic studies in the social sciences for which the LSE has an international reputation.

BRITAIN AND THE STERLING AREA From devaluation to convertibility in the 1950s

Catherine R.Schenk

London and New York

First published 1994 by Routledge 11 New Fetter Lane, London EC4P 4EE This edition published in the Taylor & Francis e-Library, 2005. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 © 1994Catherine R.Schenk All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any storage or information retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Schenk, Catherine R. (Catherine Ruth), 1964– Britain and the sterling area: from devaluation to convertibility in the 1950s/Catherine R.Schenk. p. cm. Includes bibliographical references and index. ISBN 0-415-09772-X 1. Monetary policy—Great Britain. 2. Sterling area. 3. Foreign exchange rates—Great Britain. 4. Great Britain— Economic conditions –1945–Foreign exchange rates—Great Britain –1945– . 5. Great Britain—Foreign economic relations. I. Title. HG939.5.S34 1994 332.4′941–dc20 93–41630 CIP 0-203-98240-1 Master e-book ISBN

ISBN 0-415-09772-X (Print Edition)

CONTENTS

1

2

3

List of illustrations

vii

Acknowledgements

ix

List of abbreviations

x

INTRODUCTION

1

The debate on the sterling area

3

The evolution of the post-war sterling area

7

The sterling area and the international economy

11

Outline of the book

15

THE STERLING BALANCES

17

Identifying the sterling balances

20

The mechanics of the sterling balances system

27

The sterling balances and confidence

33

The sterling balances and development

35

The sterling balances and domestic monetary policy

42

Conclusion

48

Appendix

48

INTERNATIONAL TRADE

53

The pattern of sterling area trade

54

The system of controls

57

Quantitative restrictions 1949–50

61

The Korean War boom 1950–1

64

Return to restrictions, 1952

69

The sterling area and UK export competitiveness

77

vi

4

5

6

Conclusion

85

INVESTMENT IN THE STERLING AREA

87

Capital flows and British policy

87

The volume of long-term capital flows

92

Investment and growth

96

Impact on the balance of payments

100

Capital flows as a cohesive factor

108

Conclusion

111

THE STERLING AREA AND STERLING POLICY

113

The ROBOT Plan and flexible exchange rates

114

The collective approach to convertibility

119

The administrative approach to convertibility

124

Conclusion

128

CONCLUSIONS

129

Notes

137

Bibliography

155

Index

165

ILLUSTRATIONS

FIGURES 2.1 2.2 2.3 2.4 2.5 3.1 3.2 3.3 3.4 3.5 3.6 4.1

Ratio of reserves to sterling balances, 1949/50–8 Sterling balances by holder, 1949/50–8 Sterling area sterling balances by holder, 1949/50–8 Colonial sterling balances by type of fund, 1949–57 Interest rates and yields, 1950–8 UK trade by region as a percentage of total UK trade, 1950–8 Imports from sterling area as a percentage of world imports Exports to sterling area as a percentage of world exports Imports from UK as a percentage of sterling area imports Exports to UK as a percentage of sterling area exports Comparison of value of imports by area, 1950–8 Returns to UK registered companies, 1950–7

17 21 21 21 46 55 55 55 56 56 78 105

TABLES 1.1 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 3.1 3.2 3.3 3.4 3.5 3.6

The sterling account system, April 1952 Sterling balances of the sterling area, 1945–50 The sterling balances and the balance of payments of the overseas sterling area, 1950–7 Volatility of quarterly dollar balances of the UK and the RSA, 1950– 8 Sterling as a percentage of ISA reserves, 1950–8 Gold and dollar reserves of sterling area countries, 1950–8 Selected dollar securities held by the EEA Length of maturity of sterling area sterling balances, 1954–6 Breakdown of sterling balances by type of asset The balance of trade of the UK and RSA, 1950–8 Colonial dollar allocations and actual expenditure, 1948–54 Sterling area imports from the USA and Canada, 1948/50 Comparison of half-yearly trade with the USA, 1948–52 Targets for the second half of 1952 Shares of the sterling area market for manufactures, 1953/59

9 19 28 29 30 30 34 43 43 58 61 63 67 73 80

viii

4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 5.1

UK gross external investment, 1946–57 Partner data on net flow of UK investment to selected sterling area countries, 1950–8 Official estimates of net long-term capital flows from the UK to the rest of the sterling area, 1950–8 Long-term net capital flows overseas as a percentage of GDP, 1950– 8 Overseas investment as a percentage of domestic saving, 1950–7 Incremental capital/output ratios at constant prices, 1949–59 Analysis of growth rate of GDP in case of all sterling area investment devoted to domestic investment, 1950–8 Effects of an increase in net operating assets of £100, 1956–64 Effect of a cut of £100 in direct foreign investment Profitability of UK stake in direct investment in sterling area countries Total income payable on UK investment in Australia, 1950–8 Investment income payable on UK private investment in India, 1952–8 UK invisible account: interest, profits, dividends, 1950–7 Changes in sterling balance holdings and net flow in UK investment, 1950–8 Sterling balance holdings and official London borrowing, 1950–5 Alternative sterling balances proposal

94 95 96 97 97 98 99 101 102 103 104 104 106 106 107 117

ACKNOWLEDGEMENTS

This book is the result of research toward a Ph.D. at the London School of Economics, which was funded in part by an Overseas Research Studentship from the Committee of Vice-Chancellors and Principals of United Kingdom Universities. I would especially like to thank Professor Alan Milward for his guidance and advice which contributed substantially to the completion of this research. Duncan Ross generously read the complete manuscript in its many stages and has made the finished version much more lucid than would otherwise have been the case. He also listened patiently for the past five years as I droned on about the sterling area. I would also like to thank L.S.Pressnell for casually suggesting to me during my hectic first week in London that the sterling area might be a good topic for research, and for his comments on earlier drafts. I am grateful for the assistance of archivists at the Bank of England, the Public Records Office, the Australian National Archives and the US National Archives and Records Administration. A grant from the British Academy allowed me to travel to Washington to consult the archives there in Summer 1993. My parents have consistently supported me in all my endeavours, including this one. Without their generosity and the ambition they inspired, this book would not have been written. I dedicate it to them.

ABBREVIATIONS

CDFC CIC EEA EIU EPU GATT GDP IBRD IMF ISA OEEC OSA RSA

Commonwealth Development and Finance Company Capital Issues Committee Exchange Equalisation Account Economist Intelligence Unit European Payments Union General Agreement on Tariffs and Trade gross domestic product International Bank for Reconstruction and Development (World Bank) International Monetary Fund independent sterling area Organisation for European Economic Cooperation overseas sterling area (=RSA) rest of the sterling area (=OSA)

1 INTRODUCTION

The 1950s was a testing period for British economic policy. The decade was marked at its beginning by the dramatic 30 per cent devaluation of sterling in September 1949 and at its end by the adoption of official external convertibility of sterling in 1958. In the intervening years the UK battled with the dollar shortage and worried about the liquidity of the external position while making the level of foreign exchange reserves a policy target. In the international context, this period was witness to the acceleration of the process of European integration and to the dismantling of the British Empire. Although fiscal policy was the primary instrument on the domestic front, monetary policy was redeployed as a form of witchcraft to combat incipient inflation. The decade has become characterised by ‘Butskellism’ and the infamous ‘stop-go’ policy cycle which, it was later believed, rocked business confidence and inhibited economic growth. In the midst of this uncertain decade, the sterling area had its brief period of prominence in British policy, giving the UK an international economic presence and generating several myths about the role of Britain in the post-war international economy and the impact this has had on Britain’s economic performance. The period was also the beginning of twenty years of sustained economic growth in the industrialised countries of the West. Although Britain experienced historically high rates of growth, its performance relative to other Western European countries was disappointing. 1 The failure of Britain to match the growth rates of these competitors has generated a voluminous literature which tries to identify the factors in this relative economic decline. While aspects of Britain’s domestic economy since 1945 have generated considerable interest in recent years the external economic situation has attracted fewer scholars, although it has been the subject of considerable speculation and surmise. A popular myth has developed which portrays the UK as arrogantly persisting with delusions of a past grandeur which led it to attempt to retain an international role to which it was no longer suited or equipped. Indeed, the hangover from its intoxicating position in the international economy in the late nineteenth century often appears to have sapped the British economy of scarce resources well through the second half of the next century. Britain’s leaders could not see what most subsequent commentators point to as obvious in

2 BRITAIN AND THE STERLING AREA

hindsight. Within this scenario, the sterling area perhaps best illustrates the insistence on clinging to the remnants of economic leadership which so frustrates current scholars. This tradition closely follows the literature on the nineteenth century which has focused on the rise and demise of Empire and the burdens this placed on the British economy, especially through British trade and capital exports.2 These same issues have arisen in the context of the relative economic decline of Britain in the twentieth century. To a large extent, British external economic policy in the 1950s was determined by the evolution of Britain’s premier role in the international economy a century earlier. Thus, the importance of London as an international financial centre and many of the traditional economic ties with overseas countries were products of Britain’s earlier status. Without this history, the position of the UK in the 1950s would have been very different. Nevertheless, the apparent problems of this period were in most respects the product of the turbulent economic climate after the Second World War. After the chaos of the 1930s, economic ideology shifted to advocate more orderly and deliberately managed international economic relations based on open and formalised cooperation and regular consultation. This was reflected in the institutions created at Bretton Woods in 1944 which were designed to manage the international economy. The sterling area system was definitely a creature of this post-war ideology. The sterling area embodied many of the Bretton Woods ideals of multilateral payments and freer trade which it was hoped would generate international specialisation and thus growth. Contrary to the Bretton Woods ideology, however, this was a regional rather than a global system which involved discrimination against the USA in particular. In the context of the dollar shortage, the sterling area ranked as a defensive regional trade and payments system along with the European Payments Union (EPU) established in 1950. Indeed, the splicing together of the sterling area with the mechanics of the system through the UK meant that the EPU ‘multilateralised’ over half of the world’s trade. The 1950s was a unique period of adjustment and realignment of the international monetary system. Despite the Bretton Woods agreements which had been designed to create international economic stability, an increasing imbalance emerged between the recovering continental Europe and the deteriorating balance of payments of the USA. This trend was ultimately to bring an end to the Bretton Woods plans for the configuration of the international economy. In the context of this global imbalance, the role of the UK in the international economy was also undergoing a fundamental change from its pre-war and wartime position as the most important economic ally of the USA and as a pivot between Europe and America, to a diminished role as the weakest of a group of middle power Western European economies. This transition was the result of relatively slow growth in output, productivity and the deteriorating competitiveness that manifested itself in recurring balance of payments crises through the 1950s.

INTRODUCTION 3

THE DEBATE ON THE STERLING AREA The role of the sterling area system is an aspect of this adjustment that provoked some research in the 1950s and 1960s but which has largely been relegated to generalisations in more recent literature. At the end of the 1950s and through the 1960s the growing awareness of the problems of international liquidity, the disadvantages of national currencies as units of international reserves, and the relative economic decline of Britain in the twentieth century provoked literature on the reform of the international monetary system and specific studies of the role of sterling as an international currency. The literature on the sterling area from this period falls into two groups. The first group engaged in a general critique of British economic policy since the Second World War in order to attribute blame for the apparent relative decline of the British economy.3 For writers in this group, sterling area policy played a significant part in explaining that decline. The second group of writers was concerned more specifically with the problem of sterling as an international currency or with analysing the sterling area itself.4 Through most of the 1970s interest in the post-war sterling area was suspended as the international monetary system found its new shape, but since 1980 scholars with the benefit of historical perspective have begun to return to the issues of the 1950s and 1960s. The sterling area system was focused around three types of relations: the sterling balances, international trade and long-term capital flows. This provides a convenient framework in which to survey existing views on the impact of the sterling area on the British economy. Perhaps the most surprising aspect is the existing unanimity of opinion as to the burdens and risks of the system for the UK and the necessity for reform.5 On the problem of the sterling balances and the stability of the sterling area system, there has been general agreement that the ratio of reserves to shortterm liabilities (as represented by the sterling balances) was inadequate and that this contributed to the weakness of sterling through potential runs on the central reserves.6 A prominent exception to this consensus was A.R.Conan who argued that the ratio of reserves to liabilities commonly used to describe British solvency was inappropriate. A better picture of Britain’s international position, he argued, would include all British overseas assets and not just the foreign exchange reserves in the Exchange Equalization Account.7 On this basis, Conan calculated that the UK had regained its international creditor status during the 1950s. The Radcliffe Committee on the Working of the Monetary System in 1957 shared this view but still concluded that ‘the relationship between reserves and liabilities was clearly far from satisfactory throughout the post war period and remains so’.8 The sterling balances in turn were related to British long-term investment in the sterling area in three ways that were not fully consistent. First, it was alleged that British overseas investment was financed through short-term lending to the UK (especially by the Colonies) in the form of sterling balances. Thus, ‘the United Kingdom was in the unhealthy position of borrowing short and lending

4 BRITAIN AND THE STERLING AREA

long’.9 This implied both exploitation of the Colonies10 and a precarious British international banking position.11 Secondly, it was asserted that the UK was forced to continue the policy of investing freely in the sterling area or risk a rundown of sterling balances to replace the British investment.12 Alternatively, it was argued that the accumulation of the sterling balances was largely due to the large long-term capital flows from Britain which offset the current deficits of the rest of the sterling area (RSA) with the UK.13 In this argument, Britain’s sterling liabilities would be lower if the UK had not pursued a policy of free capital flows to the members of the area. Underlying these arguments was a general presumption that large overseas investment in the sterling area was a burden on the British economy.l4 Among proponents of this view, Andrew Shonfield made the most searing and influential condemnation of the sterling area system. For him, the two greatest obstacles to Britain’s economic growth in the post-war period were excessive overseas military expenditure and overseas investment. On the second, Shonfield argued ‘that the British economy is robbed of necessary nourishment, that its growth is stunted, as a result of this too vigorous pursuit of overseas investment’.15 The Radcliffe Committee looked at the possibility of imposing capital controls because such investment competed with domestic investment and undermined the effort to rebuild the reserves. The Report concluded, however, that overseas investment was an essential part of the UK’s commitment to Commonwealth development and that such investment generated demand for British exports and expanded supplies of primary products so ‘there would certainly be no automatic gain to the reserves equal to the fall in overseas investment’.16 The Radcliffe Committee concluded, therefore, that although there have been occasions when the functioning of the sterling area has thrown an added strain on the reserves and when the capital requirements of the area have added to the total load on the reserves of the United Kingdom, we are satisfied that it is in the interest of this country to maintain existing arrangements.17 On the trade relations of the sterling area, it was generally agreed that discrimination was to the advantage of the UK rather than the RSA since the RSA was forced to restrict its manufactured imports from cheaper markets.18 The UK, in contrast, had free access to the sterling area raw materials and benefited from exporting manufactures to the RSA. Susan Strange and Dennis Robertson argued that the discriminatory exchange controls had ‘feather-bedded’ British exporters in soft RSA markets rather than forcing them to face the competition in the faster growing markets of Europe and North America.19 Conversely, others noted that the strength of the trade relationships of the sterling area weakened through the 1950s as the RSA became less reliant on the British market for their exports.20 The complementarity of trade relations had also declined as RSA trade

INTRODUCTION 5

surpluses with the non-sterling area (NSA) could no longer be relied on to balance UK deficits with the NSA.21 Another important theme, especially in more recent literature, has been that the sterling area was a prime example of the domination of financial over industrial interests. Britain was prohibited from allowing a devaluation of sterling to improve the British balance of payments because this would damage relations with the RSA who held their reserves in sterling.22 As a result of the restrictive policies necessary to protect the value of the pound, it is argued that domestic industrial growth was inhibited, with serious longterm consequences for the British economy. As early as 1954, A.C.L.Day warned that the financial benefits to the City that the system generated should not be exaggerated since ‘Britain’s wealth depends primarily on the competitive strength of her manufacturing industry, and only secondarily on the profits of international banking and merchanting’.23 Thus, he argued that the interests of domestic industry should not be sacrificed to the international status of the pound and the operation of the sterling area. Shonfield also argued that the real rationale for continuing the sterling area system was the ambition to strengthen the pound as an international currency.24 He asserted that these ambitions were founded on reasons of prestige rather than economic benefit because he calculated that the net earnings of the City that were related to sterling’s international status amounted only to £40m p.a.25 For these reasons, it was argued, British support of the sterling area system was economically misguided. In her influential book on sterling management in the 1960s, Susan Strange also made the argument that a quest for prestige was the motive for Britain’s adherence to the sterling area system. Her thesis was that the problems of the British balance of payments in the 1960s were due to the unsteady transition of sterling from a primary transactions and reserve currency to a less prominent role. Thus, her book stressed the political aspects of currency management. In this story, the sterling area represented the economic vestiges of Empire and ‘the retreat from Empire has been, in monetary as in military policy, a slow and grudging one’.26 The existence of the sterling area disguised the fact that sterling’s reserve role was over. Strange concluded that the most damaging aspect of the sterling area was that while the monetary arrangements between sterling area countries in this post-war period may have reinforced, and thus helped to prolong British influence outside Europe, they also served to lull the British themselves into a false sense of immunity from the ultimately inescapable winds of change.27 Thus, the literature of this earlier generation of writers, which extended over twenty years, ranged from a catalogue of ways in which the sterling area threatened the British economy to arguments that the very fact that these threats

6 BRITAIN AND THE STERLING AREA

were not realized in the 1950s undermined the British economy in the longerterm. The idea that the interests of industry were sacrificed to the financial houses in London who benefited from the international use of sterling has insinuated its way firmly into the recent history of economic decline in Britain.28 Relying heavily on earlier writers, proponents of this view contend that low levels of domestic investment inhibited the growth of the UK economy. Stephen Blank, drawing on quotations from Shonfield and Strange as evidence, argued with respect to British sterling policy that ‘the result of the government’s commitment to maintain Britain’s international position was continuing domestic economic stagnation’.29 Sam Aaronovitch argued that for the British government, the priorities were unmistakable; to ‘put the pound first’, to deal with the balance of payments by deflating the economy whenever a threat existed. In this sense, the state was occupied with a policy that directly damaged the growth of accumulation within the UK itself.30 Sidney Pollard has argued that in order not to ‘disappoint those who used the City of London as their banking centre, devaluation was ruled out repeatedly and much more harmful measures to the economy preferred instead’. Thus, he found the sterling area ‘a specific point of vulnerability for Britain’.31 Non-specialists have also incorporated these assumptions into their work, which threatens to distort their interpretation of other events. Thus Diane Kunz asserts in her book on the economics of the Suez crisis that ‘unfortunately part of the price necessary to keep the sterling area alive was the retention of a fixed and overvalued parity for the pound’ and attributes the rejection of a floating exchange rate in 1952 to sterling area opposition.32 She then goes further and characterises the British government’s ‘stop-go’ policy as a ‘sacrifice to retain the sterling area’.33 Finally, this over-extension of financial resources made Britain especially vulnerable to American political and economic pressure since ‘when a choice had to be made, British policymakers could be counted upon to make great concessions in order to save the sterling area and keep the value of sterling high’.34 She sums up her interpretation of the sterling area in the strong statement that In reality the sterling area and the consequent need to keep sterling at an overvalued exchange rate not only crippled Britain’s domestic economy but left it totally dependent on the goodwill of others.35 Not all writers have agreed. In a 1983 article Bernard Stafford surveyed the international comparative studies which imply that the ‘stop-go’ cycle in British policy in the 1950s and 1960s was not extraordinary and that greater fluctuations of output were associated with faster growth rates elsewhere in Europe. He also

INTRODUCTION 7

noted that there is little empirical evidence to prove that the ratio of investment to output is directly related to faster rates of economic growth.36 Suspicions that the sterling area has been judged too harshly have begun to slip into analyses of different aspects of the post-war period. Cain and Hopkins, in their thematic account of the forces behind the end of the British Empire, emphasised the benefits that the sterling area offered for British reconstruction.37 Scott Newton has found Britain’s preference for sterling area relations over European connections in the late 1940s to be an economically rational decision.38 Alan Milward, in his account of European integration, has asserted that the sterling balances ‘were less volatile than ministers feared and could even in another light have been regarded as assets’.39 Nevertheless, the general spirit that prevails in the literature on Britain’s post-war decline is that the sterling area was a burden on British economic performance. It is clearly beyond the scope of this book to explain the relative decline of the British economy in the twentieth century. The purpose of this survey has been to show that over the past thirty years there has been a broadly based consensus that the external position of the British economy has inhibited domestic growth and external economic policy. The sterling area system fits into this scenario in that it was the mechanism through which large investment flows were sent abroad, large short-term liabilities were accumulated and trade discrimination was pursued. Sterling area management was not, however, synonymous with the pursuit of re-establishing sterling as an international currency. Indeed, it has been argued that since the sterling area weakened sterling, it made necessary a regional rather than a global role for sterling.40 Nevertheless, the sterling area is most commonly judged to have been a net burden on the British economy despite the lack of intensive research on the complex of sterling area relationships. THE EVOLUTION OF THE POST-WAR STERLING AREA The evolution of the sterling area reflected Britain’s changing role in the international economy. Due to Britain’s pre-eminence in trade, shipping and finance in the nineteenth century, sterling was widely accepted as the primary currency both for denominating international transactions and for national reserves. As a result, the nineteenth-century gold standard was, in effect, a sterling exchange standard. After the First World War, Britain’s pre-eminence as an economic power faltered and sterling’s role in the international economy shrank as a result. By 1928, Britain’s sterling liabilities to foreign governments and traders amounted to four times the level of reserves.41 In the sterling crisis of 1930–1 the conversion of these balances virtually exhausted British reserves and contributed to the forced abandonment of the gold standard in September 1931. The group of countries which continued to peg their exchange rates to the now floating pound became known as the Sterling Bloc. This regional group included the Dominions

8 BRITAIN AND THE STERLING AREA

(except Canada), the Colonies, Egypt, Iraq and British protectorates in the Middle East as well as Portugal, Thailand, Denmark, Scandinavia and Latvia.42 Unlike the post-war sterling area, the Sterling Bloc was not formalised by a common exchange control system or by the pooling of reserves, and all sterling assets were fully convertible to other currencies and gold. The members did not share a common trade policy nor coordinate monetary and fiscal policies, nor meet to discuss their common interests. The Empire members and Canada shared a discriminatory trade system but the Treasury repeatedly rejected proposals to share policy determination with the Empire countries43 and indeed failed to keep them informed of British policy which would affect the sterling exchange rate. In common with the post-war sterling area, however, the stability of exchange rates among members was financed by plentiful credit from London. With the onset of the Second World War, international monetary and trade relations were suspended and some of the Sterling Bloc countries broke their fixed exchange rate with sterling. As part of the war effort, all British payments to non-residents in foreign exchange or gold were subject to approval by the Treasury, although on 3 September 1939 this restriction was amended to specifically exclude all countries which agreed to keep their currency reserves in London and to enforce exchange control in common with the UK. This formalised the sterling area into a legally defined group of ‘Scheduled Territories’ eventually listed in the Exchange Control Act of 1947. The Scheduled Territories included the Commonwealth (except Canada), the Colonies, Burma, Iceland, Ireland, Iraq (from 1952), Jordan, Libya and the Persian Gulf Territories.44 The post-war sterling area system was defined by three characteristics. Members pegged their exchange rates to sterling, maintained a common exchange control against the rest of the world while enjoying free current and capital transactions with the UK and, thirdly, maintained national reserves in sterling which required pooling foreign exchange earnings. For the most part the members also shared a historical political and/or economic allegiance to Britain, although this was not a defining requirement of membership. The sterling area exchange controls were fairly complex. Their main purpose was to restrict convertibility of sterling into dollars in the context of the post-war dollar shortage and generally to conserve foreign exchange. Payments by residents of the sterling area to non-residents were subject to the discretion of the monetary authority of each member, or delegated to ‘authorised dealers’ which were generally large commercial banks ultimately responsible to the central monetary authority. The exchange controls applied to non-residents varied considerably, giving rise to the allegation that there were fifty-seven varieties of sterling,45 but by 1950 the world was essentially divided into four areas as shown in Table 1.1. Transfers of sterling within each area were generally allowed without specific permission. The exception to this was the bilateral group. Sterling payments to accounts in these countries were allowed automatically only between sterling

INTRODUCTION 9

Table 1.1 The sterling account system, April 1952

area residents and the specific bilateral country. Transfers among bilateral countries were allowed only by ‘administrative transferability’ which required the express permission of the Bank of England. Generally, these countries ran balance of payments surpluses with the sterling area and were unwilling to accumulate sterling beyond a certain level, so their sterling transactions were most closely controlled. With the development of the EPU in 1950, administrative transferability for bilateral OEEC countries became virtually automatic. A second group of countries were designated as members of the Transferable Account Area. Payments of sterling from one transferable sterling account to another were allowed freely, as were payments between transferable accounts and sterling area accounts. Transfers were not permitted from transferable accounts to bilateral or American accounts. The American account countries were members of the dollar area who were free to exchange their sterling earnings for dollars and vice versa or to use sterling in payment to transferable accounts or to the sterling area. This division of the uses of sterling into various special accounts with varying degrees of restriction was designed to inhibit the convertibility of sterling into dollars while maximising the usefulness of sterling in international transactions. The effect of the restrictions was that no sterling was freely convertible to dollars

10 BRITAIN AND THE STERLING AREA

except that earned by American account countries. Residents of the sterling area could obtain foreign exchange only with the permission of their monetary authorities. Capital account transactions were similarly restricted. British direct investment outside the sterling area was subject to Capital Issues Committee control but generally prohibited. Permission was granted only where the investment promised to generate foreign exchange earnings, exploit technology or generally help the sterling area balance of payments. Investment by third countries in the sterling area was also restricted since the repatriation of capital was limited to the amount of the initial investment. The sterling area, however, had privileged access to the London capital market and there were no restrictions on capital flows from the UK to the rest of the sterling area. The proceeds of non-resident sales of sterling securities were only allowed to be reinvested in other quoted sterling securities. In practice there developed a market in ‘security sterling’ to allow non-residents to repatriate the proceeds of their investments. The proceeds of a sale of a sterling security could thus be exchanged for dollars in New York at a discount on the official exchange rate, and prospective buyers of sterling securities would use the market to acquire sterling cheaply for their purchase of securities. Residents of the sterling area were allowed to sell non-sterling securities freely to each other but purchase of non-sterling securities from non-residents for sterling was prohibited in order to prevent conversion of resident sterling through security trading. This last provision led to the development of the largest leaks in the sterling area exchange control system. Due to Hong Kong’s entrepôt trade and Kuwait’s oil production, these two members of the sterling area operated free markets in sterling against dollars which were tolerated by the British authorities. As they were still members of the sterling area, UK residents could purchase dollar securities freely from Hong Kong and Kuwait residents. The Hong Kong or Kuwait trader could then exchange this sterling for dollars on the free market to purchase more dollar securities. Thus, resident sterling was exchanged for non-resident securities. The so-called Hong Kong and Kuwait Gaps were finally closed in July 1957 when British purchases of non-sterling securities from overseas residents of the sterling area were prohibited. In general, however, the ring of exchange control was fairly consistent and remained a defining characteristic of sterling area membership until the 1970s. The third defining characteristic of the sterling area was the pooling of foreign exchange reserves. As part of the exchange control system, private residents were required to surrender foreign exchange earned from their transactions with the non-sterling area in return for balances in their national currency. These foreign exchange earnings were then used to settle RSA deficits with the UK.46 Any excess was sold by the members’ monetary authorities to the Bank of England in return for sterling assets in the form of Treasury Bills or British government securities. The monetary authorities of the RSA could then draw

INTRODUCTION 11

from the central reserves at any time by selling their sterling assets in London for foreign exchange. The purpose of the ‘dollar pool’, as it was known, was to conserve the amount of foreign exchange needed to support the sterling area. This was based on the principle that the pooled foreign exchange assets of the area as a whole would be less than if each member had to keep a cushion of reserves of its own. Thus, the ‘idle’ surpluses of members were available to cover the deficits of others. The main purpose of reserve pooling and the sterling area system as a whole was to coordinate the claims on the reserves in the interests of all members and so allow a smaller volume of foreign exchange to insure against fluctuations of the system vis-à-vis the rest of the world. As long as it was in the interest of each member to remain part of the dollar pool, the system was secure. Related to the dollar pooling aspect of the post-war sterling area was the problem of the sterling balances. At the end of the war, these liabilities amounted to five times the level of British foreign exchange reserves so they could obviously not be liquidated immediately. By the first quarter of 1950, the level of sterling area sterling balances was £2,541m or slightly more than the 1945 level. The central reserves, meanwhile, amounted to only £900m. This excess of short-term liabilities to the sterling area over the central reserves became a major focus for critics of the sterling area. These then were the characteristics of the sterling area in the 1950s. It was a fixed exchange rate system, bound by common exchange controls against the rest of the world while the members enjoyed relatively free current and capital flows within the area. The pooling of foreign exchange reserves generated sterling balances and the need for periodic discriminatory trade controls to protect the central reserves. Britain was the centre of the system and managed it by supplying long-term capital investment, accepting unlimited short-term sterling liabilities and purchasing sterling area exports without restriction. As this book is not intended to be a chronological history of the sterling area, nor a full account of economic diplomacy in the 1950s, it is useful to introduce the general trends in sterling area policy in the 1950s and the international context in which the policy operated. THE STERLING AREA AND THE INTERNATIONALECONOMY External economic policy in the years immediately after the end of the war was preoccupied with winning recovery assistance from the USA.47 The focus of sterling area policy was the settlement of the sterling balances, which was a condition of the 1946 Anglo-American Financial Agreement. For the United States administration, the existence of large UK liabilities threatened the prospect for movement toward freer trade and payments since they inhibited Britain’s ability to make sterling convertible. In 1950 the Board of Governors of the Federal Reserve Board System identified that

12 BRITAIN AND THE STERLING AREA

the primary interest of the United States in a settlement of the sterling balance question springs from its interest in seeing the United Kingdom and the sterling area incorporated into a system of international financial arrangements consistent with the announced goals of the United States in the field of financial and commercial policy.48 The Americans also blamed the sterling balances for supporting British export prices at higher levels than they would otherwise be and so contributing to inflation.49 From the British point of view, however, the sterling balances posed a more complicated problem. They could not be dealt with on the same basis for all holders since they had been accumulated in different ways. Repudiating the debts would be politically damaging, especially in the case of India where the process of independence was underway. The existence of the balances also ensured a market for UK exports which would aid the post-war recovery. Nevertheless, the British fulfilled the letter of the Anglo-American loan agreement by entering into negotiation with creditors in the sterling area and elsewhere during 1946–7, but only temporary agreements were reached which by mid-1947 left one-third of the balances free to be converted and only £38m cancelled. The commitment to sterling convertibility in July 1947, one year after signing the American loan agreement, marked a turning point in post-war international economic relations. In the speculative crisis that mounted on top of Britain’s weak balance of payments position as the date for convertibility approached, sterling balances held by sterling area and non-sterling area countries were run down. The suspension of convertibility after just five weeks marked the end of the American hopes of a ‘key’ currency system to replace the nascent Bretton Woods arrangements. With the weakness of the British external position thus exposed, American priorities turned increasingly toward a collective European solution for recovery and away from bilateral initiatives with the UK. What emerged was a precarious triangle of relationships between the US, UK and continental Europe which tipped in various directions through the 1950s. The Marshall Plan, announced in 1947 to provide aid for reconstruction, was designed to push Western European countries toward an American ideal of economic and political integration that would hasten the recovery of recipient countries and solidify the Continent as a bulwark against Communism. Western Europe, including the UK, initially resisted this pressure but France and Germany soon embarked on their own agenda for European economic integration which was adopted by continental Western Europe based on a recognition of the need to draw Germany back into the economic heart of Europe in order to ensure the prosperity and peace of all countries. Britain’s attitude to initiatives for European integration was hesitant. Balanced against their European interests was the desire to maintain their role as leader of the Commonwealth on the one hand and their ‘special relationship’ with the USA on the other. In the context of the dollar shortage, direct bilateral relations with

INTRODUCTION 13

America seemed to be Britain’s most promising option. After the suspension of convertibility in 1947, however, relations with the United States became strained. The balance of payments crisis which emerged through the second quarter of 1949 seemed to the American administration to require drastic domestic and external measures that the Labour Government did not appear disposed to take. It was feared on the American side that the growing gulf between the two countries would profoundly undermine their relations with the UK. In the event, American hopes for a change in policy to arrest the crisis were met. At a special meeting in Washington in September 1949 the British delegates presented the Americans with the secret information that a devaluation of sterling was planned. The State Department had also hoped that the UK would ‘undertake negotiations country by country for the purpose of funding a substantial part of the [sterling] balances and establishing firm maximum ratios at which such balances can be used for current transactions’.50 It is revealing that the Americans still did not appreciate the fact that the UK was unable to prescribe minimum foreign exchange reserves for independent countries. In the enthusiasm for the devaluation announcement, however, the Americans did not press this point to the British. Within the crisis environment of the late 1940s the sterling area system was establishing its peacetime parameters. The sterling balances of the major holders in the Asian Commonwealth were run down and replaced by colonial and antipodean reserves. The exchange controls exercised throughout the war became part of peacetime policy, although direct controls on domestic economies were gradually loosened. Quantitative restrictions rather than tariffs established themselves as the main tool for controlling international trade for both the UK and the rest of the sterling area. In the context of the post-war dollar shortage, building up and protecting the central reserves emerged as the main criterion for sterling area policy. The American attitude toward the UK and the sterling area vacillated through 1949–50. The sterling balances were of continued concern but they lost their urgency as the British balance of payments improved and other matters emerged to strain Anglo-American relations. After the brief warming of relations following the devaluation, the Labour Government became irritated by the perceived meddling of the US in British economic matters and by the continued pressure for Britain to be ‘merely’ a part of an integrated Europe. American opinion was adversely affected by British reluctance to engage themselves more positively in European initiatives, as well as by the apparent mismanagement of the British economy which kept Britain on the brink of crisis. The fundamental difference was that for the US, the priority lay with freeing trade and payments as soon as possible while for the UK internal stablility and full employment were more important policy goals. In May 1950, the US and UK drafted an agreed statement on Britain’s relationship to Western Europe in an attempt to eliminate the misunderstandings

14 BRITAIN AND THE STERLING AREA

which were affecting Anglo-American relations.51 The statement noted that Britain had special responsibilities ‘to the Commonwealth and other areas as well as to the continent’ which might restrict Britain’s ability to move too far down the road of integration. These global commitments, however, were deemed consistent with both American and British objectives of peace and freer trade and payments. The statement went on to assert that the question of the point at which action taken by the UK with respect to Europe prejudices other common objectives cannot be answered in advance. It can only be answered on a case-by-case basis as specific questions arise. Because no firm line can be drawn in advance, the problem will be a continuing source of irritation, but it is an inevitable one. From Britain’s point of view, the special relationship with America represented a balance to European pressures and an implicit recognition of Britain’s global interests, both politically through the Commonwealth and economically through the sterling area. While the dollar shortage persisted and dollar reserves were a constraint on policy it is not surprising that Britain’s economic and financial hopes lay with the US and the sterling area rather more than with Europe at this time.52 On the American side, enthusiasm for the ‘special relationship’ was not unanimous. John Snyder, Secretary of the US Treasury, was especially unwilling to have regular economic discussions with Britain which he felt ‘would be embarrassing in our relations with other countries’. George Willis of the US Treasury added ‘that he [Willis] always shuddered at any special arrangement of talks, feeling that it always worked greatly to the advantage of the British’.53 Until 1953, the Americans remained suspicious of the depth of commitment of Britain to the stated goals of convertibility and multi-lateralism pledged at Bretton Woods. The persistent failure to ‘settle’ the sterling balances as required under the 1946 Anglo-American financial agreement fuelled this distrust. Nevertheless, the Americans considered it desirable to maintain the sterling area system intact. Politically, British connections with Commonwealth countries were viewed as an important bulwark against Communism in the midst of the Cold War. Economically, the sterling area system provided capital and goods for developing countries in Australasia which it would otherwise fall to the United States to provide.54 In June 1950, the United States embarked on a military campaign against Communist agression in Korea which involved NATO and UN troops including those of Britain and the Commonwealth. The ensuing Korean War boom and bust marked a new stage of sterling area relations. Economically, the war made itself felt by the dramatic inflation of world primary product prices due to accelerated demand for remilitarisation. The impact on the sterling area balance of payments, and therefore on the sterling balances, was to change the balance of power of sterling area relations. Recently writers have marked the arrival of de

INTRODUCTION 15

facto convertibility in 1955 as the turning point for the sterling area,55 but the changes that occurred from 1950 to 1952 were arguably more fundamental. Most importantly, the geographical distribution of the sterling balances shifted dramatically from the independent wartime holders to new colonial holdings. This inevitably had implications for the liquidity and stablility of the balances as was recognised by both the UK and USA. This will be discussed in greater detail in Chapter 2. At the same time the international dollar shortage receded due to America’s import boom and Europe’s recovery. By 1952 the recovery from the Second World War was essentially complete and the economies of Western Europe embarked on the healthy growth paths which they would follow for the next two decades. In 1950 the European Payments Union was established which accelerated intra-European trade by creating a regional multilateral clearing system. That the entire sterling area was included through the membership of the UK, greatly enhanced its international importance. The third post-war balance of payments crisis for the UK and sterling area which marked the end of the Korean War boom prompted the last gasp of strictly coordinated sterling area policy. After the threat to the central reserves was fought off through import restrictions and deflationary policy, the priority of sterling area countries turned resolutely toward freer trade and payments. In 1952 they publicly announced that their primary goal was the early achievement of convertibility, and from this date the relations of the sterling area were weakened. Trade discrimination was abandoned by successive members. Capital was no longer as readily available from Britain due to the Conservative governments’ restrictive monetary policy. The sterling balances of independent members were run down to a minimum and were replaced by colonial holdings. In 1954 and 1955 technical steps were taken which established external convertibility of sterling, although this was not formally acknowledged until 1958. The Suez crisis of 1956 is often seen as a turning point for Britain’s overseas military ambitions. The economic ambitions of empire, however, were waning well before this date, a trend driven not only by the metropole but by the development aspirations of overseas members of the sterling area who wanted to buy in the cheapest market and to court capital markets in Europe and America. By the time of de jure convertibility in 1958, the sterling area no longer presented a threat to the USA’s ambitions for multilateralism or European integration; nor did it support the dreams of traditional imperialists of regaining Britain’s international economic position. OUTLINE OF THE BOOK This book is built around the three key relationships of the sterling area system. Chapter 2 examines the mechanics of movements in the sterling balances and their implications for the British economy and British policy. Chapter 3 examines the trade relationships of the sterling area and British attempts to coordinate policy. Chapter 4 analyses the long-term investment flows from Britain to the rest of the

16 BRITAIN AND THE STERLING AREA

sterling area. The final core chapter examines whether the sterling area inhibited a more flexible exchange rate policy. The concluding chapter draws the evidence together and includes a brief discussion of the sterling area as a currency area.

2 THE STERLING BALANCES

Britain’s accumulation of enormous sterling liabilities to the Commonwealth and colonies profoundly affected the post-war configuration of the sterling area system. As noted in Chapter 1, there is a general assumption embedded in existing literature on the economic and political history of the 1950s that the sterling balances were an excessive burden on the British economy during this period, due mainly to the apparently fragile ratio of external short-term ‘assets’ (reported foreign exchange reserves) to ‘liabilities’ (sterling balances).1Figure 2.1 shows the ratio of reserves to sterling balances on which this judgement is commonly made, where it is obvious that if all

Figure 2.1 Ratio of reserves to sterling balances, 1949/50–8 Source: ‘Monthly Report on External Finance’, Bank of England Archives EID/98–106.

18 BRITAIN AND THE STERLING AREA

members of the sterling area wished simultaneously to exchange their sterling assets for foreign exchange, Britain would have to refuse. Since the nineteenth century Britain had supported large overseas holdings of sterling assets due to its financial and commercial importance in the international economy. In the inter-war period, members of the Sterling Bloc continued to hold their foreign exchange reserves in sterling rather than any other currency because of their faith in its stability and because a large proportion of their external transactions was denominated in sterling. Sterling balances therefore continued to reflect Britain’s prominent position in the international economy. After 1945, however, it is argued that the sterling balances were merely an echo of this earlier period and therefore unsustainable in the realities of the post-war international economy.2 This was because these balances had not been built up as a result of a free wish by their holders to denominate their reserves in sterling, but as an extraordinary legacy of the Second World War. The persistence of the balances through the 1950s and 1960s was only achieved through persuasion and the sacrifice of some aspect of the British economy. The policy of the two decades after the war is seen as an attempt by the British to suspend the inevitable truth that they were no longer a global economic power, and the sterling area’s willingness to maintain these extraordinary balances allowed this belief to be sustained. That the holders of these balances did not merely cash in their assets for dollars or gold has been viewed as a ‘convenient coincidence’.3 In fact, the sterling balances of the 1950s were not merely a continuation of the extraordinary circumstances of the late 1940s. Instead, they more closely reflected a combination of ordinary foreign exchange reserves among the independent holders and the colonial monetary system for the rest of the sterling area. Fforde, in his detailed history of the Bank of England, recognised that ‘by 1951…the wartime accumulations seemed to be under greater control’ but he does not draw the implication that this necessarily enhanced the stability of the sterling balances.4 A closer look reveals that the fragility of the external position has been exaggerated. The sterling balances were remarkably stable throughout the 1950s (and most of the 1960s) and this was not due to convenient coincidence but rather to the deliberate functioning of the sterling area itself. In this sense, the conclusion that the balances were relatively stable is not merely an ex post observation. Furthermore, it will be shown that the way sterling balances were accumulated and run down placed the burden of improving the ratio of ‘assets’ to ‘liabilities’ on the British economy rather than on the sterling area. This conclusion has important implications for those who seek to attribute part of Britain’s relative economic weakness during the 1950s to the existence of the sterling area. The distribution of sterling balances from 1945–50 is presented in Table 2.1, which is helpful to show how the sterling balances were reformed during the late 1940s. Due to its strategic importance during the war, India accounted for most of the wartime assets accumulated by the sterling area. In an exchange of letters

THE STERLING BALANCES 19

Table 2.1 Sterling balances of the sterling area, 1945–50 (£m)

Source: Bank of England Statistical Abstract, No. 1, 1970.

between the Chancellor of the Exchequer and the Secretary of State for India in 1940, it was agreed that the UK should pay for the reorganisation of the Indian Army and the cost of British armed forces in India as well as the costs of extra Indian forces drafted especially for the war effort. These expenditures by Britain were made in the form of sterling liabilities to India which could be claimed after the war. The rate of accumulation of these liabilities accelerated after India was chosen as the arsenal and headquarters of the British Near and Middle East Command and by subsequent Indian price inflation. By the end of the war, India had accumulated £1,321m worth of sterling balances from a pre-war total of £350m. Similar wartime expenditure in other parts of the sterling area accounted for the accumulation of liabilities in these countries.5 By 1945, total short-term liabilities of the UK amounted to £3.6bn, 65 per cent of which was owed to sterling area members as defined in 1950.6 It can quickly be seen in Table 2.1 that the sterling balances problem as it emerged in the 1950s was not the same as that of the 1940s. Already by 1950, the major wartime creditors had drastically reduced their sterling assets and these had been replaced by balances of other Commonwealth countries and the colonies. Part of this reduction was due to a series of agreements concluded with India, Pakistan and Ceylon in the late 1940s, including setting aside £170m for pensions and £100m to purchase British stores and installations in India.7 During the convertibility crisis of 1947, the sterling balances of India, Ceylon and Australia were drawn down by £ 186m8 and in 1948 India suffered a severe balance of payments deficit which further reduced their sterling balances. It will be seen that the boom and bust in raw material prices caused by the Korean War from 1950–2 was to further transform the nature and geographic distribution of the sterling balances from extraordinary wartime accumulations to more stable overseas assets. Most of this chapter will be concerned with identifying the components of the sterling balances, the mechanics of their movements and their relationship to the central reserves. There was considerable contemporary debate over whether the colonies were exploited through the sterling area system and in particular by the accumulation of sterling balances. This will be assessed by looking at the British

20 BRITAIN AND THE STERLING AREA

attempts to accelerate colonial development by liquidating their balances. The failure of this policy reinforces the conclusion that the liquid part of the colonial sterling balances was relatively small and suggests that resistance to development originated partly in the conservative fiscal and monetary policies of the colonial governments themselves. One final consideration is the possible impact of the sterling balances on British interest rate policy. IDENTIFYING THE STERLING BALANCES An analysis of the sterling balances by country, or even by type of fund, would appear at first glance to be a fairly straightforward procedure. In fact, however, no published series exists of a complete breakdown either by holder or by type of fund for this period. The preference in published sources has been for regional groupings which include individual members of the RSA whose balances followed very different paths.9 The paucity of published data is in part due to the reluctance of the Bank of England and the Treasury to draw public attention to the size of the liabilities relative to reserves.10 The Bank of England, furthermore, was reluctant to reveal to the Treasury data which they received from commercial and central banks, for reasons of customer confidentiality. As part of the Monthly Report on External Finance, however, figures for most sterling area members were calculated for meetings of the Overseas Negotiations Committee. The complete quarterly series is presented in the Appendix at the end of this chapter. By disaggregating the sterling balances into their component parts, it is possible to show that they were not a homogeneous mass of liquid short-term liabilities hanging over the central reserves. The first important distinction to be made is between the three major geographical categories of holders: Colonies, independent sterling area (ISA) and non-sterling area (NSA). Figure 2.2 shows the relative sizes of sterling area and non-sterling holdings, and Figure 2.3 shows movements in colonial and independent sterling area balances. The value of colonial sterling balances more than doubled between 1950 and 1958 from £673m to £1.45bn. As a result of the Korean War boom between 1950 and 1952 they increased by £400m in these three years alone. After this rapid increase, the level grew fairly steadily until 1957.11 By the beginning of 1958, they accounted for about half of sterling area balances compared with 27 per cent at the end of 1949. This change in geographical distribution had important implications for the liquidity of the balances. In keeping with the secrecy surrounding the sterling balances, a complete breakdown of colonial assets by holder and type of fund is not available in published sources, but an estimation of the distribution by class of funds and by colony was constructed by the Treasury in 1956 for the years 1949–55.12 This can be extended to June 1957 using the Colonial Office Digest ofColonial Statistics which is flawed by the grouping together of colonies into territorial groups rather than individual members which makes analysis of the changes

THE STERLING BALANCES 21

Figure 2.2 Sterling balances by holder, 1949/50–8 Source: ‘Monthly Report on External Finance’, Bank of England Archives EID/98–106.

difficult. Using these two sources of data a general picture of the composition and distribution of the colonial balances can be determined, and Figure 2.4 shows the components of total colonial sterling balances for 1949 to June 1957. After this date the available data exclude Ghana, Malaya, Singapore and Northern Rhodesia and Nyasaland. The colonial balances were earmarked for a variety of specific purposes which restricted their liquidity. This was reinforced by the colonial monetary system and the control exerted from London on their development plans. Even after achieving independence, Malaya and Ghana retained their close allegiance to sterling and continued the conservative fiscal and monetary policies which had prevailed under British rule.13 One-third of the colonial balances arose from the requirement that local money supplies had to be backed by 100 per cent sterling reserves. In fact, most colonies kept 110 per cent reserves to allow for changes in the value of their investments, which were managed by currency boards in London or by Crown Agents for the colonies. Because of this statutory link to sterling, currency reserves grew directly with colonial money supplies and therefore with the size of colonial economies. As a result of the raw material boom of 1950–2, currency reserves grew from £236m at the end of 1949 to £363m by the end of 1952, an increase of 54 per cent in three years. Those colonies whose currency reserves

22 BRITAIN AND THE STERLING AREA

Figure 2.3 Sterling area sterling balances by holder, 1949/50–8 Source: ‘Monthly Report on External Finance’, Bank of England Archives EID/98–106.

grew fastest were, not surprisingly, those that benefited most from the Korean War boom. This included Malaya, whose tin and rubber trade generated an increase in currency reserves of £22m between 1950 and 1952, and Nigeria with an increase of £25m. Because of the statutory link to sterling, these balances did not represent a volatile claim on the central reserves. Another third of the colonial balances was government reserves which were divided into general reserves and special funds. General reserves were mainly the result of budget surpluses due to substantial government taxation of exports combined with a conservative spending policy. In Nigeria, for example, government taxation between 1948 and 1962 averaged 35 per cent of the f.o.b.14 revenue of cocoa, 48 per cent of palm oil, 42 per cent of palm kernels and 52 per cent of groundnuts.15 In turn, the government ran budget surpluses averaging almost £5m p.a. from 1950–8 or 10 per cent of government revenue.16 By 1955, Nigeria had accumulated government reserves (including special funds) amounting to a total of £107.4m or twice as much as annual government expenditure, compared with only £30.1m at the end of 1949.17 The Gold Coast and Singapore were in a similarly liquid position. Malta and Uganda had reserves three times their annual expenditure, Brunei twelve times and Hong Kong 150 per cent.18 For the colonies as a whole, government general reserves grew from £60.4m at the end of 1949 to £346.6m at the end of 1955. Part of the colonial governments’ conservative reserve policy can be attributed to potential instability in revenue due to fluctuations in raw material prices combined with undeveloped local money markets. In 1953, a Working Party of

THE STERLING BALANCES 23

Figure 2.4 Colonial sterling balances by type of fund, 1949–57 Sources: 1949–54: PRO T236/3562; 1955: PRO T236/4253; 1956-June 1957: Colonial Digestof Statistics. Note: D&C=Dominion and Colonial Securities; 1957 figures are for June 1957

Bank of England and Treasury officials endorsed the colonial policy of accumulating four to six months’ revenue in reserve each year for these reasons.19 In fact, however, the fears of a collapse in revenue were not realised and general reserves continued to increase in every year of the period. That this very conservative approach to expenditure persisted to the end of the 1950s when the colonial governments had not been obliged in any year to run down these large reserves suggests some accumulation for its own sake as well as a response to the real risk of fluctuations in the economy. A further consideration was the decline in the value of many British government securities due to market conditions in the UK. The Colonial Office estimated that an appropriate discount of colonial sterling balances from book to market value in 1956 was one-sixth.20 In 1959 Poynton of the Colonial Office remarked that ‘the hard truth is that it is the devil of a job to persuade any colony to draw down its balances—especially when they stand so much below par!’.21 As well as general reserves, the colonial governments controlled a series of special funds which were set aside for specific purposes and therefore had limited liquidity. These included statutory sinking funds for government loans, post office savings bank funds, pension funds, renewal funds and development funds. There was a considerable increase in this category of government balances, the total rising from £150m in 1949 to £264m by 1955. The largest categories were post office savings bank funds (£78m by 1955), sinking funds (£38m by 1955) and development funds (£68m by 1955). The savings bank

24 BRITAIN AND THE STERLING AREA

funds increased with export earnings and therefore with the fortunes of the market for raw materials, while the growth in sinking funds reflected the increasing volume of loans from the UK. The development funds had mostly been set up during the Korean War boom and continued to accumulate through the 1950s. The last third of the colonial balances were nominally more liquid. Funds with British banks operating in the colonies accounted for 23 per cent of colonial sterling balances in 1950 and 19 per cent by 1958. These were comprised of the reserves and working balances of these banks, held in London primarily as British Treasury Bills, and their size was determined by levels of deposits, liquidity policy and turnover. In this way they were linked to British banking practice and the fortunes of colonial trade. Marketing board assets accounted for the remaining 8 per cent of colonial balances. Raw material marketing boards were most prominent in the West African colonies of the Gold Coast and Nigeria where they accounted for about one-quarter of these colonies’ sterling balances. Cocoa marketing boards were set up in the Gold Coast and Nigeria in 1947 and Nigerian palm oil, groundnut and cotton marketing boards followed in 1949. The purpose of the boards was to stabilise producer prices given the volatile international market for these products. They fixed producer prices, prescribed grades for production, appointed buying agents and sold the product on the international market. The marketing boards absorbed most of the profits of the raw material boom of 1950– 1 and largely maintained these assets through to the end of the 1950s. The marketing boards themselves appear to have been subject to the same cautious spending policy as colonial governments. When the boards were set up, it was established that the profits of their transactions would be allocated primarily for price stabilisation but secondarily for development and research related to improving the production or distribution of their product. By 1952, all of the Nigerian marketing boards had given responsibility for managing their development projects to the Nigerian Regional Development Board22 which allocated 22.5 per cent of each year’s surplus for development projects and 7.5 per cent for research projects. The remaining 70 per cent of the profits were designated for individual product price stabilisation funds. From 1950–8 these Nigerian marketing boards contributed over £45m to local development while amassing £73.4m of general reserves. The Gold Coast Cocoa Marketing Board did not follow such a formal development programme, instead it periodically provided loans to the colonial government for particular development projects. By 1958 the Gold Coast Cocoa Marketing Board had spent over £14m directly on development and accumulated a stabilisation fund of £45m of which £33.7m was invested in British government securities. Altogether, colonial sterling balances represented an increasing proportion of total sterling area balances. About half were held in East and West Africa where marketing boards exaggerated the effects of the raw material boom on sterling

THE STERLING BALANCES 25

holdings. The Gold Coast and Nigeria alone held 30 per cent of colonial sterling assets by 1956. The share held by the Malayan area increased slightly to onequarter by 1958. The West Indies and Hong Kong held a constant proportion of about 10 per cent each. The geographical distribution of the colonial sterling balances was fairly constant and tended to reflect the concentration of the raw materials boom of the early 1950s through to the end of the period. Their liquidity, and therefore the threat they posed to the reserves, varied considerably depending on how the assets were accumulated and who controlled their spending. The currency reserves, special reserves, marketing board assets and funds with UK banks were beyond the direct control of the colonial authorities. The general reserves of the colonial governments were subject to an extremely conservative fiscal policy which was reinforced by market conditions. While the colonial balances were accumulating, the sterling assets of the independent sterling area (ISA) declined from £1.9bn in 1950 to £1.4bn in 1958. About 90 per cent of them were held as government reserves or by central banks and the rest were funds of UK banks operating overseas.23 After the mid-1950s, most countries held only minimal working balances so the image of large ‘excess’ reserves floating around the sterling area ready to be ‘cashed in’ is misleading. India was still the largest sterling asset holder in 1950, accounting for £804m or 42 per cent of ISA balances. By the end of 1956, however, Indian sterling balances had declined by a half and accounted for only 26 per cent of the ISA total. At this level they were below the amount considered by the Indian authorities to be a working minimum.24 The main determinant of the level of Indian balances in the 1950s, as with Pakistan and Ceylon, tended to be development expenditure. From 1956–8, unanticipated rising costs of development pulled sterling reserves for these three countries down £480m or to one-third of the 1955 level. Australia was the next largest sterling asset holder in 1950 with 26 per cent of ISA balances in that year. As for India, the level of sterling balances by 1956 was considered by the Australian authorities to be below the minimum desired level. The Australian Prime Minister made several public statements during 1954 and 1955 which indicated that £200m was then considered an absolute minimum sterling reserve.25 In the first quarter of 1956, the volume of Australian sterling assets had fallen to £174m. None of the ‘old dominions’ were large wartime accumulators and the level of sterling balances held by Australia and New Zealand tended to follow the vagaries of their balance of payments situations. These balances represented minimum working balances which were unlikely to be liquidated all at once. One area which was taking up the slack as the proportion of Commonwealth sterling balances declined was the oil-rich Middle East. These territories became rich through the mid-1950s, earning sterling in amounts that their development plans had difficulty absorbing. Between 1951 and 1956 Iraq’s sterling assets more than doubled from £52m to £127m. The Persian Gulf Protectorates (which

26 BRITAIN AND THE STERLING AREA

included Kuwait) increased their holdings from a mere £3m at the end of 1951 to £260m by the end of 1958, rivalling those of Australia. Together with Jordan and Libya, the Persian Gulf accounted for 20 per cent of total ISA balances by 1958. As long as British oil trade was denominated in sterling and the development ambitions of the rulers remained modest, these sterling balances would continue to mount up. The general picture of the sterling area balances is that after the Korean War boom and bust the total remained fairly constant around £4.4bn until the second half of 1957 when they declined by about £300m (although they recovered the 1955 level by 1962). Within this apparent stability there was a significant regional shift from independent to dependent territories. The big wartime creditors (India, Pakistan and Ceylon) operated at a fairly stable reduced level until 1952 and again until 1956 when their assets came close to exhaustion. The older dominions of Australia, South Africa and New Zealand were not major wartime creditors but had built up their assets by 1950 to 26 per cent of the total. Their balances fluctuated around a declining trend, never recovering from the drop associated with the slump of 1952. Colonial sterling balances offset declines elsewhere because the raw material price bust of 1952 was not reflected in a quick spending of sterling assets as was the case for independent holders. The reason for most of this accumulation was the operation of British colonial economic policy. The final category of sterling balance holders was the non-sterling area (NSA). These balances differed in both volume and character from those of the rest of the sterling area. Most NSA balances were held privately as working balances of traders. Britain exercised no control over these assets and so they were linked closely to the volume of trade in sterling and to confidence in the pound. The NSA balances declined only £97m between 1950 and 1958 although this disguises two speculative runs in 1952 (£247m) and 1955–7 (£132m).26 Looking at Figure 2.2 it is apparent that NSA balances were the most volatile, especially in the last quarters of 1953–5. The data suggest that through the early part of the 1950s, more specifically through the boom and bust of 1950–2, the sterling balances were transformed from extraordinary wartime accumulations to the natural product of the functioning of the sterling system, given the legacy of British colonial policy which persisted in encouraging conservative economic policies through the 1950s. The change in the structure and nature of the sterling balances after 1952 was recognised in the United States and was partly responsible for the loss of interest in America for pursuing a final settlement of the balances. The redistribution toward the colonies by 1952 was attributed to ‘wise management and good fortune’27 on the part of the UK and was described as making the balances ‘more manageable, and less of a threat to the gold and dollar reserves held in London’.28 In 1953 the Chief of Monetary Affars at the US State Department

THE STERLING BALANCES 27

noted that ‘I would agree…that the sterling balances are no longer the problem they were a few years back’.29 Having established what made up the sterling balances and the significance of their geographical distribution, it remains to identify the mechanics of movements in the balances and their possible effect on the British economy. THE MECHANICS OF THE STERLING BALANCESSYSTEM It should not be forgotten that the sterling balances were the foreign exchange reserves of the overseas sterling area. Members agreed to impose exchange control in common with the UK and to pool their foreign exchange reserves in London in return for sterling assets which then made up the bulk of their reserves. In return, their monetary authorities could call upon the central reserves in London to meet their foreign exchange needs by reconverting these sterling assets. The rationale of reserve pooling was to conserve the amount of foreign exchange that was required by the sterling area as a whole. Contributions to the pool by some members offset withdrawals by others and the total amount of reserves was less than if each member had to maintain its own cushion to allow for fluctuations. The system was thus designed to conserve reserves through risk sharing. Movements in sterling balances were linked to the relative balance of payments position of the overseas sterling area with Britain on the one hand and with the rest of the world on the other. Ideally, the RSA would run a deficit with the UK supported by a surplus with the rest of the world while the UK used its surplus with the RSA to offset its deficit with the rest of the world. In this event the sterling area as a whole would be in overall balance. This idyllic situation was not, however, how the system functioned in the 1950s, when the sterling area as a whole (including the UK) was often in deficit. What is important for the analysis to follow is that the UK did run a surplus on current and long-term capital account with the sterling area in every year, and the overseas sterling area ran a surplus with the rest of the world. Since the overseas sterling area was in deficit with the UK and in surplus with the rest of the world, it settled with the UK by selling to London the foreign exchange earned from the non-sterling area and by an additional reduction in sterling balances when the RSA was in overall deficit. When the RSA was in overall balance, the UK earned the foreign exchange revenue of the RSA and there was no change in the volume of sterling balances. Increases in sterling balances were the result of overall surpluses of the RSA. The deficit with the UK was paid in foreign exchange and the rest of the surplus with the non-sterling area was ‘deposited’ in London in return for sterling assets. Increases and decreases in sterling balances, therefore, did not have a symmetrical effect on the ratio of assets to liabilities. Increases in sterling balances were accompanied by equal increases in central reserves, thus

28 BRITAIN AND THE STERLING AREA

Table 2.2 The sterling balances and the balance of payments of the overseas sterling area, 1950–7 (£m)

Sources: UK Balance of Payments 1946–57, HMSO, 1959. Note: In 1950 and 1951 the figure for long-term capital includes the balancing item and miscellaneous capital.

improving the ratio of assets to liabilities. When sterling balances were run down, foreign exchange was still contributed to the central reserves and the ratio of assets to liabilities was again increased. Any widening of the gap between assets and liabilities was caused, therefore, by Britain’s own adverse balance of payments with the non-sterling area. The balance of payments of the overseas sterling area (OSA) is presented in Table 2.2 in which changes in sterling balances are equal to the sums of the RSA balances of payments with the UK and the non-sterling area after allowing for Errors and Omissions in a balancing item. In the first five years the system depended mostly on colonial foreign exchange earnings, which are reflected in large ‘other’ surpluses with the nonsterling area in Table 2.2. As the decade progressed, the sterling area surplus became more dependent on South African gold sales which were regulated by a series of agreements as part of the sterling area system.30 From 1955–7 this provided a surplus but was not enough to cover the RSA sterling deficit with the UK. The result was a net decline in sterling balances which represented sterling drawn to settle with the UK rather than a net drain on the central foreign exchange reserves. Thus, sterling area members that ran surpluses with the NSA provided the foreign exchange to meet the ‘withdrawals’ of deficit members. There was no threat to the central reserves from overseas so long as the RSA as a

THE STERLING BALANCES 29

Table 2.3 Volatility of quarterly dollar balances of the UK and RSA, 1950–8 (£m)

Source: Data from Bank of England Archives EID3/98–107, ‘Monthly Report on External Finance’, prepared for the Overseas Negotiations Committee of the Cabinet. Note: Excludes gold sales.

whole maintained a balance or surplus with the non-sterling area since this meant that the RSA was generating enough foreign exchange for its own purposes. The deficit of the UK with the non-sterling area was the most volatile element affecting the level of foreign exchange reserves of the sterling area. The volume of transactions of the UK with the dollar area was about the same as that of the RSA with the dollar area but UK dollar balances were twice as volatile. The standard deviations of quarterly balances with the dollar area are presented in Table 2.3. which shows that the balance of the UK with the dollar area fluctuated around a net drawing on the central reserves of some £30 million per quarter. Over the nine years, the net contribution of the overseas sterling area to the central reserves averaged £7.4 million per quarter. This contribution was recognised by C.F.Cobbold,31 Governor of the Bank of England, in 1956 when he noted that ‘in fact if the RSA had not earned large overall surpluses during the last few years which they have banked with the UK…the UK gold and exchange position would now be in queer street’.32 The difference about the system after 1955 was that, unlike the colonies, South Africa had virtually no sterling balances. By selling gold, South Africa was just meeting its balance of payments needs rather than accumulating ‘deposits’ for use by others and itself in the future. In this sense the central reserves were more precariously dependent on UK surpluses with South Africa than when the colonies had supported it. By 1957 the colonies were beginning to make net withdrawals and the system needed new depositors. As noted above, however, the colonial sterling balances were less liquid than those of the ISA had been in the early 1950s. Since they were tied to conservative colonial government policy and statutory currency reserves the rate of withdrawal was much slower. As a result, this change in the structure of the sterling balances system did not make itself felt until the 1960s. The continuation of the sterling balances system also depended on members pooling their foreign exchange earnings. In the 1950s, the willingness of countries to do this became more tenuous. Table 2.4 shows the declining proportion of independent sterling area reserves held in sterling. It is clear that Australia took advantage of the Korean War boom to diversify part of its reserves so that most of the decline in sterling’s share had already taken place by 1952. South Africa gradually eliminated sterling from its reserves

30 BRITAIN AND THE STERLING AREA

Table 2.4 Sterling as a percentage of ISA reserves, 1950–8

Source: International Financial Statistics, IMF for gold and dollar reserves; ‘Monthly Report on External Finance’, Bank of England Archives EID3/97–104, for sterling reserves. Table 2.5 Gold and dollar reserves of sterling area countries, 1950–8 ($USm)

Source: International Financial Statistics, IMF, 1960.

but it had never been a large holder. The decline is most dramatic for India, Pakistan and Ceylon, especially toward the end of the period. Table 2.5 puts this apparent decline into better perspective. Between 1950 and 1958 the ISA as a whole accumulated only £54m worth of independent dollar reserves and £ 115m of gold. Altogether this accumulation of independent reserves amounted to only 10 per cent of their cumulative surplus with the NSA and therefore of their contribution to the central reserves. A more significant shift was the decline in sterling balances while gold and dollar balances remained constant or increased slightly. This was the case, for example, for India whose gold reserves of £247m were a statutory part of currency reserves while most of the $US were balances of the Indian Supply Mission in Washington. The level of Indian sterling reserves, was fairly constant at just under £700m until the second quarter of 1956 when increased spending on the

THE STERLING BALANCES 31

second five-year plan began. The reduction in total reserves accounts for the increase in the proportion held as gold and dollars in Table 2.4. The RSA’s large deficits with the UK in the years 1951–2 and 1955–7 were evidently borne by a reduction in sterling balances while dollar balances remained constant or increased slightly. The UK was therefore not earning as much foreign exchange from the sterling area as it might have if all dollar assets were pooled, although the RSA was still making a net contribution to the central reserves. Australia and Ceylon were the only countries to increase their independent reserves significantly. In June 1953 Flett, now Financial Counsellor at the British Embassy in Washington, reported a conversation with Leslie Bury, the Australian alternate representative to the IBRD and IMF. In this talk Mr. Bury, ‘off the record’ said quite frankly that at the time they had started to build up this [dollar] account in New York they were influenced by a desire to show the Americans that while the sterling area as a whole seemed to be on the verge of bankruptcy, Australia at least had some dollars to her own name. This he thought had influenced the IMF in agreeing to a further Australian drawing and might improve their chance of refinancing their New York loans. Mr. Bury added that it was too much for us to expect that every sterling area country would rigorously observe the rules of the club in their entirety.33 The Australians accumulated considerable dollar liabilities in the early 1950s and were accumulating dollar assets to meet these future obligations.34 The Australians may have been mistaken in their assumptions about the impact of sterling area membership on their creditworthiness. The US National Advisory Council on International Monetary and Financial Problems decided American policy on applications for loans from the IBRD. In October 1951 the NAC compiled a manual of ‘Factors Affecting the Debt Servicing Capacity of Foreign Countries’ which noted that although the long-term dollar position of Australia may not appear to be too bright, it is possible to look primarily at the over-all position of the country rather than its dollar position because Australia is a member of the sterling area. The UK is likely to be consulted in advance on any Australian dollar loans and would probably give informal assurance that Australian sterling could be converted to service any dollar debts incurred.35 In July 1952, when asked to review an Australian application for a loan of $50m, the NAC agreed that ‘the probable availability of dollars from the dollar pool…is an important factor’ in determining Australia’s ability to repay the loan.36 In

32 BRITAIN AND THE STERLING AREA

these instances Australia’s creditworthiness was improved through its association with the sterling area. After 1951, Australia stopped selling its gold production exclusively to the central reserves and instead used the proceeds to meet their maturing dollar obligations. Between July 1955 and December 1957 £8.9m of Australian gold was sold on the London market against dollars and less than £0.1m against sterling.37 Nevertheless, Australia periodically responded to general sterling area requirements. In 1952 Australia sold $20m of gold to the Bank of England, explicitly ‘as a further contribution towards strengthening the central reserves’38 and in 1956 contributed $56m-worth of gold to the central reserves in response to the Suez Crisis. Australia also maintained an extremely tight exchange control and import quota programme which limited the potential for wholesale conversion of their sterling reserves for balance of payments reasons. In 1958, the UK and the rest of the sterling area were still Australia’s most important markets. Trade with the UK alone accounted for one-third of Australian imports and exports in 1958 and trade with the sterling area as a whole claimed over half of Australian trade. Complete diversification of reserves was not a rational policy in these circumstances. Ceylon was the independent sterling area’s only consistent dollar earner, contributing an average of £2–3m worth of dollars per quarter during the 1950s. In 1950 Ceylon was allowed to purchase £4m of gold from the central reserves to hold as a separate reserve. At the Commonwealth Finance Ministers’ Meeting in Istanbul in September 1955, the Ceylon representatives asked to be allowed to build up a fixed amount of independent reserves before paying their surplus dollars into the central reserves.39 The Ceylonese Finance Minister Jayawardena expressed the wish that half of Ceylon’s reserves should be in $US and gold since ‘an adequate independent reserve was necessary both for reasons of prestige and for reasons of security’.40 The British representative replied that this was unacceptable as ‘the central reserves also needed to be adequate and under the sterling area system Ceylon, when in difficulties, had been able to get prompt and substantial assistance from London. Now was the time for Ceylon to help the pound.’41 As a further incentive, the Ceylonese were later reminded that the sterling area connection offered a degree of insurance for Ceylon’s unstable economy and that Ceylon benefited from UK marketing facilities such as shipping and insurance which justified Ceylon’s link to sterling.42 This was reinforced by the large proportion of trade Ceylon had with the sterling area43 and the external capital needs of the Ceylon economy. Finally, Ceylon’s capacity to earn dollars was in part dependent on access to the tea market in London which might not continue if Ceylon was excluded from the sterling area.44 This strategy was not completely successful since Ceylon’s dollar reserves increased by $8m through 1956 although their net dollar earnings for this year amounted to almost $20m. The British attitude to growing independent gold and dollar reserves was settled at the fourth meeting of the Sterling Area Working Party in 1956.45 No

THE STERLING BALANCES 33

strict formula for a correct maximum level of these reserves was considered appropriate since they had been accumulated in a variety of circumstances and were used for various purposes. It was agreed that Britain should not take the initiative in discussing independent reserves as this might cast doubt on the strength of sterling. Finally, the Working Party concluded that, while the overseas sterling area should be encouraged to use their independent reserves to meet current deficits, the best way to limit the growth of these reserves was to follow policies which strengthened general confidence in sterling and therefore its usefulness as a reserve currency. The meeting did not consider the independent gold and dollar pots of the independent sterling area to be a major threat to the central reserves. The primary concern of British external economic policy had to be the balance of payments of the UK itself. This was agreed at a high-level Treasury meeting on the future of the sterling area in 195146 and was the conclusion of the exhaustive Bank of England survey on the sterling balances in 1956. This sentiment was most forcefully put by the Economic Section of the Cabinet which argued that what concerns us and the only thing that concerns us in this connection, is the movement in our own balance of payments. If we are paying for current imports and our own long term investment out of current earnings, our position must be sound, irrespective of what is happening to sterling balances held by other countries.47 Certainly as the decade passed, the enthusiasm of the Commonwealth members to ‘deposit’ their surpluses in exchange for sterling assets was weakened due to the tightening of the London capital market and the growing importance of establishing financial links with the USA. This process had not progressed very far in the 1950s, however, because of the large proportion of trade still conducted between the RSA and the UK and because the American capital market was not a promising source of finance to replace British investment. THE STERLING BALANCES AND CONFIDENCE Since, in the event, the sterling balances did not have a directly destabilising impact on the British economy in the 1950s, we are left with the question of whether the existence of these liabilities actually made destabilising speculative capital flows larger than they would otherwise have been. Unfortunately, it is impossible to construct a reliable counterfactual measure of speculative flows since opinions about the danger of the sterling balances cannot be isolated from their reaction to other weaknesses of the British economy. Some insight, however, is possible from events in the 1960s. During the 1960s a network of short-term central bank credits provided consistent support against unpredictable and destabilising drawings on sterling balances. In 1961, under the auspices of

34 BRITAIN AND THE STERLING AREA

Table 2.6 Selected dollar securities held by the EEA, market value on 31 October 1958

Source: Note by Statistics Office of Bank of England, ‘Annex IV: Assets’, for Dennis Rickett and the Radcliffe Committee, 25 February 1959, Bank of England Archives EID1/ 19.

the Bank for International Settlements, the central banks of Europe and America agreed to offer each other short-term swap arrangements to cushion against extraordinary capital flows. The UK was a primary beneficiary and was able to draw a total of £325m in 1961 in return for sterling. In November 1964, these banks provided the UK with a swap limit of $3bn of which less than half was actually used. In the next two years, further arrangements were agreed and further drawings made. Public awareness of these short-term lines of credit, however, did not overcome the persistence of speculation against sterling, and the ensuing balance of payments crises ultimately led to the devaluation of sterling in 1967. Thus, a guarantee of Britain’s ability to survive a run on the reserves would probably not have been enough to eliminate the strains on the balance of payments in the 1950s either. The assertion that it was the threat of the sterling balances being run-down without an adequate cushion of short-term assets that was the major destabilising force is unsupported by subsequent events. A further consideration in assessing the contribution of the sterling balances to confidence is that the published reserves did not cover the total foreign exchange assets held by the Exchange Equalisation Account (EEA). The ‘reserves’ excluded a small amount of non-dollar currencies, a significant amount of dollar securities which had been accumulated during the war, and the British quota in the IMF. At the end of October 1958, the market value of the dollar securities held by the EEA was $875,219,941 distributed over 9.5m shares of 198 American corporations.48 Of these, about half of the value were invested in the eight corporations shown in Table 2.6. These securities supplemented the published reserves by a full 28 per cent in 1958. The Radcliffe Committee expressed its desire to have the value of these securities published periodically ‘so as to convey a more adequate picture of the reserve position’.49 The Bank of England resisted such suggestions on the basis

THE STERLING BALANCES 35

that there were no plans to liquidate the securities and their value would fall if they were sold all at once. Also, a regular account of these assets might be embarrassing to the government since the value of British national reserves would be seen to be affected by the vagaries of Wall Street.50 The reluctance to publicise the real level of foreign exchange reserves on the basis that these assets were not really liquid, mirrors the fact that the liabilities due to the sterling area had a significant (if unquantifiable) hard core of illiquid assets whose market value would also fall in the event of liquidation. Both the American shares and the hard core of sterling balances would only be sold off in an unprecedentedly severe crisis. In such a crisis the IMF quota would also be drawn on to forestall bankruptcy. The publication of the total sterling balances was therefore inconsistent with the secrecy surrounding the total British reserves. By 1958, $318m of these securities were pledged as security to the American Export-Import Bank and a further $91m to the IBRD against loans.51 In the eyes of Britain’s creditors, therefore, these assets were considered liquid enough to act as loan security. This reinforces the conclusion of the previous section that the ratio of ‘assets’ to ‘liabilities’ on which so much public criticism of the sterling area was based was misleading. If this spurious ratio had a destabilising impact on confidence this was partly self-inflicted by the government of the time. THE STERLING BALANCES AND DEVELOPMENT The realisation that the sterling balances represented the foreign exchange reserves of undeveloped territories led logically to linking the reduction of these British liabilities to development. Plans were made to reduce the reserves of India, Pakistan and Ceylon in an ‘orderly’ way in 1949 and later to do the same with colonial balances throughout the 1950s. The wish was not to encourage them to spend their assets in Britain or elsewhere, which would exert pressure either on the British economy or on the central reserves. Instead, the plans to link these two aspects of the sterling area were rather disingenuous attempts to reduce UK liabilities while manipulating America into providing dollar aid to the sterling area; in effect to turn the sterling assets into dollar assets without going through the central reserves. Since this was predicated on an assumption that the US would be willing to ‘pay’ to see some of the sterling balances blocked or written off, it was doomed to disappointment as America lost interest in the sterling area system. The first of several approaches to the US to help Britain extricate itself from payments problems began in 1949 in the context of the continuing Tripartite Discussions in Washington52 and the development planning of India, Pakistan and Ceylon. At the first meeting of the Treasury-Bank of England Working Party on Sterling Balances in October 1949, Herbert Brittain suggested that ‘it is not unreasonable to hope that if US assistance is secured for countries with sterling balances they might in return make appropriate concessions from their full

36 BRITAIN AND THE STERLING AREA

claims on the UK economy through their sterling balances’.53 India, especially, was unlikely to engage in any funding negotiations without the promise of getting some direct benefit in return. The Treasury’s hopes appear to have been raised by President Truman’s inaugural address of January 1949 which pledged support for technical and financial aid for developing countries (the so-called Point Four programme). This idea was fleshed out during subsequent meetings where India, Pakistan and Ceylon were singled out as the targets of the proposal. In March 1950 the Working Party on the Sterling Area and the Working Party on South East Asian Development submitted a joint report to the Cabinet which would be the basis of the appeal to the Americans.54 The plan called for immediate talks with the Americans to arrange dollar aid for South East Asian holders of sterling balances. These countries would in turn send the sterling equivalent to Washington to be transferred to the British Treasury who would put it against the National Debt. In this way, the writers of the joint report hoped to achieve a cancellation of perhaps £60m p.a. of sterling liabilities over several years. The Americans at first seemed acquiescent to such a plan. An AngloAmerican solution to the sterling balances was mentioned at an informal meeting of UK Ambassador Oliver Franks and Leslie Rowan55 of the British Embassy with US Secretary of State Acheson in January 1950 at which Acheson agreed that a solution to the sterling balances might require the British to ‘go across the street’ to prevail on US support.56 Later, Acheson noted that while the US was not working on a programme for Asia at the moment, ‘the matter of dealing with certain of the sterling balances might be related to such a program[me]’.57 When the British finally put a full proposal before Acheson on April 17, however, the mood had changed and the initiative sank without discussion in the State Department.58 On April 23 the Americans leaked the proposals to the press, which provoked angry responses from India, Pakistan and Ceylon who resented not being consulted on negotiations involving cancellation of their assets.59 Finally, on 5 May 1950 Acheson spoke to Rowan and rejected the British attempt to link sterling balances with South East Asian development. This first attempt to link sterling balances to development, therefore, ended in failure. Instead, the Columbo Plan was finalised in the Autumn of 1950. India, Pakistan and Ceylon agreed to six-year development plans, part of which were financed by agreed drawings on their sterling balances. India was to draw £35m p.a. amounting to 15 per cent of their planned expenditure, Pakistan £4m p.a. and Ceylon £3m p.a. Although a step forward for South Asian development, this was not successful as a sterling balance solution since it covered only a quarter of India’s sterling assets. Releases of £42m p.a. under the Columbo Plan seem a rather poor alternative to the hoped for cancellation of £60m p.a. under the scheme involving the Americans. The next major attempt to link the sterling balances problem with development was suggested in the context of the international shortage of raw materials in 1950–1. In December 1951, the Finance Minister of Southern Rhodesia suggested that the raw material needs of the sterling area as a whole

THE STERLING BALANCES 37

should be identified and an organisation set up to coordinate the development of these raw materials. Development would be funded in part by an effort ‘to mobilize a large part of the sterling balances in London which are at present idle, including a portion of the commercial balances and also public funds such as part of the reserves of the various colonial currency boards or central banks of Commonwealth Countries’.60 This idea of pooling sterling balances for development was taken up by Cobbold, who moulded it into a plan for a Commonwealth Development Fund to spice up the upcoming Commonwealth Finance Ministers’ Conference.61 The UK would contribute from the funds already set aside for development (e.g. the Commonwealth Development Corporation) while the RSA would contribute their ‘excess’ sterling balances. Canada and the USA would be asked to provide dollars for necessary dollar imports. Any additional development capital, therefore, again depended on American aid. Cobbold wrote that this would immobilise a large part of the sterling balances and at the same time meet RSA wishes for development. This seems to assume that the Fund would be spent at a slower rate than each member would otherwise have run down their reserves.62 The Governor’s plan came up against stiff opposition within the Bank of England. Thompson-McCausland63 pointed out that countries would want to spend their sterling balances on their own development rather than on that of others, and the decision on where the funds should go would introduce a divisive element into the sterling area relationship.64 Fisher made explicit the proposal’s underlying purpose of blocking agreed amounts of sterling against dollar aid and pointed out the difficulties of getting the USA and Canada to agree to contribute.65 He did not, however, extend this to point out that the plan was the same in this essential feature as the failed attempt two years earlier to get the US to provide dollars against cancellations of sterling balances by India and Pakistan. Fisher cut through the altruistic tone of the Governor’s proposal and acknowledged that ‘the UK interest is to stimulate primary production from dollar loans and then tap the resulting increase in dollar exports (by the colonies) by selling capital goods for industrial and welfare development to the Empire for sterling’.66 The focus of development from the British point of view was on raw materials while the RSA were more interested in welfare and industrial development. This was yet another area of potential conflict. Cobbold absorbed this advice and the plan was revised. The Fund was changed to a Commonwealth Board of industrial and financial experts who would decide what products were needed in the sterling area and where to develop them as well as advising on financial and commercial aspects of proposals.67 The Governor’s plan visualised a much more intimate and formal association among sterling area members which would have required a major adjustment in the character of the system. The sterling balances aspect was included in a later draft which added that the member governments would also set aside or ‘segregate’ part of their sterling balances for ten-year development plans in their own areas.68 The plan was finally sent to the Treasury in February

38 BRITAIN AND THE STERLING AREA

1952 where it seems to have received a cool reception since it did not surface in discussions with the Commonwealth representatives.69 Even in its revised form, the Governor’s plan did not avoid the difficulties which had been raised earlier in the Bank. The new plan rested on the rather naïve belief that the RSA would not recognise this attempt to block their sterling assets and that sterling area members would agree to the political and economic compromises required by centralised direction of development for the area as a whole. This put too much faith in the common interest of RSA members among themselves as well as with the UK. Given these obstacles, it is extremely unlikely that the IBRD or the USA would have become involved to the extent of supplying additional funds, so any net benefit to development would have been unlikely. The idea of somehow pooling sterling assets to direct them at development (or rather to control their expenditure on development) did not die at this stage. Four years later, Parliament debated a proposal to establish a Commonwealth Development Agency or Bank70 which was based on the principle that by pooling ‘excess’ sterling reserves available for development, the RSA would have a better chance of attracting credit from abroad. The debate prompted the Secretary of State for the Colonies to circulate such a proposal to the various Commonwealth High Commissioners. Not too surprisingly, the response was that such a pooling of reserves into a centrally administered organisation was neither desirable nor practicable.71 The idea lived on in the Treasury until April 1958 when it was revived by Rowan, then Second Secretary in the Treasury, as a possible fillip to the upcoming Montreal Commonwealth Conference.72 By the time the Treasury had taken up the idea of pooling balances to get control of them, however, the Bank of England had dropped it. In a personal letter to the Chancellor of the Exchequer, Heathcoat Amory, Cobbold tried to temper Rowan’s enthusiasm by alerting his superior that ‘I see that suggestions for a Commonwealth Development Bank are coming to the fore again… I ought just to emphasize that, while the suggestion has obvious presentational attractions, it bristles with practical difficulties.’73 It is not easy with hindsight to distinguish even the ‘presentational attractions’. It is curious that this type of plan, which had few foreseeable benefits for the sterling area and several drawbacks, such as the loss of control of their foreign assets and a certain source of dispute among members, was repeatedly brought out as an exciting long-term concept to revive the flagging Commonwealth economic conferences. It is perhaps a deeper comment on the quality of sterling area relations that Britain could offer no other new incentive to hold the attention of the RSA. More genuine attempts were made to link the sterling balances to development in the case of the colonies. This was a response to the mounting assets of the colonies and also to public pressure to accelerate colonial development. When the colonies were accumulating millions of pounds worth of sterling assets every

THE STERLING BALANCES 39

year at the beginning of the 1950s, there emerged a general public feeling that the sterling balances system (especially the colonial currency boards) exploited the underdeveloped colonies. This view was expounded most vociferously by Arthur Hazlewood and opposed by Ida Greaves.74 Hazlewood’s general objection was that the accumulation of sterling balances represented forced lending by the colonies to the UK at the expense of their own development.75 Ida Greaves’s contention reflected the official opinion that the colonial sterling balances were accumulated for specific long-term commitments rather than being ‘idle’ balances. They guaranteed the value of local currency in relation to sterling and enhanced the creditworthiness of the colonies. The sterling balances were thus important to the longer-term stability and growth of the colonies. Another pressure to use sterling balances for development was the growing resistance of the London capital market to new colonial stock issues. In November 1951, the Cabinet suggested that some consideration should be given to the use of sterling balances for investment to reduce calls on the London market.76 The Colonial Office immediately composed a note to the Treasury protesting that very little of the colonial balances were ‘disposable’ or available for other investment, and that the colonies would still need every penny that the London market could provide given their urgent need for capital, even if more existing assets were invested locally.77 The note concluded with two limited suggestions for investigation. The first was the investment of colonial assets in each other’s colonial issues and the second was a decrease in the statutory currency reserve. Three weeks later the Colonial Office suggested a Working Party of Treasury, Bank of England, Crown Agent and Colonial Office representatives should be set up to look at colonial sterling balances and the related issue of the absorptive capacity of the London market for colonial loans.78 The second part of the Working Party agenda was dropped by the Treasury to avoid having to deal with Colonial Office pressure to ensure a priority on the London market for colonial issues.79 In the end the Working Party was postponed (probably due to preoccupation with the 1951–2 reserves crisis) and was not revived until a year later. In March 1953 the Bank of England took the initiative and suggested that it was time for a further look at the possibility of greater local investment of colonial balances.80 The Working Party on Colonial Sterling Assets was set up in May and reported in September. After two years of being on the agenda, the conclusions on the question of local investment of sterling balances are disappointing. The Working Party produced two reports, one dealing with ‘The Economic Significance of the Assets’ and the other with ‘The Financial Aspects of the Assets’.81 Despite its promising title, the Economic Significance report contained few new insights. Its major conclusion was that the charge that the UK was exploiting the colonies by forcing them to accumulate assets was unfounded since the sterling balances were not blocked and the colonial governments themselves were responsible for amassing reserves for future development.

40 BRITAIN AND THE STERLING AREA

Nevertheless, the report went on to suggest that the colonies should start spending their reserves since these charges were politically damaging to the government. Other arguments for an orderly run-down of sterling balances were that large sterling balances weakened confidence in sterling and that development spending should start while the colonies were still under British guidance to lessen the impact of future ‘irresponsible spending’ by new governments. Finally, the report argued that colonial development spending would enhance the colonies as a market for British goods. The report concluded, however, that no major change in British policy was necessary because sterling balances were unlikely to continue to increase in 1953 and 1954 since raw material prices were falling and development spending was expected to increase. In this, the Working Party underestimated the conservative nature of colonial government policy as colonial sterling balances continued to grow: by 7 per cent in 1953 and 11 per cent in 1954. The report on the Financial Aspects of the Assets is not much more satisfactory. The major implication of the report was that little could be done to increase the amount of development capital available for the colonies or to ease the pressure on the London Market. The report reiterated the conclusion that the colonies should be encouraged to invest part of their sterling balances in their own development and then went on to offer suggestions as to which funds should be targeted. The Report first recommended no change in the colonial policy of keeping four to six months’ revenue in reserve every year, although by the end of 1952 (the basis for the data used for the report) government reserves had reached 39 per cent of colonial sterling balances. The investment policy of the marketing boards was also deemed sound. At the end of 1952, 89 per cent of these funds were invested in British government securities—none was invested in colonial issues.82 In any case, marketing board assets amounted to only 7–10 per cent of colonial sterling balances. The final two recommendations of the report advocated more positive (if limited) action. The first was that the colonies should be encouraged to make use of the existing statutory right to invest up to one-third of post office savings bank funds in new local public issues. In 1951 only 6 per cent of post office savings bank funds were invested in local issues.83 This suggestion, while on the one hand only asserting the status quo, also pertained to only 5 per cent of colonial sterling balances. If all colonies had invested one-third of their savings bank funds locally, this would only have released £22m for development. The last recommendation of the report, however, was more promising. In accordance with the original Colonial Office suggestion in 1951, it was decided that the colonies should consider reducing the sterling backing of local currencies. The Working Party suggested a maximum 20 per cent fiduciary element (the actual proportions were to be determined by the colonial authorities themselves) which would release these sterling funds for local investment. This promised to release up to £70m of British liabilities for local investment or about 6 per cent of colonial balances in 1953.

THE STERLING BALANCES 41

Altogether, the recommendations of the report amounted to relatively little. Liquidating sterling assets, whether currency reserves or savings bank funds, required selling British securities on the market and taking capital out. This pressure of sales on the market would have partly offset any reduction in the frequency of issues of new colonial stocks. Indeed, it was recognised that there was no guarantee that colonial demands on the market would have been smaller or less frequent given the apparently repressed demand for new development capital. Also, a reduction in currency funds managed by the Crown Agents would reduce their purchasing power for new colonial issues for which they were the major buyer. The net impact of these initiatives on the volume of development funds available to the colonies was, therefore, ambiguous. The attempts to link sterling balances to development must be regarded as failures. They did not go far in increasing development resources nor in reducing sterling balances. This failure was sealed by the general refusal of the colonial governments to entertain the suggestion of a fiduciary element in the currency reserves. In September 1954, the Governors of the colonies were finally canvassed about their willingness to reduce their reserve ratios but the response was unenthusiastic.84 This was for several reasons. In 1951, the colonial authorities had been advised by the Crown Agents that any reduction in the sterling backing of their local currency would have negative effects on their international credit rating.85 As the London market tightened up, the colonies were increasingly looking elsewhere to satisfy their capital needs, and their international credit standing was an important determinant of their access both to the London market and to other foreign investors. A second possible motive for the colonies’ reluctance to spend their sterling balances while repeatedly complaining of being starved for capital is a more strategic one. It certainly did not make sense to give the UK an excuse to start limiting capital flows (whether official or otherwise) by releasing sterling assets for local investment. Many colonies who were rich in sterling were approaching independence (e.g. the Gold Coast, Malaya), so their special claim on the British government and on the London market would be over soon enough. This, of course rests on the assumption that those making the decision to hang on to all of their colony’s sterling assets while maximising their access to the London market were amassing them in trust for the future independent regimes. The motives of the colonial governments in clinging to their conservative policies with respect to their dependence on sterling are confused by this ambiguity. What is not ambiguous is that the newly independent regimes also wanted to maintain the colonial currency system. There was no precipitous run-down of sterling balances when Malaya and Ghana achieved independence in 1957, which suggests that their large sterling reserves were not as liquid as the British authorities feared. Neither Malaya nor Ghana gave any indication of seriously considering leaving the sterling area. Indeed, the currency board system was continued in Malaya for ten years after independence despite the existence of a nominally independent central bank. The reason behind this conservative

42 BRITAIN AND THE STERLING AREA

monetary stance was primarily the need to retain the confidence of foreign investors in the new regime.86 This reinforces Ida Greaves’s assessment that the sterling balances were tied to long-term commitments (such as sinking funds) and that the colonial currency reserve system was considered important to ensure economic stability and to attract foreign investment. This evidence shows the persistence with which the British government tried to link the issues of sterling balances and development and the obstacles they met in trying to reduce the volume of sterling assets held overseas. The liquidity of the sterling balances and the threat they posed to the central reserves and the stability of the British economy have been shown to be exaggerated. THE STERLING BALANCES AND DOMESTICMONETARY POLICY Since sterling balances were held as UK Treasury Bills and Government securities, they affected British government borrowing. In addition, overseas demand for the securities and the cost of servicing this debt were sensitive to changes in interest rates. In response to a request from the Radcliffe Committee in December 1957, the Bank of England prepared a schedule of the type of sterling asset held overseas from 1954–6.87Table 2.7 shows the data collected. The figures cover about 75 per cent of total sterling balances held by countries. Information on the other 25 per cent was supplied in confidence to the Bank of England by commercial banks whose holdings were not broken down by type of asset for the 1950s. The proportions of the holdings of commercial banks were known, however, for the pre-war period. The Bank assumed that these proportions held for the post-war period which produced the distribution of sterling area sterling balances in 1957 shown in Table 2.8. From this analysis, the Bank of England felt confident that about half of the sterling balances were held as securities and half in liquid form. Of the liquid assets, half were held in deposit and current accounts and half were UK Treasury Bills.88 The tables show that overseas holders provided a steady demand for mediumand long-term government securities. This is important in the context of the Government’s attempts in the 1950s to fund the short-term public debt. If any trend may be discerned from these three years alone, it is that there was an increased preference for short-term securities, especially by the central banks. According to evidence submitted to the Radcliffe Committee by the Treasury, overseas official holdings of securities in the market (i.e. outside the Bank of England) accounted for 11 per cent of the total outstanding in 1956 and 1957 compared to 2 per cent in 1939.89 Overseas official institutions also provided a market for UK Treasury Bills. In 1951 these holdings accounted for 45 per cent of bills held outside the domestic public sector. This proportion declined to one third for 1952–7 and fell to one

THE STERLING BALANCES 43

Table 2.7 Length of maturity of sterling area sterling balances, 1954–6 (£m)

Source: ‘Overseas Sterling Holdings of Certain Holders’, 16 December 1957, Bank of England Archives EID1/19.

quarter by 1958.90 Overseas official holdings of Treasury Bills amounted to 21– 27 per cent of total sterling balances. The effect of changes in sterling balances is described in the Radcliffe Committee Report and in evidence to the Committee.91 The Exchange Equalisation Account (EEA) routinely lent its sterling holdings to the Exchequer. When RSA countries exchanged their foreign exchange earnings for sterling the EEA reduced its holdings of sterling by drawing on their loan to the Exchequer. The Exchequer in turn offset the decline in its sterling assets by selling Treasury Bills or other securities to the RSA monetary authorities. In effect the Exchequer borrowed the sterling to purchase the foreign exchange from the RSA countries themselves. When the RSA cashed in their sterling holdings for foreign exchange, the EEA’s and the Exchequer’s holdings of sterling increased and the Exchequer could either reduce the floating debt or place a correspondingly smaller amount of debt with the domestic market.92

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Table 2.8 Breakdown of sterling balances by type of asset, as of 30 June 1957

Source: J.I.Mutch Statistics Office, Bank of England, 24/10/57, Bank of England Archives EID1/19. Note: Bankers’ returns are based on pre-war proportions.

When increases in sterling balances were the result of sterling surpluses rather than foreign exchange surpluses, the transactions did not go through the EEA. Instead they allowed the Exchequer to raise net new debt outside the domestic banking system. If the sterling balances were cashed in for sterling through a direct sale of the assets, the domestic market would have to absorb the Treasury Bills or securities. This in turn could make it more difficult for the Exchequer to place debt in the domestic market. Thus the sterling area could affect the government’s fiscal policy. In evidence to the Radcliffe Committee, L.K.O’Brien, Chief Cashier of the Bank of England, asserted that I think there is a prima facie probability if they [the sterling area] were selling Treasury Bills on a large scale we should have a problem, at any rate for a time, to replace those Treasury Bills, or, if they were selling gilt-edged securities, to find new holders.93 If the running down of sterling balances implied a British balance of trade surplus, however, there could be greater domestic savings to absorb the extra government debt. The effects of a run-down of sterling balances against sterling were therefore unpredictable. An important goal of government in the 1950s was to reduce the burden of the floating debt and especially to reduce the liquidity of commercial banks by restricting the volume of Treasury Bills in the domestic banking system. In evidence to the Radcliffe Committee the Treasury alleged that it had been pursuing an active policy of diverting the sale of Treasury Bills to outside the domestic banking system by encouraging overseas purchases.94 Only in 1951/ 2 were changes in overseas holdings very dramatic. During the run on reserves in the financial year 1951/52, overseas official holdings of Treasury Bills fell by £564m. Combined with a serial funding operation in November 1951, this allowed the Exchequer to redeem £1.3bn of floating debt.95 India assisted the funding operation by taking £100m of securities in exchange for Treasury Bills.96 From 1952–4 overseas institutions accumulated a peak of £1.1bn worth of Treasury Bills. The pattern for the rest of the period is of a gradual but steady

THE STERLING BALANCES 45

decline in overseas official holdings offset by an increase in clearing bank holdings and other holders. Overall, it seems that after 1954 the domestic market absorbed the overseas sales plus extra borrowing requirements of the Exchequer. The total private market Treasury Bills outstanding increased by £732m between December 1951 and December 1958, while overseas official holdings decreased by £280m over the same period. It is not possible, however, to isolate the effects of sterling balance movements in the 1950s on the government’s borrowing power because of the close relationship with the balance of payments of the UK as a whole. A more easily identified way in which the sterling area could have affected British policy was with respect to interest rates. This question has two aspects: the cost to the balance of payments of servicing sterling area debt (an encouragement for lower interest rates) and the need to keep sterling assets relatively attractive to overseas investors, including the sterling area (an encouragement for higher interest rates). Figure 2.5 shows movements in the Bank Rate and in long-, medium- and short-term government security yields and Treasury Bill rates during the 1950s.97 The government’s discount rate policy can be seen to have drawn both Treasury Bill and short-term rates along, reflecting the tightening of the money market in November 1951, the subsequent relaxation from 1953–5 and the violent tightening from 1955 to the end of 1957. Long-term yields were much less volatile, although these rates also responded to the rapid credit restraint from 1955–8. This performance explains the increased preference for short-dated securities as sterling balances after 1954. Since almost 30 per cent of sterling balances were comprised of Treasury Bills, changes in monetary policy in the 1950s had an immediate impact on the servicing of this debt. In 1951, interest payable on this component of the sterling balances was only about £8m but reached a peak annual rate of £54m in the fourth quarter of 1957 despite the decline in the volume of Treasury Bills held overseas. The coupon rates on securities were less sensitive to changes in monetary policy. Representative short-term securities rose from 2–2½ per cent for 1950–6 to 4½ per cent for 1957–8.98 Medium-term securities remained at 3 per cent throughout the period and 2½ per cent consols were used as representative of long-term securities. In 1957, L.K.O’Brien estimated that a 1 per cent rise in Bank Rate cost the British balance of payments about £15m p.a. through the sterling balances, of which 75 per cent was payable to the RSA.99 O’Brien assumed that one-quarter of the balances were invested in Treasury Bills and one-quarter were in deposits and other bills which were sensitive to Bank Rate changes. This excluded the cost of re-investing maturing securities or other changes in the balance of payments which would result from a change in monetary policy. It was also noted that the short-term capital inflow which might be expected to offset this cost to the current account generally failed to materialise because it was in turn offset by hedging in the forward exchange market.100 Capital would only flow to

46 BRITAIN AND THE STERLING AREA

Figure 2.5 Interest rates and yields, 1950–8

the UK if the interest rate differential between London and other centres was greater than the discount on the forward sterling market. General confidence in the strength of sterling was thus an equally important factor in generating shortterm capital flows. There was contemporary concern at the level of payments due abroad as a result of the government’s strict monetary policy. After the Bank Rate had reached 5½ per cent in 1956, George Bolton at the Bank of England suggested that an agreement should be negotiated at the upcoming Commonwealth Finance Ministers meeting to eliminate interest payments on monetary reserves held in sterling by RSA governments and central banks.101 His suggestion was to fix the rate of interest payable on monetary reserves at 1 per cent, with a gold guarantee of 250 shillings per ounce for existing Treasury Bill and cash holdings. This, he argued, would make the sterling balances more valuable to the holders since they could be considered as good as gold, which in turn would make membership of the sterling area more attractive. It is hard to see the advantage for the RSA in this arrangement. The monetary reserves of the independent sterling area were freely convertible for current purposes through the central reserves, subject only to their needs and their self-restraint excercised through exchange control. The gold guarantee would also only be effective in the case of continued restraint in calling on the central reserves, since a wholesale cashing-in would quickly exhaust London’s gold supply. The proposal seems to have fallen on deaf ears at

THE STERLING BALANCES 47

the Bank of England. O’Brien responded almost a month later, suggesting that since countries would accumulate new assets in Treasury Bills rather than securities not much would be saved.102 At this time, Treasury Bills were costing the government about £50m p.a. He also argued that members might disinvest their holdings, which would be an embarrassment to the government. If successful, the plan would encourage holders to move out of British government debt into the new gold-guaranteed, low-interest asset, depressing the government’s borrowing power. The third objection was that, having extended this privilege to the RSA, it might not be possible to refuse such guarantees to holders outside the sterling area as well. 103 In a memorandum to the Radcliffe Committee, the Treasury noted that the cost to the current account of increases in interest rates was indeed a consideration in deciding whether to rely on interest rates in conjunction with direct credit controls rather than interest rates alone.104 The sterling balances discouraged using interest rates in favour of direct controls on credit. Equally important, however, was the fact that confidence in sterling was as important as interest rate differentials in attracting funds to London since most hot money was hedged in the forward market for sterling. The second question regarding interest rate policy and the sterling area is whether the government was encouraged to have higher interest rates than otherwise to ensure that the RSA continued to find sterling assets an attractive form for their reserves. Such an argument seems to have more credence when referring to non-sterling area investors than with respect to the monetary reserves of sterling area countries. By far the greater part of the sterling assets held by the RSA were held by central monetary authorities or other official bodies. The primary motive for these countries to hold their assets in sterling was not to earn a competitive interest rate but rather as a future claim on the central reserves of the sterling area or the resources of the UK. This was especially true for the colonial authorities whose reserves made up over half of total sterling area balances by the mid-1950s. These colonial monetary authorities had no legal alternative but to hold their currency reserves and sinking funds in sterling. It is more likely that the sterling area system may have encouraged higher interest rates than otherwise in order to price the RSA governments out of the London capital market in an effort to restrict the outflow of capital which was considered damaging to the UK balance of payments. In evidence to the Radcliffe Committee, R.S.Sayers suggested to Cobbold that The fact that there is no other control by Britain of the investment of UK sterling in the sterling area might seem to be an advantage of using the interest rate rather than other weapons.105 After some hesitation, Cobbold replied

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I think it is a relevant consideration. I would not regard it as ever having been a major influence in anything we have done; not decisive, but certainly a factor in our minds.106 The sterling area system in this case, then, may have been a factor encouraging higher interest rates. This point should not be over emphasised, however, given the many perceived domestic motives for raising interest rates in the 1950s.107 Given the variety of offsetting considerations it does not appear that the sterling area had a significant or consistent impact on interest rate policy. CONCLUSION The sterling balances in the 1950s were not the dangerous and volatile factor in the British external economy that many contemporary observers believed. Changes in sterling balances did not have a detrimental effect on the reserves as long as the RSA had a surplus with the NSA and the UK had a surplus with the RSA. Indeed, increases in sterling balances strengthened the reserves. This analysis has also put Figure 2.1 into perspective. Lumping the sterling balances together in an amorphous mass and then comparing them to a limited definition of Britain’s foreign assets generated a misleading impression of the fragility of the external position. In fact, these balances reflected the overall pattern of sterling area relations and the interplay between independent and dependent members, rather than a hangover from the war. In the early 1950s, sterling satisfied the demand for liquidity by providing an additional reserve currency to dollars and gold. Without the willingness of the RSA to impose exchange control in common and to pool reserves in London, this would not have been possible. As American deficits increased through the mid-1950s the dollar was increasingly used as a reserve by some sterling area countries. This was not unnatural nor did Britain try to inhibit the process except by strengthening underlying confidence in the pound. From the mid-1950s, the diversification of reserves accelerated, the colonies’ accumulation of sterling balances finally reached its peak and the RSA surplus with the NSA (a main determinant of the stability of the system) came to rely on Middle Eastern surpluses and South African gold sales. Nevertheless, the choice of foreign exchange reserve reflected the large proportion of transactions of the sterling area still denominated in sterling through to the end of the period.

THE STERLING BALANCES 49

APPENDIX

Sterling balances: monthly report on external finance, Bank ofEngland Archives EID/98–106

50 BRITAIN AND THE STERLING AREA

THE STERLING BALANCES 51

52 BRITAIN AND THE STERLING AREA

Note:* Independent RSA total includes dominion and colonial securities not allocated to individual countries after II 1956.

3 INTERNATIONAL TRADE

International trade is perhaps the least controversial of the sterling area relationships. Certainly, the possible impact of these trade flows on the British economy has generated a smaller literature than the sterling balances or longterm capital flows. In part this may be because the impact of British trade with the sterling area on the long-term competitiveness of British exports is difficult to quantify. Addressing a counterfactual of whether British industry would have been better off if it had been forced to weather the alternating storms and calms of international competition in other markets draws the researcher even further into the realm of imagination than for longterm investment. Some features of sterling area trade flows in this period, however, give insight into the direction of benefit or loss to British industry. By coordinating sterling area trade Britain hoped to achieve three goals: to ease the effects of the international dollar shortage by buying more products with sterling, to run down Britain’s sterling liabilities in the least painful way, and to provide the UK with a surplus to support its traditional deficit with the nonsterling area (NSA). During the 1950s, these goals were not realised. The sterling area did not turn out to be a dependable market to offset declines in British competitiveness and the surplus with the sterling area dwindled as the decade progressed. Nor did it prove possible to coordinate sterling area trade policy after 1952. The international dollar crisis did recede due to the recovery of Europe and the Korean War boom but Britain’s foreign exchange reserves remained low. By the mid-1950s British trade policy focused increasingly on Britain’s own problems and less on those of the sterling area. The goals of trade policy in the 1950s reflected the pre-war pattern of trade. By the 1930s, Britain’s competitive edge in Europe and North America had weakened, and (with the help of Imperial Preference) British exports were increasingly concentrated on what were to become sterling area markets. The Empire (excluding Canada) bought 34.5 per cent of British exports in 1930 and 41.5 per cent in 1938.1 Increased imports from Europe, especially of manufactures, tended in turn to push Britain into deficit with more developed countries. It was hoped that this pattern could continue in the post-war period. Thus, sterling area trade with the rest of the world could be balanced if the RSA was able to earn an export surplus with the NSA and the UK earned a surplus

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with the RSA. The RSA surplus with the NSA would cover their deficit with Britain and hard currency would flow from the RSA to finance the UK deficit with the rest of the world. For this pattern to work two requirements had to be met. First, there had to be a strong international demand for sterling area primary products. The second requirement was that the sterling area should satisfy its demand for manufactured imports in the UK rather than elsewhere. Close historical ties between the sterling area and British traders and the shortage of hard currency in the system guaranteed the second requirement immediately after 1945. Post-war reconstruction, followed by the Korean War boom, sustained a high demand for sterling area raw material exports which satisfied the first requirement. By 1955, however, the overseas sterling area as a whole fell into a trade deficit with the NSA and relied on gold sales to maintain its balance of payments surplus. As the decade progressed, British exports were not adequate in price or quality to meet the import needs of the RSA, which eroded the second leg of the triangle. As a result of these developments Britain was unable to sustain a coordinated sterling area trade policy and instead urged sterling area countries to adopt deflationary domestic policies to improve their individual balances of trade. THE PATTERN OF STERLING AREA TRADE Figure 3.1 shows trade with the RSA, the Dollar Area and the non-sterling OEEC as proportions of total British trade.2 The percentage of exports directed at the sterling area was somewhat higher than imports from the area but both follow a generally declining trend through the period except for slight revivals from 1953– 5. In 1954, when exports to the dollar area fell due to the American recession, it was the sterling area which was the fastest growing substitute market rather than Europe. By 1958 the sterling area was still collectively the UK’s greatest market group, absorbing over 45 per cent of British exports. It is commonly noted in support of the contention that complementary trade was a fundamental feature of the sterling area system, that sterling area members conducted half of their trade with each other. Figure 3.1 verifies that this was almost the case for Britain. Figures 3.2 and 3.3 show trade with the sterling area as a proportion of total trade for the colonies and for ten independent members of the sterling area. What is immediately obvious is that the sterling area played a role of varying importance in the trade of sterling area members. Although most countries imported close to half of their goods from within the sterling area, the pattern for exports is more varied. The peripheral independent members, Iceland and Iraq, conducted the least of their trade within the sterling area. The trade of the colonies of Malaya, Singapore and Hong Kong was more aligned to Far Eastern markets than to the sterling area. India’s imports were also well diversified, with German and

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Figure 3.1 UK trade by region as a percentage of total UK trade, 1950–8 Source: Direction of International Trade, OEEC

American goods accounting for 30 per cent of India’s total imports by 1958. Indian exports, however, were more focused on sterling area markets, averaging 53 per cent p.a. of total exports over the eleven years shown. Figures 3.4 and 3.5 show that behind the high figures for intra-area trade there was a strong bilateral pattern between the UK and the individual members of the sterling area. Iceland and Ireland, among the independent members of the system, hardly participated in trade with the sterling area outside the UK at all. South African trade with Rhodesia and Nyasaland accounts for most sterling area trade other than with the UK. The non-sterling colonies of Mozambique and the Belgian Congo were the next two largest African markets for South African exports. South Africa’s intra-area trade outside the UK may be attributed more to a regional African system than as evidence of a genuine sterling area pattern of trade. The bilateral relationship between the UK and individual members of the sterling area system was strong also for New Zealand and to a lesser extent for Australia. For New Zealand, the large figures for sterling area trade were based on a bilateral relationship with the UK, combined with a naturally close relationship with Australia. Australian trade was less concentrated in the UK than was the case for New Zealand but the UK still absorbed two-thirds of Australian exports to the sterling area and accounted for only slightly less of sterling area imports. Australia’s other sterling markets for exports and imports were in Asia, especially Ceylon, Malaya and India as well as New Zealand.

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Figure 3.2 Imports from sterling area as a percentage of world imports Source: Direction of International Trade, OEEC

Australia’s largest export markets after the UK were the non-sterling countries of Japan and France.3 The Asian sterling countries—Pakistan, India, Ceylon and Burma—all had larger proportions of their sterling area trade going to countries other than the UK. Hong Kong, Malaya and Singapore, the Asian colonies presented individually in the table, also follow this pattern. For the most part this was due to a large proportion of intra-Asian trade. Ceylon is the exception where sterling area exports, mainly of tea, were more diversified in destination.4 In summary, Britain dominated both as an export market and as a source of imports for all the non-Asian members. The rest of the sterling area trade of these members was predominantly with their sterling neighbours (e.g. Australia and New Zealand, Iraq and Aden, South Africa and Rhodesia and Nyasaland). For the Asian members, the UK figures somewhat less prominently due primarily to a large intra-Asian trade, but they fall into the same pattern as other RSA countries, combining a bilateral relationship with the UK with regional trade. The system of quantitative import restrictions devised by Britain and copied in the rest of the sterling area discriminated in varying degrees against non-sterling imports for the purpose of conserving the central foreign exchange reserves. As a consequence of this discrimination, the restrictions served a second purpose of encouraging the RSA to satisfy their import needs within the sterling area. Since the primary relationship of most sterling area members was with the UK, encouragement of intra-area trade meant encouraging British exports to the RSA.

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Figure 3.3 Exports to sterling area as a percentage of world exports Source: Direction of International Trade, OEEC

Table 3.1 shows the balance of trade between the UK, the RSA and the NSA. These figures show that the complementary triangular balance of trade which Britain had hoped for did not prevail in the 1950s. The UK did earn export surpluses with the sterling area in every year after the war until 1953 and then again from 1956 to the end of the period. Even in those years when the UK was in surplus with the sterling area, however, this was not enough to offset the UK trade deficit with the rest of the world except for 1958. Nor was the RSA balance with the rest of the world consistently healthy enough to pull the sterling area as a whole into balance. Indeed, the RSA trade surpluses with the NSA diminished into deficits from 1955 onward. THE SYSTEM OF CONTROLS Having established the pattern of sterling area trade in the 1950s we turn to attempts to ‘manage’ that trade. There are two issues to address. First, the overlap between sterling area and Empire trade policy and secondly the change in approach over the course of the decade. From a tight discriminatory bloc at the end of the 1940s, the sterling area adopted much more loosely coordinated policies by the mid-1950s. There were two major strands of policy which might have affected sterling area trade. These were imperial preferential tariffs and the quantitative

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Figure 3.4 Imports from UK as a percentage of sterling area imports Source: Direction of International Trade, OEEC

restrictions against dollar and other non-sterling imports coordinated by sterling area members from the late 1940s. Certainly the economic policy of the Commonwealth overlapped with sterling area policy, just as the politics of the sterling area overlapped with that of the Commonwealth. Imperial Preference was designed not only to encourage mutual trade and to discriminate against nonEmpire countries, but also to strengthen the political ties of the Commonwealth. The sterling area system was also an important part of Britain’s efforts to solidify Commonwealth relations in the new international political environment of the 1950s. Nevertheless, Imperial Preference was not a tool of sterling area policy, as a brief account of its history will reveal. Imperial Preference emerged from the Ottawa Commonwealth Conference of 1932 in an effort to foster trade within the Empire. Under a series of agreements, Commonwealth countries agreed to impose lower tariffs against each other’s goods than those imposed against imports from the rest of the world. The Ottawa agreements excluded what were then members of the Sterling Bloc, such as Portugal and Scandinavia, and included all members of the Commonwealth, including Canada. At its inception, Imperial Preference was deliberately not part of the prevailing sterling monetary system, but rather part of the political union of the Commonwealth. The system of Imperial Preference persisted through the 1950s and excluded all non-Commonwealth members of the new sterling area except Ireland, which

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Figure 3.5 Exports to UK as a percentage of sterling area exports Source: Direction of International Trade, OEEC

had a special status because of the close integration of its economy with Britain. The tariff preferences also included Canada which was then part of the dollar area, while dollar goods were discriminated against by the sterling area as a whole through quantitative restrictions. The geographical coverage of Imperial Preference thus differed from that of the sterling area in such a way as to bring the aims of this policy into conflict with the aims of the sterling area. The rules of the sterling area were designed to support sterling both as a trading and reserve currency in the presence of the post-war dollar shortage. This was the basis of the willingness of members to impose common exchange restrictions against the non-sterling world (including Canada), and to pool their foreign exchange reserves. The imposition of quantitative restrictions on nonsterling imports was based on the same general principles as the rest of sterling area policy. Quantitative restrictions were imposed on dollar imports by members of the sterling area in concert in the early 1950s to preserve the foreign exchange reserves of the area as a whole while Imperial Preference continued to be offered in theory to imports from Canada.5 In fact, however, quantitative import restrictions, and the necessities of the sterling area system that they reflected, undermined Imperial Preference. The effectiveness of Imperial Preference had been deeply eroded by the 1950s. Inflation after 1932 had erased much of the benefit that overseas Commonwealth exporters enjoyed in the British market since most of the preference offered by the UK had been specific duties rather than on an

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Table 3.1 The balance of trade of the UK and RSA, 1950–8 (£m)

Notes: Exports (X) and Imports (M) f.o.b: RSA=sterling area other than UK; NSA=nonsterling area; £A=sterling area total. Source: International Monetary Fund, Balance of Payments Yearbook for 1951–8; UK Balanceof Payments 1947–57, HMSO, 1959; and OEEC, Direction of International Trade, Area Summary for 1950.

advalorem basis. 6 This effect was reinforced by changes in the composition of trade away from imports on which preference was given and toward non preferential goods such as raw materials. By 1953 the average preference margin on trade between the UK and the Commonwealth was only 5–6 per cent.7 Preference may still have been important for particular items or industries but it had relatively little aggregate effect on Commonwealth or sterling area trade. In a 1953 report on the sterling area, the Bank for International Settlements asserted that ‘trade quotas and foreign exchange restrictions are now of considerably greater importance than differential tariff rates’.8 Import controls on private trade in the UK were administered through a licensing system established during the war. Importers were granted licences which determined both the amount of a particular good which could be imported as well as the allowable areas of consignment. There were four main categories: Open General Licence (OGL), Open Individual Licence (OIL), Specific Licence and Global Licence. OGLs allowed imports of a specific good by any importer up to any value. The only limitation under this category was the area of consignment. OILs were issued to individual traders usually for six months for specific goods with no quantitative restriction but they were also subject to discrimination by the origin of the good. Specific or Individual licences were

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Table 3.2 Colonial dollar allocations and actual expenditure, 1948–54 ($USm)

Source: PRO BT241/332. Note: Figures are c.i.f. and exclude oil imports and imports of machinery by oil companies.

akin to OILs except restrictions were placed on the amount of the good imported as well as area of consignment. Global licences had no restrictions whatsoever. Most independent members of the sterling area operated a licensing system similar to the UK but with some local adjustment. In addition to quantitative restrictions, New Zealand, for example, also controlled imports through a foreign exchange allocation scheme. Pakistan supplemented its quota system by controlling the extension of trade credit for all imports except a few essentials. After 1954 Ceylon discriminated not only in favour of soft currency imports, but also in favour of native Ceylonese importers as against foreign firms operating in Ceylon. The colonies were given annual foreign exchange allocations decided by the UK after reviewing each colony’s needs for the coming year. The dollar allocations and actual expenditure for 1948–54 are presented in Table 3.2, where it will be noted that the colonies underspent their allocations in all but two years. This, then, was the apparatus though which Britain hoped to achieve the three goals introduced at the beginning of this chapter. The attempts to coordinate sterling area trade policy fall into three periods punctuated by the responses to the crises of 1949 and 1951/2. QUANTITATIVE RESTRICTIONS, 1949–50 The coordination of sterling area import controls which set the tone for the early 1950s began at the Commonwealth Economic Conference of July 1949. At the end of June the Chancellor of the Exchequer, Sir Stafford Cripps, sent messages to all the sterling area finance ministers outlining his belief that 1949–50 sterling area dollar imports would have to be cut by 25 per cent from their 1948 value or from $2,815m to $2bn.9 Cripps therefore asked, without prejudice to the outcome of the upcoming conference, that finance ministers should be prepared to submit estimates of dollar earnings and expenditure for the coming year, bearing in mind the British predictions of affordable dollar expenditure. As an encouragement Cripps announced two days later that the moratorium on British dollar imports begun in June would be continued for at least three more months. On 9 July 1949, the Economic Policy Committee of the Cabinet approved a Treasury paper on the British objectives of the conference which proposed a new approach to sterling area trade.10 The Treasury recommended that the sterling Commonwealth should agree on the total dollar imports possible (allowing for

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estimated earnings and overseas aid) and then negotiate national dollar import programmes within this limit. These programmes would then be under continuous review to allow for changes in the state of the international economy. Dealing with individual targets in the context of a collective agreement, it was suggested, ‘should certainly minimise the chances of any individual country getting away with dollar expenditure which the sterling area as a whole cannot afford’.11 The policy paper went on to suggest that any member unwilling to negotiate on these lines might be threatened with banishment from the sterling area and a consequent withdrawal of the right of convertibility of their sterling balances. This last threat was especially directed toward India which, it was thought, might view the programme as an unacceptable infringement on its sovereignty. Facing an escalating dollar drain in the middle of July while the Commonwealth finance ministers were meeting in London, Cripps led the way by announcing a cut of 25 per cent on the 1948 value of British dollar imports, which amounted to a reduction of some $400m. A few days later, the Conference issued a joint communiqué stating that immediate steps necessary to check the continuing heavy drain on the central reserve of the sterling area were discussed, and the Ministers concerned agreed to recommend to their Governments action comparable in its results to that already decided upon by the United Kingdom.12 Sterling area finance ministers dutifully went home with this undertaking and British precedent behind them and suspended almost all licences for dollar imports. In the third quarter of 1949 sterling area imports from the USA fell $148m and a further $28m to the end of the year. This coordinated effort was too little too late for the immediate crisis, however, and in September sterling was devalued 30 per cent to $2.80/£. In April 1950 the Chancellor of the Exchequer commended the efforts by other sterling area countries to restrict dollar imports in a telegram which concluded that ‘the reductions in dollar expenditure have played a highly significant part in the recent improvements in our dollar position. If we are to pull through we must continue to act together in this way.’13 The path was thus set for the restrictons to be continued, even though the sterling area trade deficit with the USA had fallen to $22m in the first quarter of 1950 from $159m in the first quarter of 1949. There followed telegram replies from the sterling area finance ministers pledging their willingness to continue the measures adopted in July 1949 through to June 1951. The Indian Finance Minister’s reply was reluctant, pointing out that ‘the continued limitation of dollar purchases after June 1950 will cause further strain on the Indian Economy’ but he concluded that

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Table 3.3 Sterling area imports from the USA and Canada, 1948/50 ($USm)

Source: Direction of International Trade Statistics, OEEC.

nevertheless in the common interest of the general sterling area position we are prepared to fall into line with other commonwealth countries and to limit our total dollar expenditure on dollar imports during the year July 1950 to June 1951 to the maximum of 75 per cent by value of our expenditure during the calendar year 1948.14 The 25 per cent reduction in dollar imports agreed in 1949 was achieved through 1950. In fact, American trade figures record that sterling area imports from the USA in 1950 were only 61 percent of their 1948 value.15Table 3.3 shows the percentage changes in imports from the USA and Canada for most sterling area countries. The experience of individual members varied quite widely although dollar imports fell for most members. Particularly striking was the drop in South Africa’s imports by 70 per cent over the 1948 value. This is in part influenced by the abnormally high level of dollar imports in 1948, although the drop over 1949 was still 54 per cent. The figure for Pakistan is conversely affected by a very low level of imports from America in 1948. The value of imports in 1950 was 19 per cent lower than the 1949 value. Ireland was a direct recipient of ERP aid so its dollar expenditure did not directly affect the central reserves and its imports were not subject to the same restrictions as the rest of the sterling area in 1950. Overall, the drop in dollar imports from 1948 to 1950 was impressive indeed, but not all of this success was due to sterling area import controls. First, 1950 was a bad year in general for American exports. The volume of North American exports fell from an index of 100 in 1948 to 90 in 1950 and the dollar price index fell from 100 in 1948 to 92 in 1950.16 The fall in the value of North American exports was, therefore, fairly evenly distributed between price and volume. The other major influence in 1949, of course, was the September devaluation of sterling and all other RSA currencies except the Pakistan rupee. This had the effect of making dollar goods more expensive, which no doubt made a significant

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contribution to a reduction in dollar imports. It is interesting to note that Pakistan, which did not devalue in 1949, increased its imports of American goods in 1950 over 1948. The conclusion for the 1949 restrictions, then, is that price movements in terms of dollars, and the sterling devaluation no doubt accounted for much of the decline in the value of imports. The quantitative restrictions thus appeared to have been overwhelmingly successful because they coincided with these other favourable changes in the international economy. In most cases there was some diversion of RSA imports of which the UK was the primary beneficiary. UK exports to the sterling area increased by 35 per cent or £263m between 1948 and 1950, which accounts for most of the drop in RSA imports from the USA. Only in Pakistan, Australia, and to a lesser extent in some colonies, were some of the forgone imports from the dollar area offset by an increase in imports from the non-sterling OEEC. For the rest, imports in 1950 fell absolutely from their 1948 level. THE KOREAN WAR BOOM, 1950–1 Three months after the sterling area’s resolution to continue the dollar import restrictions the Korean War erupted, generating a dramatic increase in the world demand for raw materials for re-armament. Sterling area exporters of such war materials as tin, jute, rubber and wool, in particular, benefited. In 1950, the sterling area together accounted for 40 per cent of world exports of tin, 100 per cent of world exports of jute, 60 per cent of world exports of rubber and 70 per cent of world exports of wool.17 These were all raw materials of which the USA was a net importer. As a result of rising prices and volumes, the value of sterling area exports to the NSA as a whole increased by 52 per cent or almost £1bn during 1950. Of this increase one-third was to the dollar area, 38 per cent was to the OEEC, and the rest to other non-sterling countries. Here was the first postwar opportunity to achieve the triangular balance sought by the British if RSA imports from the NSA could be restrained. The RSA earned a trade surplus of £340m from the NSA which was contributed to the central reserves to offset the British deficit with the NSA, and their sterling balances rose commensurately. This surge in export earnings, however, inevitably had a deteriorating influence on the willingness to restrict non-sterling imports. At a meeting near the end of September 1950, the sterling Commonwealth finance ministers reviewed the import restrictions in the context of the changed balance of payments situation. Before the meeting convened, J.F.Ninmo, representing the Australian Treasury in London, warned Flett, UnderSecretary of the UK Treasury, that the Australians would not take part in any dollar import agreements that specified cuts using a percentage formula similar to that agreed in July 1949, in the interests of introducing greater flexibility into the Australian import programme.18 The Menzies government which had taken office in 1950 was pledged to a more independent course of economic

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development than the previous Australian Labour government and looked beyond the bilateral relationship with Britain to fulfil these ambitions.19 It seemed to Flett, however, that the Australians might accept a ‘gentlemen’s agreement’ regarding import restrictions,20 but he had to report the next day to Ninmo that Hugh Gaitskell21 (acting for the Chancellor who was on leave) was not ready to abandon a percentage formula.22 Ninmo commented to his Australian colleagues that ‘in his [Cripps’s] absence a very energetic Gaitskell is carrying on, but one wonders whether he is not showing more energy than commonsense’.23 Another obstacle which faced all RSA countries was that inflation had made it more difficult to hold their imports to 75 per cent of the 1948 value. As a result, the Commonwealth finance ministers were at first unable to agree to any public statement on dollar import restrictions. They were agreed only on the need to increase the sterling area’s reserves and that the measures taken in July 1949 had been important in improving the sterling area’s position.24 Three alternative formulas for a commitment on dollar imports were devised by the UK and presented to the RSA. The first was to continue to limit dollar imports to 75 per cent of the 1948 value with additions for exceptional stockpiling needs. The second option was to limit dollar imports by a percentage less than 25 per cent to allow for price increases, or thirdly to make a more vague statement that dollar imports should be limited to essentials on a basis no less stringent than the 1949 policy.25 The first option was unacceptable to most delegates because of inflation since 1948 as well as the need for re-stocking, and the second option was supported only by India and Pakistan who wanted an explicit ceiling on dollar expenditure to impose discipline on their own departmental spending. The third option would have satisfied Ceylon and New Zealand but it was rejected by Australia because of its reference to the 1949 policy. The final communiqué of the meeting was, therefore, much less specific, stating only that the members were agreed on the need to persevere with measures designed to increase the dollar earnings of the sterling area, whether by exports or by the provision of dollar-earning services. The Ministers of the sterling area countries agreed upon the need to maintain strict economy in dollar expenditure.26 Gaitskell continued to hope that a concrete undertaking could be negotiated after the conference was finished27 but by the end of October he was forced to report bitterly to the Economic Policy Committee of the Cabinet that we have failed to secure anything approaching the sort of formula which my colleagues authorised me to aim at and that the agreement that eventually emerged is weak enough to permit a really substantial upswing on dollar expenditure by the independent sterling area.28

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In the event, Gaitskell’s fears were realised as RSA imports from the dollar area increased significantly through 1951, especially for those members which benefited from the Korean War boom. Table 3.4 shows the growth in exports to the USA from Australia, India, Malaya and Singapore and Pakistan from 1948– 52. These four sterling area members were major beneficiaries of the raw material boom of 1951. Australia exported 66 per cent of sterling area exports of wool and India accounted for 76 per cent of the area’s cotton exports. Malaya and Singapore provided 88 per cent of the sterling area tin exports and 83 per cent of the area’s natural rubber exports, while Pakistan exported most of the raw jute in the sterling area. These five commodities alone rose from one-quarter of RSA total exports in 1949 to one-third in 1950 and 37 per cent in 1951. Table 3.4 also shows the acceleration of dollar imports for these countries and the sterling area as a whole. In the first half of 1951, exports were still rising faster than imports for all four countries except Malaya. Malaya’s rubber exports had been subject to dramatic price increases over 1950, while for most other products the price boom really only took off in 1951. As a result, Malaya had greater dollar earnings to spend over the first half of 1951 than other countries. For the sterling area as a whole, imports in the first half of 1951 rose 34 per cent over the same period in the previous year but exports were increasing at more than twice this rate, generating a surplus with the USA of $354m. The four RSA countries shown in the table together ran a surplus of $406.3m, more than offsetting a UK deficit of $210.7m. In the second half of 1951 this relatively healthy situation changed as the rate of increase in dollar imports for the sterling area as a whole more than tripled while exports to the USA stagnated. In India, Malaya, Pakistan and the UK, exports to the USA suffered an absolute fall. Only Pakistan succeeded in reducing imports commensurately, but even it could not avoid falling into a dollar deficit for the half year. Australian exports increased slightly, but this was not enough to offset the growth in imports. Still, the four countries together only accumulated a deficit of $25.1m in the second half of 1951, which was more than adequately covered by their surplus in the first half of the year to give them net earnings of $381.2m from the USA over the year as a whole. They were able to continue their spending spree through the first half of 1952, despite sharp drops in their export earnings when the price boom collapsed in the second half of 1951. The sterling area as a whole, however, was in a much less healthy position, accumulating a deficit in the second half of 1951 of $379. 2m, bringing the deficit over the year as a whole to $25.4m. The major culprit in the crisis of 1952 was the UK itself. Through 1950, the UK ran a deficit with the NSA amounting to £196m and earned a surplus with the RSA of only £60m. Imports from the USA doubled in the second half of 1951 over the same period in 1950, pushing the UK into a deficit of $637m for the year. It is not surprising that the British authorities were eager to preserve the much more favourable trading situation in the RSA by encouraging them not to spend their foreign exchange earnings.

Source: Direction of International Trade, OEEC. Note: M=imports; X=exports.

Table 3.4 Comparison of half-yearly trade with the USA, 1948–52 ($USm)

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In January 1951, the British Treasury began to prepare a campaign to reemphasise the need for dollar economy. The campaign was dubbed ‘The Darkening Picture’ and was to be comprised of telegrams to sterling area finance ministers and a presentation at the Commonwealth Liaison Committee in London.29 The telegram from the Chancellor of the Exchequer to the sterling area finance ministers pointed out that the improvement in the area’s dollar account had been due to the exceptional circumstances of rearmament but that this favourable situation would soon end.30 British dollar expenditure was expected to increase in 1951 due to supply shortages in the non-dollar area, combined with the need to replace stocks and expected increases in international prices. These three factors together, it was estimated, would cost the UK alone an extra $490m in 1951. In addition, Britain would have to start payments on the 1946 American Loan. The Chancellor, therefore, correctly anticipated a dollar deficit by the end of 1951 and concluded by urging dollar economy. Nine days later, R.W.B.Clarke31 was sent to appear before sterling area representatives at the Commonwealth Liaison Committee meeting of 24 January 1951, where he gave a speech designed ‘to make their flesh creep’.32 Clarke reviewed the Chancellor’s pessimistic predictions for 1951 and went on to present estimates that a full 40 per cent of the improvement in the sterling area’s gold and dollar position had been due to the reduction in dollar imports by members and only one-third was due to increased export earnings.33 The rest was due to capital inflows and reduced payments to non-dollar countries. The lesson from these figures was that dollar restrictions were vital to continue to strengthen reserves. The response to the Chancellor’s telegram in January 1951 was predictably less enthusiastic than in April 1950. The Indian Finance Minister, C.D. Deshmukh, painted a bleak outlook for Indian dollar imports in the coming year. In a telegram to the Commonwealth Relations Office he cited three changes in India’s economy which would raise dollar expenditure.34 Delivery dates from non-dollar countries (including the UK) had proved uncompetitive with dollar sources of supply in recent months. Delays in the delivery of dollar raw materials due to the imposition of export controls in the USA had artificially lowered the figures for dollar payments in 1950 that would have to be borne in 1951. The final development was the poor crop of 1950 which would inflate India’s food imports from all sources. In the event, India’s imports from the USA almost doubled to $416m in 1951. The response from Finance Minister Jayawardena of Ceylon was scarcely more promising, allowing only that as a member of the sterling area and of the Commonwealth, Ceylon is anxious to assist sterling area as a whole to maximum extent by contributing to dollar pool its share of dollar earnings with due regard however to Ceylon’s own need for consumer and capital goods from dollar area as well as for foreign reserves to strengthen its currency.35

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Ceylon had always been a dollar earner for the sterling area but the resolve to continue to support the area’s dollar pool was evidently weakening. News from the UK High Commissioner in New Zealand was even more disturbing. On 12 February 1951, he reported that the New Zealand Treasury’s support of dollar economy was up against strong opposition from other official departments.36 The government had decided to accelerate the removal of quantitative restrictions as a result of pressure from older established manufacturers who felt they could withstand international competition and wanted their younger competitors, who relied on protection, to be forced out of business thus releasing scarce labour. The responsibilities of New Zealand as a member of the sterling area do not appear to have figured in the decision. The new Chancellor of the Exchequer, R.A.Butler,37 pencilled on the bottom of the telegram, ‘I don’t like this at all.’ Here was a blatant example of the discipline of the trade system beginning to crumble under the force of national interests. On the same day, Bowden, the New Zealand Finance Minister, proposed that a Commonwealth Ministerial meeting be called to discuss ‘the merit in the general adoption by sterling area countries of the greatest possible relaxation in the discriminatory application of controls against dollar imports under a carefully selected range of commodities’.38 At the same time, however, Bowden reassured the UK that an end to discrimination would only follow a joint decision by the sterling area and promised that New Zealand would not take unilateral measures to relax dollar discrimination. In the second half of 1951, the gold and dollar reserves began to fall, slipping $600m in the third quarter of 1951 and a further $900m in the three months to December. Sterling area sterling balances were run down by $865m (or 10 per cent) in the second half of 1951 as export earnings fell against import expenditure. Finally, in November the UK was forced to retreat on its position on European liberalisation and a wide range of imports were removed from OGL. An emergency meeting of Commonwealth finance ministers was called for January 1952. RETURN TO RESTRICTIONS, 1952 In December 1951, the Treasury Working Party on the upcoming Commonwealth Finance Ministers Conference compiled a paper entitled ‘Objectives and General Policy’.39 There were four main objectives. First, to convince the members that the sterling area was good for them and that the UK was determined to earn a balance of payments surplus for the area after being in deficit over the past few years. The second was to get an undertaking from members that they would adopt internal and external measures to correct their economies and cease being drains on the dollar reserves. The third objective was to organise longer-term plans for closer economic cooperation and the last objective was to draft a strongly worded communiqué expressing the area’s resolve to strengthen sterling. With regard to import controls, the Treasury

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Working Party warned that ‘the present situation is not conducive to the 1949 treatment by a uniform cut of imports from the dollar area’ because the sterling area was in deficit with the non-dollar world as well. The longer-term survival of the sterling area was described by the Working Party as depending on a sustained surplus of the sterling area with the NSA to increase the reserves base. To achieve this the UK, colonies and independent sterling area each had distinct roles to play. Britain was to aim at a surplus with the RSA and a balance ‘at best’ with the NSA. The colonies were already in surplus with both the dollar area and the sterling area and this was to be continued through ceilings on dollar imports. The independent sterling area was to generate a surplus with the NSA to offset their deficit with the UK. The Treasury Working Party concluded that if the pattern of multilateral trade is to be preserved, this is the only means by which the whole sterling area can get its indispensable surplus with the outside world, for UK and Colonies cannot both have a surplus with the ISA and have a surplus with the rest of the world.40 Here, then, is implicit acceptance that the UK was chronically unable to earn a surplus with the NSA and that this deficit would have to be borne by the RSA, primarily through running larger deficits with the UK and by depriving themselves of NSA goods as the terms of trade moved against their exports. The burden borne by the RSA in this scheme was considerably heavier than that assigned to the UK. With the end of the Korean War boom, international demand and prices for the primary goods produced by the RSA had fallen drastically so the prospect of increasing exports to the NSA was unlikely. At the same time, by restricting imports of dollar manufactures and machinery, the RSA was restrained from developing new industrial products or increasing the level of local processing of traditional primary exports. In any case, the UK did not want the RSA to go too far toward diversifying their economies. The longer-term policy of the Treasury Working Party emphasised the development of raw materials and food as targets of investment in the RSA rather than industrialisation or ‘social advance and the provision of amenities’.41 This was to ensure that they kept producing the primary products on which their surplus with the NSA depended. The British task was merely to continue to generate a surplus with the RSA and avoid too deep a deficit with the NSA. The priority for British exports was to be RSA markets, both to allow the UK to achieve an overall surplus and also to supply the RSA with the goods which they would otherwise import from the NSA. In July 1949, this second motive for directing UK exports to the RSA had been acknowledged by the Chancellor of the Exchequer who stated that ‘we cannot possibly bring the sterling area along with us unless we are able to supply them and temper the dollar cuts’.42 In this way, exporting to the sterling area indirectly saved dollars. These ideas were to prove out of date as the

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RSA was becoming impatient for development and at the same time was increasingly dissatisfied with British products, as will be seen below. That British policy seemed to be in a rut was recognised by some policymakers in Britain who were losing faith in quantitative restrictions as a solution to trade problems. The Bank of England criticised those government officials ‘who seem to have no other kind of solution to present sterling area difficulties but a further round of intensification of controls and import restrictions’, adding that ‘this policy has been tried consistently in the past with no great success and in our opinion is likely to have an unfortunate psychological effect on the independent members of the sterling area if put forward as the sole solution to deal with the present emergency’.43 Instead, the Bank suggested putting emphasis on the need to take internal deflationary measures to bring the expenditure of individual members within their means. The Economic Section of the Cabinet Office, on the other hand, was more concerned with the immediate crisis. Robert Hall,44 Director of the Section, wrote that it does seem to me that the immediate task will be to convince the members of the Conference that the sterling area will break up from loss of reserves unless the current drain on the reserves is stopped; and that the only way to do this is by sharp reductions in expenditure on dollars and the currencies of OEEC countries.45 In the long term, Hall agreed that internal measures were the root of the solution but he argued that if this approach were stressed, the RSA would say that their internal economies were their own affair and/or that they were already doing all that they could in this area. In any case, due to time lags internal measures would not get the sterling area out of the immediate crisis. In the end, the agreed approach was to emphasise the need for internal measures to get the sterling area ‘houses in order’ but at the same time to declare an immediate reduction in non-sterling expenditure. At the first preliminary meeting of officals, Herbert Brittain, Third Secretary at the Treasury, described the British vision of triangular trade balance and went on to discuss how this might be achieved by the second half of 1952.46 The Treasury estimated that at the current rate of spending, the sterling area deficit with the NSA would amount to £550m in the second half of 1952. To achieve at least a balance with the NSA various strict remedies would have to be taken by each member of the sterling area. Internal deflationary measures were vital because the sterling area as a whole was living beyond its means and inflationary pressures were mounting. Internal deflation could not be relied upon alone, however, due to the extreme urgency of the present situation, so some immediate cuts in imports were necessary. Brittain reviewed the steps that Britain had taken in the past few months, including an excess profits tax and the tightening of credit through a rise in Bank Rate and stricter policy by the Capital Issues Committee against investment intended to increase production of goods for the domestic market. In

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addition to these internal measures, the UK had taken direct action to cut imports by £130m, mostly from Europe. The response of the sterling area delegates to this call to action was mixed. Most countries had already taken steps to reduce domestic inflation, although the officials agreed in the report to their ministers that further measures were needed.47 The imposition of import controls, however, was more controversial. Only Southern Rhodesia had followed the UK in imposing controls on the NSA as a whole rather than just on dollar imports. India and Pakistan felt they had already imposed the strictest controls on imports that they could support. Australia and New Zealand had recently taken a mixture of internal and external policies designed to help their situation, and Australia in particular was unwilling to commit itself to further measures until the effects of these policies had time to make themselves felt. Ceylon was already in surplus with the NSA and was more interested in the longer-term viability of the sterling area than its immediate problems. The South African government was against direct controls, but in any case met their own dollar needs out of gold production. The report of the officials’ meetings resolved that the sterling area balance of payments with the NSA should be brought into balance in the second half of 1952 and that for this purpose, it was agreed that all members should seek to improve their situations vis-à-vis the rest of the non-sterling world as a matter of urgency, by the imposition, where that was decided to be necessary, of emergency import restrictions on goods from these sources.48 The concluding statement of the Commonwealth finance ministers nine days later echoed the report of officials but stated more firmly that, although they were committed to balancing their accounts, ‘this cannot be attained by negative and restrictive methods alone, or merely by the imposition of cuts on imports from certain parts of the world’.49 The methods for correcting the situation would be at the discretion of individual governments and would vary according to individual circumstances, but would follow three general steps. The first was to ensure that the internal economy was sound and to combat inflation. The second was to increase exports and foreign earning power, for example by long-term borrowing outside the sterling area. The third step was ‘so far as other methods do not fully achieve the desired results, it will be necessary, as a temporary measure, to reduce imports’.50 Import controls were thus relegated to third place in sterling area trade policy. What the public statement did not reveal was that in unofficial meetings the Chancellor had given each member a target to contribute to the sterling area balance. This involved the UK running a deficit with the NSA of £200m balanced by an equal surplus of the RSA with the NSA.51 In March 1952, as the British situation worsened, the targets were revised to allow the sterling area as a whole to achieve a surplus of £200m. Each member of the RSA was told that this

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Table 3.5 Targets for the second half of 1952, balances at annual rate

Source: Telegram, Chancellor of the Exchequer to Commonwealth Finance Ministers, 4 March 1952. PRO T236/3360.

would be made up of an RSA surplus of £300m and a UK deficit of £100m, but the revised targets for the RSA added up to significantly more than this, leaving the British task somewhat easier. These targets are presented in Table 3.5. Sterling area trade policy had, therefore, changed from a uniform import cut for every member of the area to cuts in overall deficits with the NSA according to each member’s earning potential. Although the public statement of the finance ministers did not commit them to import restrictions they were unlikely to achieve their targets by the second half of 1952 without them. After the Conference, the Indian government accepted the target set for them and stopped importing dollar food grains and raw cotton. Other restrictions were put on the import of goods with healthy domestic stocks or where non-sterling countries were the major sources of supply, and after March the collapse of Indian export prices slowed inflation.52 The Australians informed the UK that they were unlikely to meet their target, mainly because of the long delay between policy changes and actual flows of goods due to the distance of Australia from its import markets.53 The Australian Treasury was particularly concerned about the future of the sterling area and advised the Australian Prime Minister that unless there are grounds for believing the sterling area can ‘weather the storm’ and these grounds appear solid to you, then I think that the government would be ill-advised to place in the sterling area pool at the present time any assets which it might subsequently need in the event of a breakdown.54

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Nevertheless, in March they imposed widespread import restrictions against both sterling and non-sterling imports and recalled outstanding import licences for review. New Zealand expected to reach their target in the year 1952/3 rather than by the end of 195255 and in April introduced an exchange allocation scheme which allowed importers only 80 per cent of their 1950 allocation of foreign exchange. These controls only affected imports from the sterling area and the OEEC, which were free from licence restriction. Goods from the dollar area and from Japan were already subject to licence with their own foreign exchange allocations. Pakistan tightened credit and increased the duty on cotton textiles in mid-1952 from 30 per cent to 60 per cent. This was not sufficient to restrain foreign exchange expenditure, however, and in August non-sterling OGLs were retracted for all imports except machinery, capital goods, drugs and other essentials. In November the remaining OGLs were removed and all imports became subject to specific licensing. Existing import controls were tightened in Ceylon, which was already in surplus, and in South Rhodesia, which had taken measures in late 1951 along with the UK to restrict imports from the entire NSA. Ireland also reduced imports from the NSA from $17m to $7m, and South Africa further restricted imports through their complicated licensing procedure. The colonies were asked to keep their NSA imports at their 1951 level. By the second half of 1952, the sterling area was able to achieve a balance with the rest of the world. The UK moved from an overall deficit of £171m on current and long-term capital account to a surplus of £31m, including a trade surplus of £23m, compared with a deficit of £230m in the first half of 1952. The RSA also moved into a slight current account surplus with the NSA from a deficit in the first half of the year of £160m. This was achieved by a cut in imports from the NSA by 25 per cent (including a 35 per cent drop in imports from the dollar area). The drain on the central reserves of £232m in the first half of 1952 was halted and reserves increased £57m in the second half of the year. The turnaround from the first to the second half of 1952, then, was dramatic indeed. W.M.Corden calculated the effect of the British restrictions of 1951/2 and noted that there were aspects of the British economy which helped the controls seem to be effective, such as the large stocks built up in 1951 as well as the recession in consumer demand in 1952.56 These observations are reinforced by the fact that British imports from the sterling area (which were not controlled) fell, along with imports from the NSA, which indicated a general slackened demand. Corden did not extend his analysis to 1953 when the NSA exports to the sterling area were squeezed further. The decline was greatest in 1952 for the UK but the RSA reduced imports more in 1953. This reflects the longer distance between the RSA and large markets like the USA and Europe which entailed longer contracts and more goods in the ‘pipeline’, factors which delayed the effects of import controls. Also, most countries did not take action until the end of the first quarter of 1952, which would further delay the effects of their policy.

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There were, however, other reasons not connected to the direct controls which would reduce imports in 1952/3. For the UK, and also for Australia, Ireland, New Zealand and South Africa, 1951 was a year of stockpiling. This enhanced their ability to restrict their imports and would also have made imports less in 1952/53 than in 1950/51 even in the absence of direct controls.57 There were also important price changes during these years. As in 1950, the price index of sterling area imports fell in 1953 almost as much as the quantum index for sterling area imports. In particular, the prices of manufactured goods fell after rising in 1952. The quantitative restrictions of 1952/3, like those of 1949, were favoured by exogenous changes in international prices. The relief from the crisis of 1951/2 marked the end of coordinated sterling area trade policy focused on quantitative restrictions. In November 1952 a Commonwealth Economic Conference was held to review the progress on the sterling area balance of payments situation and to introduce the Collective Approach programme as a path to sterling convertibility. At this conference, coordinated import controls were pushed firmly into the background of sterling area trade policy. The Preparatory Meeting of Officials completed a ‘Report on the Short Term Balance of Payments Outlook’ in October 1952, which emphasised that the quantitative restrictions had been reinforced by deflationary internal measures and that the role of such policies in maintaining and improving the Sterling Area’s Balance of Payments with the rest of the world is likely to be of crucial importance both in its effect on imports and in increasing competitive power and production for exports.58 It was frequently noted that import controls were a short-term measure whose effectiveness could not be relied upon for much longer. In a brief on the balance of payments outlook, Paul Vinter of the Treasury suggested that the Chancellor should not as on some past occasions, suggest precise targets for imports or for the non-sterling balance, but rather that he should…lay the predominant stress on the need for substantial increases in exports from the Sterling Area at competitive prices.59 The Treasury added in a later brief that specific balance of payments targets for members of the area were not necessary since most members were individually in enough trouble to induce them to maintain strict control on their domestic economies.60 Import controls should not be abandoned but rather kept as they were, except for relaxations by Australia in favour of British exports. In the longer run, in conjunction with the approach of convertibility, it was felt that discrimination should progressively be relaxed.

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This represented a distinct change of spirit in the British attitude toward sterling area trade policy. The priority given to restricting dollar imports had been relaxed at the January conference and the emphasis had begun to shift to general balance of payments considerations, with special regard to the importance of trade policy rather than trade policy in isolation. By December, the immediate crisis had passed and no emergency measures had to be urged on the sterling area. The Conference was preoccupied with the longer-term issues of convertibility and development and this was reflected in the discussion on trade policy. The emphasis was on longer-term solutions such as coordinating internal policy to effect a general decrease in the pressure of demand, and increasing exports to make the sterling area viable on an ongoing basis in preparation for the eventual freeing of trade and payments. Quantitative discriminatory restrictions on imports were less palatable among the sterling area’s trading partners in Europe and North America as the sterling area recovered from the 1951–2 crisis and reserves began to increase. It was also in keeping with the general movement in European relations that the British trade barriers which had been restored in the wake of the crisis should be removed once the crisis had passed and Britain’s balance in the EPU improved. These changes in the character of sterling area policy were apparent in the final communiqué of the Conference.61 Internal stability of members was described as the key to the external balance of the area as a whole, while it was noted that ‘the level of the reserves is as yet too low to warrant any substantial relaxation of the restrictions on imports from outside the sterling area’. The triangular balance of trade was to be pursued through more positive means, such as efforts to ‘expand the earning power of all sterling countries’ while imports were held to a minimum. This was to take place partly by strict internal policies and partly by the more careful direction of development funds toward ‘projects which directly or indirectly contribute to the improvement of the area’s balance of payments with the rest of the world’ by increasing their competitive power in world markets or replacing goods only available outside the sterling area. This change in emphasis away from quantitative restrictions marked the end of coordinated sterling area trade. The nature of export policy, dealing with indirect incentives and controls on domestic investment and consumption rather than the direct controls associated with import policy, made it more difficult for Britain to interfere in sterling area choices. British policy grew more focused on stimulating its own exports to help balance trade, and the hopes that the trade pattern of the sterling area would solve Britain’s chronic trade deficit with the NSA faded. One final influence in British sterling area trade policy after 1953 was the fact that the pressure to restrict imports in 1952 had resulted in the RSA imposing controls on imports from the UK as well as the rest of the world. This route no doubt seemed a self-defeating one for the UK after 1953. As trade issues receded from sterling area discussions the problems of development and convertibility gained prominence.

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THE STERLING AREA AND UK EXPORTCOMPETITIVENESS It was widely believed in the 1950s that the sterling area provided British traders with an easy and secure market based on traditional trading relationships and overseas holdings of expendable sterling assets. In 1956, for example, P. Harris of the Board of Trade reported that this was the view of the Board of Trade, the Treasury and the Economic Section.62 D.H.Robertson wrote in 1954 that British traders were able to ‘lie back on the featherbed of mutual trade’ with the sterling area rather than moving into more competitive world markets such as America and Europe.63 As noted above, the sterling area system allowed Britain to earn foreign exchange indirectly through exports to the RSA, so direct exports to the NSA were not necessary. This scenario on its own, therefore, would not have been damaging to British interests except for the fact that the sterling area market grew much more slowly than the world average. Between 1948 and 1958, the RSA’s total imports increased by 38 per cent from $9,803m to $13, 563m, while world imports grew by 71 per cent.64 North American imports grew by 84 per cent but this was mostly due to large increases between 1948 and 1951 so that from 1951 to 1958 American imports grew only 23 per cent. The Continental European market, in contrast, absorbed almost twice the value of imports in 1958 as in 1948 due to their industrial recovery after the war and the removal of trade restrictions. Figure 3.6 shows the growth of imports for these three areas, where it is evident that RSA imports grew roughly in line with North American imports after 1951 although at a lower level. Europe, however, was the market to aim at for growth. The trade figures for the 1950s show that British traders were quite successful in penetrating the competitive American market, especially after the US recession of 1954. British exports to the USA and Canada almost doubled between 1950 and 1958 and grew to 15 per cent of total British exports. Britain’s performance in the faster-growing Continental European market, however, was less successful. British exports to Western Europe increased by 46 per cent but remained a fairly constant proportion of Britain’s total exports (23–25 per cent). Britain’s share of the European market remained below 10 per cent after 1951, declining after 1953 to 7.7 per cent, while intra-continental European trade expanded by 16 per cent from 1951. There are two aspects of sterling area trade which may have contributed to Britain’s weak perfomance. The first is whether the sterling area indeed lulled UK exporters into complacency. The second is the importance of the geographical distribution of British exports in the 1950s for the loss of world market share. The causes of the decline in Britain’s share of world trade from the 1950s to the 1960s has been the subject of considerable research which consistently concludes that undue concentration in the slowly growing sterling area market was not primarily responsible. In 1957 the Board of Trade assessed the possible effect of the geographical distribution of UK exports on the decline in world

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Figure 3.6 Comparison of value of imports by area, 1950–8 Source: Direction of International Trade, OEEC

market share of manufactured exports from 22 per cent to 19.7 per cent during 1951–5.65 The report concluded that the area pattern of UK trade accounted for about 30 per cent of the change in market share for manufactures during these years or a loss of 0.7 per cent of the world market for manufactures. To some extent the concentration of UK manufacturing exports in the relatively slowgrowing sterling area market was offset, however, by a favourable commodity distribution of exports to this area so that the combined effects of area and commodity pattern accounted for a loss of market share of 0.6 per cent. This was mainly due to the large proportion of the category of Metals and Manufactures absorbed by the sterling area while exports of textiles from the UK declined. Sterling area markets for Metals and Manufactures allowed the UK to increase its world share of this category, although it should be noted that this was due mainly to the inclusion of arms and ammunition in which the UK did not compete with Germany. The Board of Trade attributed most of the decline in UK market share to a general loss of competitiveness.66 These conclusions were confirmed by subsequent studies. In 1964 S.J. Wells calculated that if the UK had kept its share of the market for manufactures in each area to which it exported between 1953 and 1959, UK exports would have amounted to $9,637 in 1959 instead of $7,864m.67 If the UK had kept its share of

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the world market as a whole, total exports would have been $9,661 in 1959. From this he concluded that ‘the United Kingdom lost only about $24m of trade as the result of exporting to countries whose import markets grew less rapidly than the value of world trade as a whole’.68 In a study for the National Institute of Economic and Social Research, R.L. Major assessed the reasons behind the declining world market share of UK exports from 1954–66.69 He concluded that only 9 per cent of the decline was due to the combined effects of commodity and area pattern changes. The difference from the Board of Trade’s analysis of 1951–5 reflects the slower rate of growth of the European market during the period covered by Major. In the Brookings Institution investigation of the British economy in the 1960s Lawrence B. Krause concluded that ‘while the large concentration in the slowly growing sterling area markets has been somewhat unfavourable, it has been offset by a desirable product concentration’.70 Thus, as in the 1950s, the benefits to British industry of having a large market for high growth manufacturing exports offset the effects of the slower overall growth in the RSA market. Krause’s study concluded that Britain’s own slow economic growth and lack of price competitiveness were the primary causes of falling world market share in the early 1960s. While the relatively slow growth of the sterling area market cannot be held directly responsible for most of the loss of British competitive power, it is still possible that the RSA provided a ‘soft’ market for British exports which allowed traders to sell inferior goods with respect to price and quality while their competitors were forced into the harsher climate of American and European markets which demanded cheaper goods of better quality. In this case the existence of the sterling area system allowed the British manufacturing sector to fall behind European competitors in productivity and competitiveness. The existence of an excessively ‘soft’ market during the 1950s, however, does not withstand closer analysis. Table 3.6 shows that after 1953 British exporters competed less successfully with foreign traders. The loss of Britain’s share of the sterling area market was taken up mainly by West Germany and Japan. The downward trend in the British share of independent sterling area markets was most marked in Australia, Britain’s largest trading partner, which contributed most to the overall decline in Britain’s market share in the RSA. Whether this was due to the relaxation in discrimination in import controls or to a general lack of competitiveness of UK exports will be investigated below. Even before 1953, however, changes were apparent in trade relations between Britain and the RSA. On 8 March 1952, facing an accelerating drain on reserves and poor export prospects, the Australian government imposed severe quantitative restrictions on imports from all sources. Specific goods were divided into either Category ‘A’ imports or Category ‘B’ imports. Category ‘A’ included various raw materials and semi-manufactures which were limited to 60 per cent of the value of similar imports in 1950/1. Category ‘B’ goods were mainly consumer items, including

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Table 3.6 Shares of the sterling area market for manufactures, 1953/59 (%)

Source: S.J.Wells, British Export Performance: A Comparative Study, Cambridge University Press, 1964, p. 17.

most textiles and all clothing, and were to be cut to 20 per cent of their 1950/1 value. It was estimated by the Board of Trade that the UK supplied 75 per cent of the non-dollar category ‘B’ goods.71 Some other items such as capital goods and other essentials were subject to administrative control and licensed individually. These arrangements covered all goods except dollar and Japanese imports which were licensed separately. Wilson, Secretary to the Australian Treasury, had warned at the finance ministers’ meeting in January 1952 that Australia would have to cut sterling area imports to bring its balance of payments into order. Clarke of the UK Treasury responded that the UK did not advocate import cuts among sterling area members but that any reduction in imports from sterling sources should be the result of internal monetary policies, not direct controls.72 This was a rather naïve attitude since a full 62 per cent of Australian imports came from the sterling area in 1951 and 45 per cent from the UK alone. Australian imports from dollar sources were already restricted to essentials, so a reduction in imports which excluded the sterling area would require an almost complete embargo on European goods to be at all effective and this might invite retaliation. The Board of Trade tried to resist the practical necessity for Australian restrictions against UK exports but eventually had to concede.73 What the British found particularly offensive was the lack of consideration for the balance of payments needs of the sterling area as a whole. A.L.Burgess objected that the Australian position was ‘in complete contradiction to the whole concept of the sterling area’ because it acted on the principle that a member should restrict imports based only on their individual balance of payments rather than on the situation of the area as a whole.74 The January conference, however, had committed each member to balancing its own economy, vis-à-vis the rest of the world, as a contribution to the viability of the sterling area as a whole, and the Australians believed their new policy was consistent with this commitment.75

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Australia could not afford to continue to run such a large trade deficit with the UK even though the British surplus was integral to the triangular balance which was sought for the sterling area. In 1951, the UK had a trade surplus of £339m with Australia and a surplus with the whole sterling area of only £30m. Britain’s surplus with the RSA was therefore very dependent on access to the Australian market. The Australian restrictions undoubtedly had a significant impact on the relationship between Britain and the RSA. From the end of 1951 until the end of 1953, before temporary relaxations of the restrictions began to have effect, Australian imports from the UK fell by £334m or 35 per cent while its exports to the UK rose by £158m.76 By the end of 1953 Australia had a trade surplus with Britain of £153m compared with a deficit in 1951 of £339m. This change in the fortunes of British trade with its largest trading partner predictably had an impact on Britain’s ability to earn an adequate surplus with the RSA on which the triangular balance depended, and in 1953 the UK actually ran a trade deficit with the RSA. Despite all the attention focused on Australian policy in 1952/3, other sterling area countries were also restricting their imports of British goods as part of their balance of payments programmes. New Zealand’s exchange allocation scheme covered imports from the UK and the RSA from March 1952, until it was abolished in September 1954. New Zealand was an important market for British automobiles and textiles, both of which were especially strictly controlled in 1952/3.77 New Zealand imports from the UK were almost halved in the first quarter of 1953 compared with the same period a year earlier. Pakistan’s import controls in 1953 were also directed against UK goods. As in the Australian and New Zealand cases, imports from the dollar area were treated more strictly but the controls on all but industrial capital goods, along with trade pacts with Japan, pushed UK imports from 21 per cent of the total in 1951 to 16 per cent in 1953. In May 1953, the South Africans informed Lord Swinton, Secretary of State for Commonwealth Relations, that they proposed to begin to dismantle import restrictions and end dollar discrimination from the beginning of 1954 in the interest of ending distortions in the South African economy.78 Since South Africa was under considerable international political pressure over the apartheid system, it was anxious to avoid attracting American displeasure in the IMF or GATT over trade discriminations. To this end, South Africa needed to reduce the value of total imports to be able to reduce dollar expenditure. The British authorities were understandably concerned for the fate of British exports to South Africa and were also determined to keep their entitlement to part of South Africa’s annual gold production. The Treasury outlined three objectives for negotiations with the South Africans.79 The first was to secure as much gold as possible for 1954, and second to make sure that South Africa’s plans were consistent with her relationship with the sterling area and would not have serious repercussions on other sterling area governments’ policies regarding dollar discrimination. The third object was to get the South Africans to remove existing

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restrictions on traditional British exports to South Africa. The methods to achieve these objectives were either to ‘get tough’ and threaten to expel South Africa from the sterling area, removing free access to the London capital market and excluding exports from the UK market, or to ‘rely on persuasion’. The Treasury believed that the first option was too fierce since relations had so far been cordial and such an attitude would invite retaliation which would put the UK’s interest in South African gold mining at risk and threaten Britain’s position in the South African market. Relying on persuasion, Britain was able to secure an annual £50m sale of gold for the central reserves. On the repercussions for other RSA governments, the Treasury wrote that the present South African proposals can be regarded as generally in line with ultimate sterling area policy of removing restrictions and freeing world trade, but the sterling area is not yet in a position to dispense with discrimination against dollar imports.80 The British stressed the need for sterling area discipline in negotiations in June 1953 but the South Africans were not impressed.81 Nevertheless, the threat to sterling area discipline was not considered to be too overwhelming since South Africa traditionally had a special status in the system as a gold producer and was not part of the dollar pool which was the rationale for coordinated discrimination. South Africa also gave an undertaking to give special consideration to relaxing trade restrictions on items in which the UK had a special interest.82 Finally, on 19 October 1953, P.R.Botha announced to GATT members that South Africa would be ending discrimination as of January 1954, and was congratulated by the Canadian and American representatives.83 The effect on South African dollar imports was not very damaging to the sterling area. As a percentage of total imports, those from the USA and Canada grew only from 23 per cent to 25 per cent from 1953 to 1956 and declined thereafter. West Germany was the major beneficiary of the loss of British market share in South Africa. At the beginning of 1955 Pakistan also ended discrimination against dollar imports. In August 1954, facing political and economic crisis, the government of Pakistan approached the USA for aid and in October $75m was granted to allow imports of capital goods, agricultural commodities and a wide range of scarce essentials. In June 1954, Pakistan had embraced the general sterling area export drive, introducing an Export Incentive Scheme which increased import licences to industrial importers for raw materials and machinery for use in producing goods for export. As of January 1955, with American dollars in the offing, these import licences were declared valid for imports from all countries. At the end of January a list of twenty-two items to be imported specifically against aid from the USA was published. These were mainly raw materials and semimanufactures for industry. Between the end of 1953 and the end of 1955,

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Pakistan imports from the USA and Canada grew from 5 per cent of total imports to 12 per cent. Other sterling area countries also relaxed their restrictions on dollar imports in less spectacular fashion. India relaxed licensing and increased quotas gradually through 1954–5 to allow imports of cheaper machinery and raw materials from the dollar area to help Indian industrialisation. By April 1956, however, the adverse trade balance could no longer be ignored and imports of consumer goods were cut, followed by more wide-ranging import controls in July 1957. The movement to non-discrimination was motivated by politics as much as economics. Australia and South Africa were concerned to disentangle restrictions on their domestic industry but were also preoccupied with the strength of their political position in GATT and IMF and their relationships with the USA and OEEC. Pakistan was influenced by its position as a recipient of American aid which made it politically difficult to continue to discriminate against American exports as well as less necessary. The Indian relaxations, however, had resulted from the desperate need for imports for development from the cheapest market as well as a political re-orientation of trade toward Eastern Europe. Sterling area countries were increasingly active in seeking other markets both for imports and exports. India, Ceylon and Pakistan were courted by West Germany, Eastern European countries and Japan as trading partners to replace the UK. India made trade agreements with Romania and China in the Spring of 1954, with East Germany in December, and received substantial technical and financial aid from the USSR in 1955/6. Ceylon concluded trade agreements with China in 1953 and 1954 and with Poland and Czechoslovakia in early 1956. In March 1953, Pakistan concluded its first trade agreement with Japan for cotton, and through 1954 sought bilateral agreements with Western and Eastern Europe to secure markets for exports by linking them to agreements which allowed deferred payment for imports (which the UK was unwilling to do). West Germany, in particular, increased its share of Pakistan’s trade and created a market for German capital exports by developing industry in Pakistan and buying an increasing share of Pakistani goods to supply foreign exchange. Between 1954 and 1958 West Germany increased its share of Pakistan’s imports of machinery and transport equipment from 11.6 per cent to 23.5 per cent. The UK share of this market fell from 47.4 per cent to 35.8 per cent over the same period. Contemporary observers were aware of increasing competition in sterling area markets. The import restrictions imposed by Australia and some other countries against UK exports in 1952/3 highlighted the danger of under-estimating competition in the sterling area. Through 195 3, Peter Thorneycroft, as President of the Board of Trade, gave a series of speeches to British industrialists and the House of Commons warning that the imposition of restrictions in the sterling area

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requires a willingness on the part of our exporters to make the determined efforts necessary to establish themselves in newer markets that are open to our goods.84 Lord Lloyd, Joint Under-Secretary of State for the Home Department, exhorted the Plymouth Mercantile Association that if we encounter import restrictions in our established markets we cannot afford simply to sit down and wait until they are removed. We must go out and seek new business in the new markets that are open to our goods.85 Anecdotal evidence also supports the view that competitiveness was part of the explanation of the decline in UK market share. British goods were considered uncompetitive with respect to delivery dates, especially in the far-off markets of Australia and New Zealand. In 1952, the Economist Intelligence Unit (EIU) warned that ‘delivery dates are of vital significance and America, Germany and Japan can often deliver more quickly and at competitive prices’.86 Quality and after-sales service were other aspects of the weak competitive power of British exports. With respect to British car exports, the EIU reported in 1957 that recently there has been considerable discussion on the prospects for British cars in Australia. Considerable criticism has been levelled at many types as ‘dust-boxes’ and unable to stand up to poor roads, and there are recurrent complaints of poor after sales attention and inadequate supply of spares.87 In August 1951, Nigeria asked to be allowed to import 500 American cars which were particularly suited to rough terrain with which British cars could not cope. The request was denied by the Treasury because of the weakening dollar position,88 and because if the imports were allowed ‘the independent countries of the sterling area will certainly also take note of these relaxations and be all the more ready to follow the lead now given by New Zealand’89 who had announced that they would be importing £1.5m worth of American cars in 1951.90 In the end, the Colonial Office finally convinced the Treasury to overturn its decision, arguing that the restrictions on dollar imports imposed on the colonies had gone far enough given their development needs and their consistent contribution to the dollar pool.91 With respect to British textile exports, the UK trade Commissioner in Sydney warned in a 1957 speech to the Manchester Chamber of Commerce that competition from other textile producers was strengthening and designs from Switzerland, Italy and Germany are often considered more attractive than those from the UK.92

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In 1961 the National Institute of Economic and Social Research commissioned an investigation into the causes of the falling share of British exports in the sterling area market after 1954.93 The study concluded that the reduction in discrimination in favour of the UK was only partly responsible for the change in trade patterns. Most of the gains were made by exports from the OEEC against which tariff barriers had not been high in 1954, rather than imports from the dollar area which was the main focus for the removal of tariff barriers after 1954. Part of this may be explained by the lengthy delay between the innovation of policy and its effects, particularly for Southern hemisphere countries. In addition, the American recession, and a subsequent drop in total exports from the USA, reduced the short-term impact of the liberalisation of dollar imports, although the American share of the sterling area market for manufactures increased from 12.9 per cent in 1954 to 14.5 per cent in 1959. The increase in the share of the OEEC and Japan was 5.2 per cent and 2.9 per cent respectively. Instead, the National Institute described the change as the ‘normal processes of competition and the weakening of commercial and personal links as well as of official ties with Britain’.94 Tastes were becoming more diversified in the RSA and the proportion of UK imports was bound to fall from the historically high level in 1954. Why changes in taste and the loosening of ties to the UK should have accelerated after 1954 was left unexplained but was presumably related to the recovery of the range and quality of products available from Europe and elsewhere. The investigators concluded that because Britain’s share of trade did not change as dramatically in other markets, it was ‘doubtful whether declining competitive power can have been the predominant cause of Britain’s loss of share in the sterling area’.95 The data, however, certainly suggest a declining competitiveness in the sterling area market as the formal and informal barriers to trade with other countries (such as ‘commercial and personal links’) were removed and the inferior quality of British goods was revealed. CONCLUSION In the early 1950s the government did encourage exports to the sterling area to help achieve a triangular balance of trade, but this policy was abandoned after the Korean War boom. Once the international dollar shortage had receded it quickly became evident that Europe was the most dynamic market for exports. The allegations against the sterling area assume that a steady demand for inferior products in terms of price and quality allowed the British producer to ignore events on the Continent. It has been argued here that the sterling area ‘featherbed’ was in fact a fairly hard mattress for UK exporters by the mid-1950s. Perhaps exporters should have been grateful that a market for their products existed for as long as it did, since their prospects worsened considerably in the 1960s when they were further shut out of the sterling area. Once these markets had further receded it is not clear that British exporters were driven to greater competitiveness. Earlier studies have shown that the relatively slow growth of

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the sterling area was not responsible for much of Britain’s loss of market share either. The problems of British export competitiveness, therefore, must be found in levels of productivity and factor costs rather than blamed on the sterling area system.

4 INVESTMENT IN THE STERLING AREA

The London market had always been an important source of capital for sterling area countries. In the nineteenth century this was the natural product of Britain’s predominant position in international commodity and capital markets. In the inter-war period the prevalence of British industry and banks operating abroad, combined with the Sterling Bloc association, perpetuated the special connection with the Commonwealth. After 1945, when exchange controls were imposed on British investment in the rest of the world, preferred access to the London capital market was considered a major attraction of the sterling area system for overseas members since London was a haven from which investment could be sought to fulfil post-war development ambitions without competition from the rest of the world. Not surprisingly, this was a central aspect of the criticism of the sterling area by those concerned both with the balance of payments and with the growth of domestic British industry. These criticisms closely follow similar claims about nineteenth-century overseas investment. Indeed, the literature on capital flows in the 1950s might be mistaken for referring to a period 75 years earlier. In both cases it is argued that overseas investment was a burden on the balance of payments and that it was a drain of scarce resources which should have been applied to domestic capital formation to prevent the economic decline of Britain.1 These allegations beg the question of how much capital was flowing overseas and how important this was for Britain’s growth, balanced against the importance of this capital both for generating current account returns and for maintaining the coherence of the sterling area. It also needs to be noted that although the principle of unrestricted capital flows to the sterling area prevailed throughout the 1950s, this did not mean that the consequences of this policy were not investigated and that possible alternatives were not assessed. This chapter will address these issues. CAPITAL FLOWS AND BRITISH POLICY The British authorities were able to exert some control over the nature and timing of some of its overseas investment if not over the volume of capital flowing abroad. The Capital Issues Committee (CIC) vetted all private applications to the

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London market for investment in the sterling area, deferring to the Treasury, Board of Trade and Colonial Office as to the likely benefit of the project for the UK or sterling area balance of payments. Reinvested profits of British firms operating in the sterling area or other funds raised within firms were not subject to any scrutiny. In addition, sterling area central governments had the exclusive privilege of floating official loans in London. The timing of government issues accepted by the CIC was under the further control of the Bank of England which maintained a list of pending applications ranged in order of priority and, depending on the conditions prevailing in the market, could rearrange this list so delaying the issues of particular governments. Until 1952, the requirement for capital raised on the London market for sterling area investment was that it had to be for specific projects which promised to benefit the British balance of payments. This was not especially limiting provided that such projects promoted British exports, reduced imports, exploited foreign expertise or gained control of scarce raw materials which were useful to British industry. Since overseas sterling area countries were major producers of essential primary products this was not very difficult to achieve. In 1952, sterling area access to the London market was widened. At the Commonwealth Economic Conference in December of that year, the British government committed itself to a ‘Special Effort’ to encourage investment in the rest of the sterling area. Applications from sterling area governments and from private investors to the London market for capital destined for sterling area countries were to be accepted on the basis of their effect on the general sterling area balance of payments rather than on their effect on Britain directly. Any application which promised to encourage sterling area exports or to promote production which replaced non-sterling imports would be allowed. The communiqué also explicitly recognised the need for basic development in some regions. As part of the ‘Special Effort’ the Commonwealth Development and Finance Company (CDFC) was established, with £15m subscribed by the Bank of England and ninety-one British business concerns to channel private capital into development projects in the sterling area and Canada. The CDFC was empowered to borrow up to twice the original capital stake, but by March 1957 they had committed only £14m.2 The ‘Special Effort’ was reconfirmed and extended at the Commonwealth Economic Conference of January 1954. From this time sterling area governments could float loans on the London market for general development programmes as well as specific projects. To this point it appears that official policy consisted of a broad and expanding commitment by the British authorities to encourage private investment to finance development in the sterling area. Behind the scenes, however, there was serious doubt among officials at the Treasury and the Bank of England about the wisdom of encouraging capital flows to the sterling area. In January 1953 (immediately after the much-heralded announcement of the ‘Special Effort’), Reginald Maudling, the Economic Secretary, requested a policy paper on the pros and cons of continuing investment in the sterling area. In response, a debate arose

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between Otto Clarke, then under-secretary at the Treasury, and Robert Hall, Director of the Economic Section of the Cabinet.3 Both submitted reports in early 1953. Clarke’s paper contended that Britain would never attain the level of exports necessary for an adequate current surplus if investment continued to be directed overseas.4 He reiterated the Treasury position that Britain needed an annual current surplus of £300–350m to meet existing obligations on the capital account.5 This was proving a difficult target to meet and Clarke argued that in this climate no further capital claims should be introduced. He suggested a tight monetary policy to direct resources into domestic export industries and concluded, ‘what has to be done is to put as many obstacles as possible in the way of sterling area borrowing’. Hall’s response one week later made the opposite argument that the only way Britain would ever achieve the necessary current surplus was by increasing overseas investment and credit facilities to stimulate demand for British exports.6 Based on earlier Treasury working party reports that predicted a £300–600m slack in the British economy in 1953, Hall argued that exports were demandconstrained rather than limited by under-investment in the domestic economy. Furthermore, he argued that the British economy should be able to expand enough to allow for both sufficient domestic and foreign investment. While recognising that in the short run the external capital position of the UK was ‘precarious’, Hall asserted that this did not affect the economy’s capacity for long-term overseas investment. Sound investment in the sterling area was a longterm solution to the balance of payments problem by increasing invisible earnings and developing non-dollar sources of British imports, thus reducing the dollar deficit. In the short term, then, commercial credit should be increased to combat international illiquidity and to stimulate demand for British exports. A more liberal overseas investment policy would only prompt a drain on reserves if it stimulated dollar expenditure by the rest of the sterling area. In this case, Hall suggested that the British authorities should try to come to an arrangement with the sterling area to limit dollar imports further. The bottom line, however, was that investment in the sterling area would ultimately strengthen the British balance of payments and that a tighter monetary policy would be ill-advised. Hall was perhaps overly optimistic about the prospects for renewed dollar discrimination by the RSA, given the commitments at the December 1952 Commonwealth Economic Conference which aimed to promote freer trade and payments. His second assumption—that the British economy was suffering from excess capacity—was a point of ongoing debate through the 1950s. In hindsight, 1953 can be seen as the beginning of the run up to the inflation of 1955, but the picture would have been considerably different from the perspective when Hall and Clarke were writing at the end of the slump of 1952. Indeed, in 1952/3 excess demand was not a problem; the rate of increase of labour costs per unit output fell dramatically from 8.8 per cent in 1951/2 to 1.3 per cent in 1952/3 and output per head increased 3.1 percent after a decline of 0.8 per cent in 1951/2.7

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Gross fixed investment had fallen in 1951 and in 1952 despite the increase in public sector investment associated with the Korean War, but 1953 marked the beginning of an acceleration of investment that lasted until 1958.8 After the Korean War, profits were high and borrowing was easy for industry, especially through the encouragement of the Capital Issues Committee. The evidence thus seems to support Hall’s interpretation. The debate on overseas investment continued through February 1953 with the Economic Section of the Cabinet promoting a wide interpretation of the ‘Special Effort’ and the Treasury pressuring to conserve resources for the domestic economy. Hall noted in his diary on 24 February that ‘Strath and I have had several long and heated discussions with Otto Clarke, which I enjoyed very much…between us we more or less defeated Otto’.9 Near the end of February a paper expressing both positions was prepared for the Economic Secretary with some favouritism alloted to Hall’s view,10 and this bias was reflected in the widening of sterling area access to British capital announced in January 1954. The debate over the advantages and disadvantages of British investment in the sterling area, however, continued. Much of the contemporary literature seems to have sided with Clarke. A.C.L.Day, writing in 1954, warned against the dangers of devoting too many resources to overseas investment and ‘failing to realize that Britain’s wealth depends primarily on the competitive strength of her manufacturing industry, and only secondarily on the profits of international banking and merchanting’.11 Shonfield, in his tract on British economic policy published in 1958, stated more categorically that British economic growth was ‘stunted as a result of this too vigorous pursuit of overseas investment’.12 On the eve of the 1954 Commonwealth Economic Conference, The Economist also warned its readers that the financing of sterling area development could only be at the expense of the British economy.13 That the Treasury, especially, continued to have reservations about the wisdom of free capital flows to the sterling area is apparent in the negotiations for the renewal of the Colonial Development and Welfare Act during 1954 and 1955. Throughout the prolonged discussions of how much money should be allocated for the programme over the next four years, the Treasury stood firm against Colonial Office warnings about the potential for unrest which would result from the combination of a further restriction on the amount of official funds available to the colonies with the general tightening of the London market against colonial issues.14 Instead, the Treasury emphasised the need for colonies to fund their own development or to look for non-British sources of finance. The figure for the four-year development allocation was thus whittled down from £120–130m suggested in June 1954 to only £80m by March 1955. The unwillingness or inability to afford extra capital for the CDC is evidence of the weakening of Britain’s most basic financial commitment in the sterling area, namely the development and welfare of the colonial territories.

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In 1956, the Treasury-Bank of England Sterling Area Working Party concluded that ideally investment in the sterling area should be cut.15 This would force the sterling area to use their existing sterling balances to finance their investment, which would in turn reduce UK liabilities. Secondly, the Treasury argued again that overseas investment drained resources away from British industry. Clarke’s interpretation of the effects of overseas investment was thus still held in the Treasury and accepted by the Bank of England. While on this basis investment flows ought to be cut, the report recognised that there were other circumstances which made such a policy inadvisable. The report noted that Britain’s current account surplus was in part dependent on the invisible earnings and exports generated by overseas investment. It was also asserted that these capital flows linked the sterling area together, that the British government had a political commitment to continue investment after the Commonwealth Economic Conferences of 1952 and 1954, and finally that the colonies, at least, had a right to development as British dependencies. Since direct controls were impossible for these essentially political reasons, the report concluded that the higher interest rates currently used to restrain domestic demand should be allowed to curb overseas investment. The implication of the Report was that while capital flows to the sterling area might be an economic burden they had to be borne for political reasons. In fact, in 1957 the Colonial Office reported that there was little evidence that high interest rates had restricted colonial borrowing, since the amount of capital raised on the London market had increased from £9.5m in 1955 to £11.5m in 1956 and to £15.5m by May 1957, during which time Bank Rate had been raised from 3.5 per cent to 5.5 per cent.16 The Colonial Office believed that borrowing was governed by need and access to the market since the colonies could afford the higher interest payments. A Board of Trade report noted that colonial borrowing had not been affected but that there was some evidence that Australia and South Africa had been encouraged by high interest rates to look elsewhere for capital.17 The conclusions of the 1956 Sterling Area Working Party report were repeated when the Treasury and Bank of England completed a series of papers on ‘The Prospects for Sterling: The Capital Account’ for the Economic Policy Committee of the Cabinet in May 1957, which looked more specifically at where investment in the sterling area could be pruned without resort to direct controls.18 They argued that withdrawing the ‘Special Effort’ commitment would not have had any real effect since the impact of the policy had been offset by high interest rates and the CDFC was not working to capacity.19 The dangers to sterling area cohesion which might result from large-scale borrowing outside the UK were restated, but the prospects for the sterling area raising substantial funds outside London were acknowledged to be poor.20 Finally, cutting back on the £60m commitment to sterling area development made by the UK through the IBRD, was considered politically undesirable.21 In any case, the prospects for British exports were taken into account when allowing releases of the UK subscription

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to the IBRD so in this sense the investment was ‘tied’.22 In the end no action was suggested or taken beyond letting existing high interest rates discourage borrowing on the London market.23 The pattern that emerges from this survey of the official policy toward sterling area capital flows is that the Treasury and Bank of England felt unable to limit overseas investment for political reasons, although in most cases they believed that this would have been a good thing (one exception was investment in Middle Eastern oil exploitation). The over-riding political consideration was the cohesion and continued stability of the sterling area. Since direct controls were impossible, it was hoped that the higher interest rates already in place would restrict borrowing. Since the policy was not targeted specifically at sterling area investment the political difficulties of imposing new controls could be avoided at the cost of a somewhat more generous outflow of capital than might be desired. Two questions arise from this interpretation. First, was sterling area investment such a burden on the British economy as was commonly supposed, both among officials and in the contemporary literature? Second, was the continuation of these capital flows to the sterling area an important cohesive factor in the system worth the perceived burden on the balance of payments and on British industry? The next two sections of this chapter will address these questions and suggest that, while the capital flows were not a very strong cohesive factor, nor were these flows an onerous burden on the British economy. THE VOLUME OF LONG-TERM CAPITAL FLOWS Tracing the volume and direction of British investment in the sterling area employs the arts of speculation and estimation to a degree that, while by no means unique in economic history, still leaves the working figures at the level of rough estimates. The problem with the data is due to the nature of the sterling area itself. Because there were no exchange controls on capital flows to the RSA, no precise record was made of their size. Thus David Bensusan-Butt complained in 1958 that our own White Papers give figures which are quite certainly wrong by large amounts. They are pieced together, for the most part from RSA countries’ own estimates which range from big figures for Australia and New Zealand (who have wide definitions and elaborate surveys) through to wobbly guesses or mere balancing items for South Africa and Hong Kong.24 Grants, government loans and other official investment were all recorded but private investment probably accounted for up to 90 per cent of gross investment in the sterling area.25 Of this, capital raised on the London market by RSA governments can be traced since these were recorded on the stock market by name. Where capital for direct investment was raised within a parent company

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without recourse to the London market, or was raised through an issue in a domestic company’s name and then sent overseas, British exchange control authorities had no record of the transaction. The other large omission was profits reinvested in sterling area branches of UK companies. It was the contemporary belief that reinvested profits were substantially underestimated, suggesting that the outflow of capital from the UK to the sterling area was rather larger than the official figures allowed.26 Conan suggested this omission amounted to perhaps £200m per year.27 After 1958, the Board of Trade commissioned a census which showed that net reinvested profits overseas during this later period were actually negative.28 However, net reinvested profits in sterling area countries were liable to be more substantial than the total since most profits earned by foreign companies in the UK (and therefore probably profits reinvested in the UK) were earned by North American or European companies, while most profits which UK companies earned (and reinvested) overseas were from the sterling area. This conclusion is reinforced by the census of direct investment in Australia, which recorded that gross reinvested profits in the 1950s averaged 28 per cent of the total annual inflow.29 All these considerations and omissions show that the estimates of private capital flows must be considered approximate. Published estimates of the flow of long-term capital from the UK to the sterling area vary widely. Shonfield estimated that the net total of private and official capital plus government grants amounted to perhaps £150m per year between 1952 and 1956.30 Conan calculated that capital imports into the major non-oil members of the sterling area (i.e. Australia, South Africa, the colonies, Rhodesia and India) from the UK amounted to £2,075m between 1946 and 1958.31 In an earlier version of this research he estimated that the capital flow from the UK to these countries and territories amounted to £ 1,650m between 1946 and 1955,32 or an annual average of £165m for these years and £142m for the years 1956–68. In evidence to the Radcliffe Committee, the Bank of England estimated UK gross investment in the sterling area at between £172m and £272m per year between 1952 and 1957 or an average of £220m per year.33 These estimates are presented in Table 4.1. To get a better view of the direction of investment one can look at the figures compiled abroad for capital imports from the UK which were used by the British authorities when estimating the UK balance of payments.34 The sources of data vary widely among reporting countries. Australia, New Zealand and India all published censuses of inflows of private overseas investment in industrial or manufacturing concerns, although these are incomplete to varying degrees. The Australian figures are the most comprehensive, covering both direct and portfolio investment.35 The drawback of this series, as with the New Zealand data, is that they were calculated according to fiscal years ending 30 June rather than the calendar years used by the rest of the sterling area. The New Zealand census has the further limitation that it includes only direct investment.36

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Table 4.1 UK gross external investment, 1946–57 (£m)

Source: Committee on the Working of the Monetary System: Minutes, Appendix. Note: ‘UK government’ is loans by UK government to other governments. This excludes contributions to the IMF and IBRD.

Indian census results were published in a series of articles by the Reserve Bank of India which recorded stock values of foreign business investments at the end of 1948, 1953 and annually for 1955–8, while capital flows were recorded for only 1956–8.37 Comparison of yearly stock figures does not give a true picture of capital flows since they include revaluations of old investments as well as new capital. From 1956–8, when it is possible to compare them, the changes in stock values underestimate recorded net capital inflows. The Ministry of Finance of the Federation of Rhodesia and Nyasaland also compiled estimates of foreign capital receipts by both official and private sectors.38 The results, however, are not broken down geographically until 1953 and then only into sterling area, dollar area and international agencies. The sterling area classification includes capital from South Africa although the reports state that ‘most’ of the new sterling area capital was from the UK while only ‘small amounts’ were from South Africa.39 Before 1953, details of the larger components of the capital inflow into Rhodesia and Nyasaland were described so it is possible to attribute most of it to the country of origin. South Africa published a census of overseas investment in 1956 but this only recorded the stock value as at the end of that year.40 Approximate net figures for British investment in South Africa and the colonies is available from the relevant IMF Balance of Payments Yearbooks for 1950–8. Net capital investment from partner data is presented in Table 4.2, which amounts to approximately 80 per

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Table 4.2 Partner data on net flow of UK investment to selected sterling area countries, 1950–8 (£m)

Sources: Colonies, India and South Africa: IMF Balance of Payments Yearbook (IMFBPYB); Australia: Annual Bulletin of Overseas Investment: Australia 1960–1, No. 6, Canberra, Commonwealth Bureau of Census and Statistics, 1962; Rhodesia and Nyasaland: EconomicReport, Ministry of Finance, Federation of Rhodesia and Nyasaland, Salisbury, 1954, 1956, 1958, 1959; New Zealand: New Zealand: Report on Official Estimates of Balance of Payments 1960–1, Wellington, Department of Statistics, 1961.

cent of official estimates of UK investment in the sterling area as a whole. The geographical distribution must be considered approximate, but it serves to establish the relative orders of magnitude of the receiving countries. Thus, the greatest part of British investment in the sterling area was destined for the colonies, Australia and South Africa although the political situation in the latter led to a net capital outflow after 1955. The balance of payments and census returns tend to disguise oil investment. Detailed figures, however, are available from Board of Trade and Treasury papers for investment in oil exploitation in the sterling area based on confidential company returns for the years 1953–7.41 These figures are presented in the last line of Table 4.2 which show that oil companies accounted for about a quarter of private investment in the sterling area during these years. The UK Balance of Payments for 1946–57, published by the Treasury in 1959, offers the most consistent annual survey of net British investment in the sterling area as a whole. After 1952, short-term capital flows and errors and omissions were separated from private long-term investment along with outstanding intercompany balances and intercompany loans. The data also include intergovernmental loans by and to the UK. These figures are presented in Table 4.3 along with investment in the non-sterling area. It is clear that most private overseas investment was destined for the sterling area. These annual estimates can be compared to UK gross domestic product (GDP) to show the relative magnitude of British capital exports. The results are presented in Table 4.4, which shows that UK long-term capital flows averaged about 1.3 per cent of GDP. In the period 1870–1914, when capital exports have also popularly been considered to be a burden on the economy, they comprised 5 per cent of

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Table 4.3 Official estimates of net long-term capital flows from the UK to the rest of the sterling area, 1950–8 (£m)

Sources: Data for 1950–7 from UK Balance of Payments for 1946–57, London, HMSO, 1959; data for 1958 from IMF Balance of Payments Yearbook. Figures exclude Mutual Security Act aid and non-territorial organisations. Notes: Until 1952 ‘Private’ investment in RSA and ‘Investment in rest of world’ includes a balancing item. ‘Private’ investment in rest of world is the difference between net government loans and total investment in the rest of the world.

GDP.42 Relative to the American economy in the 1950s, however, British investment appears much more substantial. A further indication of the relatively large part that overseas investment played in the British economy is evident in a comparison of US and UK domestic savings in relation to overseas investment. These figures are presented in Table 4.5. If domestic and overseas investment were substitutes, competing for the same scarce funds (as in the Shonfield scenario), overseas investment took up a larger part of available resources in Britain than was the case for America. This suggests that the squeeze on domestic investment imposed by overseas opportunities may have been considerably stronger in the UK than in the USA, which would support Shonfield’s contention. This assumes, however, that it was a shortage of supply of capital rather than demand that was the constraint, and that increased investment would have accelerated British growth rates. This raises a fundamental question about the role of capital formation in the British economy which needs investigation. INVESTMENT AND GROWTH The concern about British growth rates after 1945 stems not from the historical record of British growth itself but from the relative performance of the British economy, especially when compared to other countries in Western Europe. In the second half of the 1950s when the ‘catch-up’ explanation of faster growth on the Continent seemed to have exhausted itself, doubts about Britain’s economic prospects increased, and the sources of this relative decline were often attributed

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Table 4.4 Long-term net capital flows overseas as a percentage of GDP, 1950–8

Sources: GDP is at factor cost at current prices from Economic Trends, Annual Supplement to 1988 edition. USA figures are from Historical Statistics of the United States, Bureau of the Census, Washington, 1960. Table 4.5 Overseas investment as a percentage of domestic saving, 1950–7

Sources: USA statisticsfrom Historical Statistics of the United States, 1960. UK statistics from relevant editions of Estimates of National Income and Expenditure, HMSO.

to the fact that the UK had greater overseas obligations than its European rivals. Chief among these was the level of overseas investment. Unfortunately, the relationship between investment and economic growth is still unclear. In the 1950s, traditional growth ‘accounting’, which derived economic growth from additions of capital and labour and a (usually large) residual of ‘total factor productivity’, was the most prevalent means of indentifying the sources of economic growth. The classical model of economic growth assumed diminishing returns to scale so that additional inputs of capital would not raise the growth rate in the long term. More recently a ‘new’ growth theory has been developed (associated with Romer and Lucas43) which assumes that capital formation has positive externalities through the accumulation of human capital, so that the growth rate will accelerate as investment rises. With the new emphasis on human capital rather than on tangible capital, however, the causation between gross fixed capital formation and growth seems even more theoretically tenuous. Given the lack of consensus about the precise impact of investment on growth it is perhaps dangerous to embark on a course to determine the impact of the lack of such investment in the UK during the 1950s. The justification for continuing with this issue in an approximate fashion is that, as we shall see, the amount of

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Table 4.6 Incremental capital/output ratios at constant prices, 1949–59

Source: UN Economic Commission for Europe, Some Factors in Economic Growth in EuropeDuring the 1950s, 1964, Chap II, p. 17. Note: Gross investment ratio=Gross fixed capital formation at constant (1954) prices/ GDP.

foreign investment relative to domestic capital formation was small and the productivity of capital in Britain was low. It is therefore possible to determine that overseas investment was not a significant drain on the British economy. The first step is to construct a tentative counterfactual scenario to estimate the effects of a system of exchange controls which diverted all of British investment in the sterling area to gross fixed capital formation at home. This gives the most optimistic case since it is by no means certain that all the capital invested abroad would have been invested as productively at home as actual domestic investment. Even in this case, however, the results show that the extra domestic capital formation would have contributed little to the rate of growth of UK gross domestic product. We begin by gingerly assuming that Britain’s relative incremental capitaloutput ratio (ICOR) for the 1950s reflected the structural aspects of the British economy which determine the productivity of capital and that it was therefore relatively constant. The ICOR describes the proportion of GDP devoted to capital formation that is associated with a percentage increase in GDP.44 The inverse of the ICOR is thus a rough measure of capital productivity. Expressed algebraically,

where I=gross domestic capital formation, and GDP=gross domestic product. ICORs for the UK and twenty-one other countries for the 1950s were calculated by the United Nations Economic Commission for Europe in 1964, a selection of which is presented in Table 4.6.45 In general, a low value of ICOR was associated with a higher rate of growth of GDP and vice versa. The UK had the

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Table 4.7 Analysis of growth rate of GDP in case of all sterling area investment devoted to domestic investment, 1950–8 (£m)

Source: ECE, Some Factors…(1964). Notes: Gross domestic fixed capital formation at constant (1954) market prices. GDP constant (1954) prices factor cost.

lowest gross investment ratio of the twenty-two countries surveyed by the Economic Commission for Europe and its ICOR was exceeded only by that of Ireland. The UK also suffered from the lowest rate of growth of GDP of all countries except Ireland. As can be seen in Table 4.7, adding the annual net investment in the sterling area in the 1950s to actual gross domestic fixed capital formation increases the average investment ratio for the 1950s from 16.1 per cent to 17.8 per cent. This is about the level of the actual investment ratios of Greece and Denmark but does not approach the level of West Germany, Italy or France. Using the UK ICOR of 6.7, this generates a hypothetical rate of growth of GDP of 2.6 per cent p.a. or only 0.2 per cent p.a. greater than the actual rate for the 1950s, which leaves the British growth rate below almost all twenty-two countries surveyed by the Economic Commission for Europe. The analysis errs on the side of exaggerating the increase in the investment ratio to the extent that some selectivity in any controls on investment would be used. Government loans to the colonies, which amounted to about £16m p.a., would probably not have been included in a policy restricting investment in the sterling area. Another likely exception would be British oil companies which ensured essential supplies of oil for sterling and accounted for a further £47m p.a. Together these two items account for about £60m p.a. of investment in the sterling area, which would reduce the investment ratio in Table 4.7. to 17.3 per cent. The accuracy of this analysis should not, of course, be overstated since it ignores possible multiplier effects of increased domestic investment, but the indication is that if the resources devoted to investment in the sterling area had been devoted to investment in the UK instead, the problem of the relatively slow growth of the British economy in the 1950s would not have been solved. This seems to arise both because the volume of investment going abroad was only a small proportion of actual domestic investment and because the productivity of

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investment in the UK as measured by the inverse of the ICOR was low relative to other Western economies.46 If it is to be argued that even a marginal increase in domestic investment would have been significant if it was directed at increasing productivity,47 some evidence that this might have happened must be found. There was certainly no indication in the 1950s that such a policy would have been more successful than the attempts by the CIC to direct domestic capital formation to more profitable uses. IMPACT ON THE BALANCE OF PAYMENTS Exports In the nineteenth century, the UK balance of payments followed a pattern of a current account surplus (mainly due to invisible earnings) balanced by large overseas investment. In the post-1945 period, when Britain seemed destined to run recurring balance of payments deficits, it seemed to many that it would be a logical step to ‘curb’ foreign investment; net invisible earnings had fallen and restrictions were already imposed on imports, yet individuals and companies were free to send their capital abroad. These sizeable ‘negative’ balances in the capital account attracted the attention of those concerned by the balance of payments position. The options seemed to be either to earn a greater current account surplus, which did not seem possible, or to cut down on the capital account deficit. A moral position could also taken that since the current account was the main target for controls, the burden of adjustment was falling on consumers and import-intensive industry while rich capitalists were free to send their savings abroad. Thus the current account was generating earnings which were then squandered overseas rather than contributed to building up the foreign exchange reserves or strengthening domestic industry. Foreign investment was a luxury of the nineteenth century which Britain could no longer afford. While intuitively appealing to some economic commentators, this reflects an over-simplified view of the balance of payments. Action on one entry in the accounts quickly affects others. This was recognised by the Bank of England and the Treasury when it was acknowledged that overseas investment generated invisible earnings and exports. As we have seen, the Economic Section was convinced that overseas investment had a net positive impact on the balance of payments. No systematic attempt, however, was made to quantify the actual relationship between the current and capital accounts in the 1950s and, unfortunately, this is still a difficult matter to determine. The most complete source of empirical evidence on the returns from direct investment is the work of W.B.Reddaway.48 Reddaway surveyed the direct investment overseas by sixty-two British companies operating in fifteen countries in the period 1956–64. As part of his analysis, Reddaway calculated the initial and continuing effects on exports of

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Table 4.8 Effects of an increase in net operating assets of £100 on exports from the UK, 1956–64

Source: W.B.Reddaway, Effects of UK Direct Investment Overseas, Final Report, Cambridge University Press, 1968, p. 216. Note: ‘Total average’ is the average of all firms surveyed, not the average of the countries.

direct investment in seven sterling area countries and eight non-sterling countries. His results are presented in Table 4.8. The companies operating in sterling area countries generated markedly more exports from the UK than non-sterling area investment both in the initial and continuing effects. On average, companies located in the sterling area generated exports equal to almost 25 per cent of the increase in net operating assets compared with a total of only 9 per cent for the firms surveyed in all countries. This is probably due to the fact that most of the sterling area countries were less developed than the other countries surveyed. As Reddaway pointed out, this meant that these countries were more likely to import capital goods and inputs related to the investment rather than using goods produced locally.49 Reddaway further disaggregated the effect of direct investment on exports by type of export and by country. Of those companies surveyed, sterling area subsidiaries accounted for 83 per cent of the purchases of inputs from the UK but only for 46 per cent of the net operating assets. The absolute value of these subsidiaries’ imports of capital goods, however, amounted to only 7–8 per cent of UK machinery exports to the ex-colonial group and to about 3 per cent of UK machinery exports to the older independent members.50 While the actual impact of capital flows on the current account is difficult to determine, the possible impact of a policy which eliminated or restricted this flow

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Table 4.9 Effect of a cut of £100 in direct foreign investment

Source: See Table 4.8.

is even more speculative. Nevertheless, Reddaway’s analysis provides a rough indication of the impact of such a policy on UK exports over time. Table 4.9 shows the effects of a reduction in direct investment of £100 by those of Reddaway’s companies operating in the sterling area against what they would otherwise have invested. This suggests that while restricting direct investment overseas might not be a particularly costly way to ease a balance of payments deficit for the short term, after several years the policy would run into diminishing returns as the continuing effects of the ‘lost’ investment accumulated.51 In order to effect a saving of £100 for the central reserves, capital flows would have to be reduced by £132.5 in the first year, escalating to £161.5 in Year Five. If investment in the oil industry was to be maintained, other investment would have to be all but eliminated. This level of restriction would prohibit replacement and maintenance expenditure required to keep existing capital productive, a process which would further undermine the prospects for the longer-term balance of payments. In addition, if the policy were to be extended beyond a few years, this might lead to disinvestment by British firms and the loss of overseas assets. Accordingly, Reddaway’s conclusion was that ‘a policy of restriction will bring an easing of the “cash” problem for a substantial number of years, but at the expense of making the long-run problem worse’.52 Interest, profits and dividends The magnitude of returns from investment in the sterling area is obviously critical, not only to determine the impact on the balance of payments but also to determine the motives of investors. Reddaway’s survey revealed that overseas investment in the sterling area was more profitable than investment elsewhere. The average annual post-tax profitability of Reddaway’s companies operating in the sterling area was 9.5 per cent or 1 percentage point higher than the comparable figure for profitability of UK stake in all fifteen countries combined.53 Reddaway’s results for the sterling area are presented in Table 4.10.

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Table 4.10 Profitability of UK stake in direct investment in sterling area countries

Source: W.B.Reddaway, Final Report, Table IV.5, p. 358.

A second source of information is the census returns of investment in Australia, South Africa and India. According to the official census for 1950–8, the investment income payable to the UK from Australia averaged 10.7 per cent of the book value of net assets in Australia of branches of UK companies plus the paid up value of shares, debentures, unsecured notes and other obligations of Australian companies held by UK companies or individuals.54 These figures are presented in Table 4.11, which also shows the importance of investment income from Australia to the total investment income earned by Britain from sterling area investments, although some of the Australian profits would have been reinvested in the enterprise rather than repatriated. Information from South Africa is limited to figures for 1956 which show that investment income paid to the UK amounted to 8 per cent of UK-owned capital stock in that year.55 For India, data on investment returns are available only for 1953 and 1955–8. For these years investment income payable to the UK averaged 8.8 per cent of UK-owned capital stock. Investment income payable is presented in Table 4.12. From this admittedly sketchy data, the returns on UK investment in the sterling dominions were probably between 8 per cent and 11 per cent, which is roughly consistent with Reddaway’s findings.

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Table 4.11 Total income payable on UK investment in Australia, net assets of branches of UK companies and UK investment in Australian companies, 1950–8 (£m)

Sources: Annual Bulletin of Oversea Investment: Australia, 1960–61 Tables 20 and 24. Sterling area total income from investments, UK Balance of Payments 1946–57, London, HMSO, 1959. Table 4.12 Investment income payable on UK private investment in India (net of Indian tax), 1952–8 (£m)

Source: Reserve Bank of India Bulletin, April 1960 for stock of business investment; January 1956, June 1958 and August 1960 for income payable.

The Bank of England series of data on nominal UK investment overseas offers an estimate of returns on portfolio investment. Pre-tax interest and dividends received and retained in the UK each year can be compared with the nominal capital value of overseas investment through the medium of securities quoted on the London Stock Exchange. The results for sterling area and non-sterling area investment are presented in Figure 4.156 which shows that investment in the sterling area was considerably more profitable than investment elsewhere, although this gap began to close in the 1950s (mostly due to higher returns to investment in the rest of Europe). At the same time, however, the nominal value of British investment outside the sterling area declined steadily from £233m to £149m, while the value of investment in the sterling area remained fairly constant at around £340m. The return of about 15 per cent on sterling area capital can be compared with an average pre-tax yield on domestic industrial securities in this period of 6 per cent. Source of capital Net interest, profits and dividends from the sterling area between 1950 and 1957 amounted to a cumulative surplus of £896m, or a yearly average surplus of over £112m. The gross inflow of returns on investment was sufficient to cover the net

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Figure 4.1 Returns to UK registered companies, 1950–7 Source: Bank of England, UK Investments Overseas.

outflow of long-term investment in the sterling area but the rising cost of servicing the sterling balances eroded this favourable position as the decade progressed. The invisible account of the British balance of payments is shown in Table 4.13. and brings us to the source of capital for overseas investment. A popular contemporary interpretation of the source of capital for UK overseas investment was that the colonies accumulated sterling balances which financed capital flows to the independent sterling area.57 In this way the UK was borrowing from the less-developed colonies to invest in the independent sterling area who were therefore not forced to reduce their claims on the UK in order to finance their own development. Table 4.14 shows changes in sterling balances and flows of investment for those members of the sterling area for which partner data on capital flows are available. From Table 4.14 it is clear that allegations that the colonies were financing investment in the independent sterling area are false since there was a net capital flow from the UK to the colonies amounting to some £340m during the 1950s. In May 1957, the Treasury undertook a study of the volume of government borrowing by the RSA in relation to their sterling balances and concluded that the major sterling area borrowers did not have sufficient liquid assets available to finance their investment programmes.58 An embargo on UK capital exports

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Table 4.13 UK invisible account: interest, profits and dividends, 1950–7 (£m)

Source: UK Balance of Payments 1946–57, London, HMSO, 1959. Table 4.14 Changes in sterling balance holdings and net flow in UK investment, 1950–8 (£m)

Source: Sterling balance figures from ‘Monthly Report on External Finance’, Bank of England Archives EID3/98–106. Investment estimates from partner data, see Table 4.2.

would simply have meant a slower rate of development for these countries rather than an improvement in the ratio of UK reserves to liabilities. Indeed, the abandonment of the development plans of these RSA countries would no doubt have hurt the UK current account. A more detailed breakdown of colonial borrowing on the London market reveals the redistribution of surpluses among the colonies. Table 4.15 shows increases in sterling balances for selected colonies from 1950–5 (the years for which detailed data are available) and official borrowing from the London market for these years. It is apparent that the surpluses of Nigeria, the Gold Coast and

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Table 4.15 Sterling balance holdings and official London borrowing, 1950–5 (£m)

Sources: Colonial sterling balance figures from J.G.Littler, ‘Sterling Balances of the Colonial Territories’, 2 March 1956, PRO T236/3562. Official borrowing on the London Market from Times Issuing House Yearbook.

Hong Kong in part ‘subsidised’ borrowing by others such as Kenya and the East African Harbour and Railroad Commission. Allegations that the colonies were ‘exploited’ to finance development in the independent sterling area must be further amended to allow for this redistribution of surpluses among the colonies. Imposing capital controls, therefore, does not seem to be such an easy way to ‘fix’ the balance of payments. Although the relatively relaxed attitude of the government toward investment in the sterling area came under attack, it should be noted that the free imports from the sterling area were also a ‘negative’ on the balance of payments but did not generate as much popular interest because these imports were considered ‘essential’ (mainly raw materials) or because restrictions might invite retaliation and the sterling area markets were an important target for UK exports. Little consideration was given to the analogous situation of the capital flows that they were perhaps an ‘essential’ outlet for more profitable investment, that they often produced the ‘essential’ imports, and that restricting the flows might invite ‘retaliation’ in that these countries may not have been able to afford UK exports. Even when UK investment was not directly involved in exploiting primary products for the UK market, investment in secondary industry would generate trade directly in terms of inputs and indirectly in terms of raising local national income. This raises the question of the importance of British investment to the recipient countries and the degree to which capital flows were a cohesive factor for the sterling area, as they were so often characterised.

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CAPITAL FLOWS AS A COHESIVE FACTOR There is evidence that at the beginning of the period, at least, capital flows were an important factor in the cohesion of the sterling area. In 1948/9 South Africa refused to supply other sterling area members with gold in payment for their exports. In retaliation, Britain refused the South African government access to the London capital market during the first half of 1949. Private investment in South Africa was also inhibited through moralsuasion.59 Finally, in November the South African government was allowed to float a £10m loan in London and two months later it was announced that South Africa was to pay gold for all essential imports from the rest of the sterling area. By starving South Africa of sterling through restrictions on capital movements, Britain had been able to bring South Africa back into its traditional role of gold supplier for the sterling area. Access to the London market was an effective sanction against South Africa, although this was perhaps due to the special situation of a sterling shortage that would not prevail in the case of a member with larger sterling balances. As the decade progressed there was an evident decline in the other components of the system, which may have raised the importance of the free flow of capital. Trade discrimination was being undermined by the GATT and by the general movement toward freer trade in the international economy. The practice of maintaining reserves in sterling and pooling foreign exchange earnings was also weakening as the United States and the rest of the world became more important markets for trade. Finally, the traditional alignment with the UK that most members had enjoyed in the early post-imperial days was dissolving as the Dominions grew further away from the UK and colonial territories approached independence. Free access to British capital thus became a relatively more important part of the system as the other incentives dissolved. Certainly, official opinion seemed convinced that capital flows were important to keep the sterling area viable. At the beginning of the 1950s, for example, a Colonial Office Programmes Committee Report concluded that the dependence of the rest of the sterling area on long-term British capital was perhaps the most important factor on which the UK could rely to keep the system together.60 This was echoed later in the Treasury-Bank of England Sterling Area Working Party Report of 1956 which concluded that ‘any trend which connotes an absolute or relative decline of London as a source of capital cannot help but weaken in some degree the ties of the sterling area’.61 Whether the free capital movement enjoyed by members really was an important factor in maintaining the cohesion of the system through the 1950s depends on the importance of British capital to the sterling area recipients. Here again, the sketchy nature of the evidence makes any assessment incomplete. However, the census data available for Australia, New Zealand, India and South Africa show the proportion of total foreign capital that originated in the UK. In Australia, British investors accounted for 61 per cent of private foreign capital flows through the period with a slight downward trend. The USA was the second largest source, contributing 30 per cent on average with a slight upward

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trend. In New Zealand, an even larger proportion of foreign direct investment came from the UK, averaging 72 per cent while dollar area investment provided only 15 per cent with a slight downward trend to the end of the period. The Indian census data is slightly more complicated and is available in detail only for 1956–8. Through these three years, the UK share of net foreign investment fell from 64 per cent to a net disinvestment. In the same period the American share grew from 28.7 per cent to 159 per cent as it offset the disinvestment by the UK. The net figures are heavily affected by massive capital repatriations in the form of compensation for nationalisation of British interests. In 1958, for example, some £16m was repatriated, mostly to the UK, as a result of the nationalisation of the petroleum industry.62 Since most compensation payments were to the UK, the gross figure for capital flows tells a significantly different story, with the UK share of foreign investment rising from 66 per cent to 74 per cent from 1956–8 and the American share declining from 23 per cent to 18 per cent. More general information is available from comments in the Indian Reserve Bank Bulletin which estimate that the UK accounted for 90 per cent of the total inflow of foreign business investment from 1948–53, 70 per cent from 1954–5 and 64 per cent in 1956.63 The figures for the UK share in stocks of foreignowned capital reflect this decline. In 1953, the UK claimed 83 per cent of the stock of foreign capital, in India but by 1958 this had fallen to 70 per cent although the absolute value of UK capital had risen from £245m to £299m.64 For South Africa, only the stock value for 1956 is available. In this year, the UK was responsible for 65 per cent of foreign capital (69 per cent in manufacturing) while the USA took second place at only 14 per cent.65 For all these major independent members of the sterling area, then, the UK was still the single most important supplier of foreign capital, with the United States and the rest of the world following a distant second through to the end of the period. Data for the colonies are less specific but, as expected, the evidence available indicates that Britain was the largest foreign investor. Between 1949 and 1957 colonial authorities were able to borrow only £11m outside the sterling area and private interests only £9m, none of which came from private sources.66 The British authorities actively encouraged private foreign investment in the colonies, including a campaign after 1952 to give the colonies ‘sex appeal’ for the American market on the basis that ‘the American is an emotional creature, and that if one can find a “good cause” the possibilities of tapping his [sic] pocket are almost endless’.67 Discussions with American trade officials in London, however, served only to identify the problems of attracting investment to the colonies rather than achieving any real improvement. Wayne Taylor, the American adviser, suggested setting up Investment Trust schemes which would better suit American tax law. Other changes to sterling area tax rules were also suggested along with revisions of sterling area exchange control to allow repatriation of capital profits.68 The Treasury was unwilling to tailor sterling area tax law to American wishes and such changes in the sterling exchange control

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were unlikely. Foreign investors were allowed to repatriate only the sterling value of their original capital stake so as to avoid enterprises designed simply to breach currency boundaries.69 In both the dependent and independent sterling area the UK was still the primary market for foreign capital, which would seem to support the thesis that these capital flows were an integral part of the sterling area system. The cohesive force of these flows, however, hinges on how dependent the sterling area members were on foreign capital. A rough calculation, based on Morgan’s estimate of colonial capital formation70 and the IMF Balance ofPayments Yearbook estimates of capital flows, suggests that British capital accounted for as much as 23 per cent of colonial capital formation. The dependence of the colonies on British capital thus seems evident, but the independent sterling area was the primary threat to the cohesion of the system. Here, the figures available look much less convincing. In Australia and New Zealand, British capital amounted to an average of only 4 per cent of gross domestic fixed capital formation in each year.71 According to British estimates, total net foreign long-term capital and official donations from abroad to India and South Africa comprised only 1.8 per cent of GDP for each country by 1958.72 This suggests that although the UK was the largest supplier of foreign capital to the independent sterling area, these countries were not overwhelmingly dependent on capital flows from Britain. The cohesive role of free capital movements among members of the sterling area must therefore be thrown into some doubt. Certainly the 3–5 per cent of fixed capital formation might have been an important addition to the economies of the independent sterling members but this contribution was certainly not of the order of the dependence of the colonies on British investment. This analysis also serves to put into perspective the degree to which sterling area development was accomplished from domestic rather than overseas resources. The weakness of the capital market incentive is further illustrated by an episode in 1955 which contrasts with the successful sanction against South Africa in 1949 and 1950. In 1955, India appeared unwilling to peg to a fluctuating pound and was beginning to accumulate independent gold reserves. In a draft paper on ‘Problems of the Sterling Area’ in October 1955, Rowan suggested that if a country such as India did not comply with the ‘rules’ of the sterling area system it should be ejected from the area or its credit facilities should be limited.73 M.W.Stamp of the Bank of England responded that the political outcry in the UK from such a move would be considerable, and furthermore that the rest of the sterling area was not much impressed by free access to the London capital market, especially given the high interest rates attached to borrowing there.74 This exchange shows that the restriction of capital flows was no longer considered to be as effective a sanction to enforce discipline in the system as it had been when used against South Africa in 1949. This reflects the general loosening of the structure of the sterling area relationships from 1952, which was also evident in international trade.

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CONCLUSION This analysis has suggested that the UK had more to lose from restricting capital flows than the rest of the sterling area stood to lose from forgoing this investment. Imposing further exchange controls would have put Britain out of step with the general movement toward convertibility and would have required the violation of international commitments. More fundamentally, such a step would have caused considerable damage to the British balance of payments in the medium term due to the loss of visible and invisible earnings associated with this investment. On the other hand, while sterling area countries took more capital from the UK than from any other foreign country, it comprised a small part of their total fixed capital formation. It has also been argued that the investment in the sterling area did not hamper the growth of the British economy because of the small size of capital flows to the sterling area relative to domestic investment and the relative inefficiency of capital formation in Britain. The available empirical evidence suggests that the rate of profit and the capacity for generating exports was greater for investment in the sterling area than for investment elsewhere. This would have exaggerated the losses to the current account from a reduction in overseas investment since any capital restrictions would have been focused specifically on the sterling area, given the strict controls already in place against investment in the non-sterling area.

112

5 THE STERLING AREA AND STERLING POLICY

The main thrust of sterling policy through the 1950s was to widen the role of sterling in the international economy. The inter-war period had shown dramatically that the USA could not be trusted to provide international liquidity in a crisis, or to act in the interests of the international economy, so sterling and Britain still had an important role to play. Successive governments also strove for a ‘strong’ pound because it was believed to generate price and employment stability and reflected confidence in the British economy as well as supporting traders and merchants in the City of London. In the end, Britain followed a rather circuitous route to convertibility which led to the waning importance of the sterling area in British policy. After the devaluation of 1949 did not solve Britain’s balance of payments problems, the new Conservative government returned to direct controls in response to the next crisis in 1951. This period of intensification of discrimination based on the sterling area, however, was an emergency measure only. Neither Britain nor the overseas sterling area were willing to retreat into an exclusive economic bloc. This was clear in the communiqué from the 1952 Commonwealth conference (see Chapter 4) which was repeated frequently in public and private correspondence. Since the sterling area was defined by the exchange controls and discrimination which had followed the war, once policy was directed towards freer trade and payments the sterling area moved out of the main arena of British policy. This declining importance of the sterling area is noted by Cain and Hopkins as part of the process of accelerated decolonisation in the mid-1950s.1 By the late 1950s, initiatives toward Europe preoccupied British policy-makers as they looked for a way to align themselves economically with the Continent, culminating in the application for membership of the EEC in 1961. Allegations have been made, as noted in Chapter 1, that the sterling area system inhibited British policy, especially with respect to the exchange rate of sterling. It is argued that the damaging demand management techniques used during the 1950s could have been avoided if the exchange rate rather than the reserves had been allowed to carry the burden of fluctuations in the British economy, but that the sterling area blocked any such initiative.2 The Radcliffe Committee in 1957 seemed to support the contention that the sterling area inhibited a more flexible exchange rate policy, but the adverse historical

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experience of floating rates was also an important consideration. After reviewing the fortunes of floating exchange rates in the 1920s and 1930s the Committee concluded that This experience has been sufficient to demonstrate both the inconvenience of a fluctuating pound and the impossibility of altering its value without regard to the interests of other countries which use sterling as an international currency. Either course of actions intimately concerns the other members of the sterling area and would confront them with awkward dilemmas of policy. The preservation of a fixed rate of exchange undoubtedly offers the best prospect of avoiding strains and stresses within the sterling area, except perhaps in highly abnormal conditions when the entire world economy is seriously out of balance and the area as a whole is under persistent pressure in its balance of payments with the non-sterling world.3 Despite this official rejection of a flexible exchange rate there were two episodes in the 1950s when this was seriously considered. The first was the now-famous ROBOT plan of 1951–2 and the second was during negotiations for the Collective Approach at the end of 1952. After these two routes had been abandoned, the Bank of England and the Treasury turned to an administrative approach to convertibility at a fixed rate. A closer look at the role of the sterling area in the abandonment of these flexible exchange rate policies will go some way toward establishing the degree to which the sterling area inhibited policy in this regard. THE ROBOT PLAN AND FLEXIBLE EXCHANGE RATES The history of the ROBOT plan for convertibility devised by George Bolton,4 Leslie Rowan and Otto Clarke has been well described elsewhere.5 Briefly, ROBOT called for the establishment of external convertibility at a variable exchange rate which would be allowed to float around the par value of $2.80/£ between unpublicised boundaries of $2.40/£ and $3.20/£ supported by the Exchange Equalisation Account. Only the central banks and governments of the sterling Commonwealth would be informed of these boundaries. Ninety per cent of non-resident sterling balances would be blocked and the remaining 10 per cent would be classified as ‘external’ sterling which was convertible. All current earnings of sterling after the implementation of ROBOT would also be freely convertible. Not less than 80 per cent of sterling area sterling balances would be funded in low-interest securities, making them unavailable for current or capital transactions. The remaining 20 per cent would be freely convertible subject to continued exchange control by sterling area authorities. There was to be no change in arrangements with colonial members of the sterling area whose

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balances in any case were tied up in currency funds and other fixed obligations. Finally, the London gold market was to be reopened at a freely fluctuating market rate. Residents of the rest of the sterling area would be denied access to the market, except those from goldproducing countries. The sterling area featured positively in the early development of ROBOT. At the first stages of planning in January 1952, Otto Clarke noted that ‘it was pretty clear from the Commonwealth Finance Ministers Meeting official discussions that South Africa and Ceylon would not continue permanently in an inconvertible sterling area; nor will Malaya and the Gold Coast when they get their freedom’.6 This argument was taken up by Cobbold, writing in support of convertibility at flexible rates to Butler in early February.7 He argued that given the atmosphere at the Commonwealth Finance Ministers’ meetings and the deteriorating reserves position it was doubtful if the sterling area could survive on exhortations to ‘put their houses in order’ and on infrequent aid from the USA for the next eighteen months. Britain had a responsibility as keeper of the central reserves. If the sterling area was unable to survive in its present state, then it was up to the UK to take early action to protect the pound, perhaps by reviewing the fixed parity to the dollar. When it came time to present ROBOT to Cabinet the Chancellor reiterated the argument that ‘at the recent meeting of Commonwealth Finance Ministers it had clearly emerged that sterling could not survive on an inconvertible basis and this plan would be regarded as a major step on the road to convertibility’.8 The sterling area system was thus perceived as pushing Britain toward a fundamental change in sterling policy. The greatest potential obstacle which the sterling area posed was the proposal to deal with the sterling balances. When presenting ROBOT to the Cabinet, Butler argued that ‘the funding of sterling balances, though it may initially be a shock for the holders would remove the greatest potential danger to the sterling area reserves and would strengthen confidence in sterling’.9 Enlarging on the disadvantages of the plan, however, he recognised that a unilateral decision to fund the balances ‘would be a shock to the Commonwealth members of the sterling area and might bring one or two of them to the point of deciding to leave the sterling area altogether’.10 He speculated that Pakistan, then experiencing political difficulties, and Ceylon as a consistent dollar earner, might resist further restrictions on the use of their sterling balances and break their ties with the sterling area if not with the Commonwealth. It was expected that New Zealand would accept funding as a decision of the UK government, South Africa would welcome ROBOT for the reopening of the gold market, and the Indians would agree if they were assured that they would still get sufficient capital for their development plans.11 Australia was the major obstacle since its sterling balances were large and not restricted by existing agreements. It was acknowledged at the Cabinet meeting that Australia ‘would be hard hit by it but her government must realise that she was over-spending and could not expect to go on doing so. It was conceivable though unlikely, that she might seek independence of the

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sterling area.’ The Cabinet agreed that from the point of view of the sterling balances the most significant gain would be the restraint imposed by this plan on Australia’s use of her sterling balances; for her drawing rights were not at present the subject of any agreement and her overseas expenditure constituted the greatest current threat to the stability of the sterling area.12 In this sense, ROBOT was a convenient way unilaterally to solve the sterling balances ‘problem’. On 24 March 1952 Churchill suggested to Butler that the government might negotiate limits on the drawing down of sterling balances instead of looking to ‘free’ sterling along the lines of the ROBOT proposals.13 The advice from Rowan for the Chancellor’s reply was that if there was not mention of convertibility there could be no hope of any success of such negotiations and it would merely further weaken the pound, while on the other hand, there could certainly not be any mention of convertibility because this would result in major losses to the reserves through advance manipulation of funds etc.14 Any formula to block the sterling balances would entail protracted bilateral negotiations with the relevant members unless sterling convertibility was included to show the necessity for the UK to act secretly and unilaterally. The sterling Commonwealth had shown themselves committed to early convertibility at the recent Commonwealth Finance Ministers’ meetings in London and they were unlikely to accept a restriction on their freedom without a significant quid pro quo along these lines. This point was reiterated in a draft speech prepared for the Chancellor to present to the Cabinet at the beginning of April 1952. The Chancellor was to conclude ‘I think we should defer any action on the sterling balances until I have been able to put before my colleagues [in the sterling area], and secure their agreement to, proposals in the field of convertibility.’15 The prospect for blocking the sterling balances was thus transformed into a carrot for Ministers to accept the ROBOT plan. Still, the possibility that sterling area members would not accept unilateral 80 per cent funding of their sterling balances was a serious obstacle to ROBOT when the plan was first presented to Cabinet in February 1952. One disadvantage of the plan was that it required re-opening the hard-fought agreements with India, Pakistan and Ceylon with the possibility of losing Pakistan and Ceylon, at least, from the sterling area. Furthermore, Australia was not realistically in a position immediately to fund 80 per cent of her balances since a large part was committed for import contracts concluded before the recent round of Australian quantitative restrictions. Finally, any such funding agreement would require a catastrophe clause to allow members to draw on their sterling balances for

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Table 5.1 Alternative sterling balances proposal (£m)

Sources: India, Pakistan and Ceylon figures represent currency reserves and blocked balances existing at the end of February 1952 from ‘The Position of Sterling’ draft paper for the Chancellor of the Exchequer, 4 April, 1952. Others from M.T.Flett, report for T.L.Rowan, ‘Robot and the Commonwealth Sterling Area’, 31 March 1952, PRO T236/ 3242.

‘unforeseen eventualities’ such as previous commitments and food imports in times of famine. This would greatly reduce the effectiveness of any agreements as had been seen in the existing contracts with India, Pakistan and Ceylon. In March 1952, after ROBOT had been deferred by the Cabinet, members of the Treasury and the Bank of England devised an alternative to the funding proposal which avoided many of the difficulties raised in the Cabinet meeting in February.16 Their report proposed to leave the agreements with India, Pakistan and Ceylon intact and to get the other members to freeze their hard core of sterling balances in the same pattern. Most of this hard core was currency reserves, and agreement would have to be reached on the proportion of sterling balances this comprised. The figures offered by Flett are presented in Table 5.1. The total amount of sterling area balances blocked under this alternative scheme would be about £850m, which was £200m less than under the original ROBOT scheme. The disadvantages of this extra liquidity were outweighed by the advantages of avoiding fresh negotiations with India, Pakistan and Ceylon, avoiding the pitfalls of a catastrophe clause and, most importantly, the proposals were more liable to be accepted since they only required an acknowledgement that a hard core of sterling balances existed. Whether the sterling area countries would have acquiesced to this restriction on their ability to use their sterling balances is uncertain. The final column of Table 5.1 shows the different treatment which would have been accorded to members. South Africa was treated quite gently with only 29 per cent of sterling balances blocked, while New Zealand and Southern Rhodesia would be requested to forgo the use of half of their sterling balances. This disparity may not have been an obstacle to the agreement, however, since India, Pakistan and

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Ceylon had agreed to arrangements which treated each differently according to their circumstances. Some indication of the RSA’s likely reaction is available with respect to Australia and New Zealand. The Australians were strong advocates of early convertiblity and non-discrimination in trade in order to strengthen sterling in the long run, and had made it clear that they were ready to pursue deflationary fiscal and monetary policy and to entertain limits on the running down of existing sterling balances in common with the rest of the sterling area.17 R.G. Menzies, the Australian Prime Minister, was briefed on ROBOT while on an official visit to Britain in June 1952. The plan was outlined in a secret brief prepared for the Chancellor’s discussion with Menzies. Instead of compulsory funding of a fixed percentage of the sterling balances, the Overseas Finance Division’s alternative proposal to leave existing agreements with India, Pakistan and Ceylon intact was coupled with the gentle suggestion that ‘we might ask for public statements from Australia and the remaining dominions that each of them did not contemplate drawing down its balances below a stated minimum’.18 Menzies’ response was positive and Butler noted that ‘Mr. Menzies was clearly in favour of a step on these lines and would probably favour it sooner rather than later.’19 Cobbold then spoke to Fursell, Governor of the Reserve Bank of New Zealand, and also receieved a positive response, including Fursell’s opinion that ‘he would see no difficulty about a statement that New Zealand regarded the bulk of her balances as a minimum reserve’.20 Allegations that ROBOT ‘failed, not least because it took insufficient account of the effects such a step might have on the behaviour of sterling area members, given the large blocking of balances that it required’21 are clearly unfounded. The opponents of ROBOT in Britain were less concerned with the obstacles presented by the sterling area system than with the effect of flexible exchange rates on the domestic economy and on relations with the EPU. It was assumed that there would be little difficulty in persuading RSA members to continue to peg to a flexible pound. Members who refused would be removed from the list of scheduled territories and treated as outsiders with their balances completely blocked and restrictions placed on capital flows from the UK. The effect of flexible rates on the domestic economy, however, was seen as both an economic and political obstacle. Even with the burden of adjustment to balance of payments disequilibria borne by the exchange rate rather than the foreign exchange reserves, it was argued that domestic price and employment levels would be adversely affected. If the exchange rate fell very low, import prices would rise, disturbing inflation rates especially for food and raw materials. Lord Cherwell, Paymaster General and close adviser to Churchill, argued that exports were constrained by supply problems as much as price competitive ness so the depreciation of sterling would not have a balancing beneficial effect on export revenue and imports would have to be reduced further through quantitative restrictions to the point where industry would suffer.22 Domestic employment and prices would be squeezed until

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balance was achieved. Churchill later described this as his ‘main anxiety’ about ROBOT.23 Cherwell also argued that abandoning the public commitment to price stability and full employment was politically impossible and that the government would eventually be forced to intervene to soften the strain on the domestic economy.24 A second major objection was that if sterling was a ‘hard’ (i.e. convertible) currency, other countries might discriminate against British exports as they did against American goods and the UK would have to respond by intensifying quantitative restrictions. The result would be a decline in trade among non-dollar countries. This reduction in world trade would be reinforced by the fact that the UK would have to pull out of the EPU, probably causing its dissolution and the reversal of Europe’s trade liberalisation policies.25 The third major obstacle was the disruption of Britain’s international political relations. Europe and America were liable to be hostile to the damage to the EPU. Furthermore, ROBOT contravened the IMF rule of the adjustable pegged exchange rate. It was thought that the Americans would welcome the reintroduction of convertibility but would probably object to the flexible rate since it did not fit well with these existing international economic institutions operating under American influence.26 The ROBOT plan for a flexible exchange rate could have foundered on any of these three obstacles as the urgency of the reserves crisis receded. The most decisive factor was the lack of unanimity at the outset, which made a revolutionary and risky departure from current economic and political policy impossible. After the initial deferral at the end of February, the economic situation eased and the spirit of crisis passed, making a dramatic change in policy even more remote. The sterling area was not the primary obstacle to exchange rate flexibility. A ‘strong’ and stable pound was a prerequisite for the government’s domestic economic and political agenda. THE COLLECTIVE APPROACH TO CONVERTIBILITY The Collective Approach to convertibility which succeeded ROBOT in 1952 was the last significant attempt to devise a return to convertibility at a flexible exchange rate. At the Commonwealth Finance Minister’s Conference in January, delegates had agreed to short-term measures to stem the current crisis but also, in the words of the Australian finance minister, ‘despite certain reservations on the part of the United Kingdom, the Conference adopted the view that full convertibility was not only a feasible goal for sterling area policy but was the only one worth seeking’.27 After the Finance Minister’s Conference, a working party on convertibility was established under the chairmanship of Sir Arthur Salter to examine the steps by which convertibility could be reached. As noted above, the Australians were persistent advocates of an early move to sterling convertibility but they believed that British officials were confused on its

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implications and unwilling to make the sacrifices necessary to free up trade and payments. After the Commonwealth conference, L.G.Melville, who was the Australian member of the Sterling Area Working Party on Convertibility, reflected that the prevailing mood [in the UK] is one of escapism and wishful thinking, dictated partly by political difficulties which weigh heavily, but also by the defeatism of officials, particularly in the Board of Trade, who believe that the UK could never face unrestricted competition with the USA.28 What especially exercised the Australians was Britain’s unwillingness to accept that a reduction in discrimination would have to be a necessary accompaniment to convertibility. In the Australian view, the British were unwilling to commit themselves to the domestic anti-inflationary measures which would inevitably be required to improve British competitiveness. To this extent the Australians lacked faith in the British commitment to convertibility. Through 1952, however, the advocates of convertibility in the Bank of England and Treasury gained influence.29 The Collective Approach which emerged from their deliberations was presented to sterling area officials at the run-up to the December Prime Ministers’ Conference in September 1952. European currencies and sterling would go convertible together to spread the burden of possible speculation, and it was hoped that the USA would supply a support fund for use by the countries involved. It was still envisaged that the exchange rate of sterling would be allowed to fluctuate to lessen the pressure on the central reserves. Sterling area officials at the preparatory conference were generally supportive. The Australians were particularly enthusiastic, noting that both at the Ministerial and official level we are greatly pleased and encouraged to learn that the UK has so definitely re-affirmed the convertibility objective and more importantly, has devoted so much thought to the preparation of a broad plan for practical steps towards attainment of that objective.30 Nevertheless, sterling area countries objected in varying degrees to the fact that only non-resident sterling was to be convertible, that the proposed removal of quantitative import restrictions might be dangerous and that the American government might be alienated by a request to support sterling convertibility and follow good creditor policies. Resistance was also expressed by the Indians to the proposal for a flexible sterling rate against the dollar, and they refused to commit themselves to maintaining fixed parity with a fluctuating pound. The Bank of England, however, judged that this was ‘unlikely to be a breaking point with any delegation’.31 Melville, again representing Australia, cabled home that ‘I do not believe floating rate for sterling a necessary part of the plan, and if you agree, propose to argue against it. I do not, however, believe we shall reject

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proposal if UK insist.’32 Indeed, the Commonwealth Bank of Australia had investigated what action Australia should take in the event of a floating pound in August and had concluded that ‘the best thing for us to do would be to keep our rate with sterling constant’.33 The Collective Approach was modified to reflect the concern expressed by the officials and was presented to the Prime Ministers’ Meeting in November. The changes included pushing the removal of quantitative restrictions further into the future and shifting the provision of a stabilisation fund to the IMF or GATT rather than the USA. By the end of the Prime Ministers’ consultations in December 1952, the British were authorised to approach the Americans with the plan but the future of a flexible rate in the Collective Approach was left unresolved. The question of a flexible sterling exchange rate within fixed boundaries of 3 per cent on either side was discussed at the Commonwealth Finance Ministers’ Meeting at Istanbul in 1955. Commonwealth delegates had received directions from their respective governments and were willing to give tentative commitments on pegging to a flexible pound. Only India continued to refuse to commit themselves. By this time, however, the Collective Approach was already effectively dead as a route to convertibility. Sterling area resistance to a flexible sterling exchange rate was no doubt a possible threat to the success of the Collective Approach but it was not the cause of its failure. The Collective Approach to convertibility was a non-starter because of its reliance on American and European cooperation to an extent that was not forthcoming. Thus, the Americans were told they would have to provide a support fund for convertibility through the IMF, and were also required to revise their national economic strategy by proving themselves committed to ‘good creditor’ policy and reducing their surplus with the rest of the world. The Europeans were expected to follow the UK and adopt convertibility according to a British timetable to strengthen the chances of success for sterling. Not surprisingly, the Collective Approach met with a cool response when presented to America and Europe in early 1953.34 The US State Department’s initial response was surprise and caution. In an internal memorandum on the response to the proposals, it was suggested that ‘the American reaction to the Proposals should be one of welcome for the initiative which has been taken by the Commonwealth Governments and of the warmest endorsement of the broad objectives which they seek to achieve’, however, ‘we should be clear that we do not accept the Proposals as the exclusive basis of our future consideration of the broad trade and payments problem’.35 The US Treasury was especially concerned about the flexible exchange rate, the stabilisation fund and the possible impact on European integration.36 The Collective Approach was discussed by the British and Americans through a series of five meetings from 4–7 March 1953 where it became immediately clear that the US was unwilling to commit itself. In an unsuccessful attempt to pressure the Americans, Butler threatened that ‘the UK would have to review the

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position of Western Europe if steps could not be taken along the lines the UK had proposed. He thought the EPU a “nice little working mechanism” but it was not a world-wide approach to the problems.’37 In the end, Secretary of the Treasury Humphrey told Butler that he ‘did not see that any more could be said than that we share common objectives and that we are studying the problem’.38 The Chancellor rather bitterly responded that he ‘thought that some countries would derive some pleasure from this outcome, while there might be disappointments in several parts of the Commonwealth that we had not been able to go farther’.39 The Americans avoided a final decision on the Collective Approach pending the completion of the Randall Commission on External Monetary Policy which was finally presented to Congress in January 1954. In the short section at the end of the Report devoted to currency convertibility, the Commission concluded that it does not favor a ‘dash’ for convertibility, or letting the currency ‘find its own level,’ since such a method presents the danger of a vicious circle of inflation and would require larger reserves than may be available to prevent currency depreciation from getting out of hand.40 The Report continued, however, to state that the USA was ‘sympathetic to the concept of a “floating rate”’ but qualified this with the proviso that ‘whether a country is strong enough externally and internally, to administer such a system effectively involves a judgment which only the country in question could itself responsibly make’.41 Furthermore, a strong internal economy, willing and able to control its money supply and its budget as safeguards against inflation, sufficiently mobile to make the best use of its resources, and able and willing to save in order to increase its productivity and improve its competitive position in world markets, is a prerequisite to convertibility.42 That the British economy did not meet these criteria was suggested in the conclusion that ‘to restore full convertibility in sterling, Britain’s reserves must be strengthened’.43 The Americans were hostile to the suggestion that sterling adopt a flexible exchange rate because it represented a departure from their existing plans for the international economy. Thus, the Randall Report stated that ‘the commission feels it should not sponsor any measures that might wreck the Union [EPU] before there is something better to put in its place’, and recommended ‘a gradual and controlled approach to full convertibility’.44 If floating convertible had been put to the test it is likely that American opposition would have proved more serious than Indian reluctance to maintain a fixed rate with sterling.45 By the time the OEEC was formally consulted about the Collective Approach in late March 1953, the American rebuff had essentially put paid to the idea.

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There were, however, specific European objections, including the fact that the Collective Approach conflicted with European plans for convertibility which were being devised simultaneously by the Board of the EPU. In addition, continental Europeans were hostile to floating exchange rates and Butler did not mention the possibility of a flexible rate when first presenting the proposals.46 The European priority was the liberalisation of trade to be followed by convertibility, rather than the other way around. Moreover, ‘the Continentals were not ready to dispense with the EPU’,47 while the UK, which depended on it most, was unlikely to be able to extricate itself without being burdened by large gold payments to its creditors. The unrealistic prerequisites of the Collective Approach serve to focus the gulf between British and European visions of the post-war world in the early 1950s.48 The purpose of examining these two episodes was to put into context the role of the sterling area as a factor in the determination of exchange rate policy by identifying the obstacles to adopting convertiblity with a flexible exchange rate. It has been shown that the sterling area figured only marginally in the failure of Britain to adopt a flexible, convertible pound. Indeed, pressure from the sterling area was forcing the pace for freer trade and payments. Placing the burden of adjustment on the exchange rate rather than on the reserves, however, would have required political sacrifices that were not acceptable in the 1950s. Trying to avoid this pressure on employment and prices by limiting the fluctuation of the pound and collecting an international foreign exchange reserve through a ‘stabilisation fund’ sponsored by the Americans required a level of cooperation from the Americans and the Europeans that was also not feasible. This does not tackle the option of a devaluation to another fixed rate. This option was repeatedly dismissed by the British authorities, in part because it would mean a reduction in the value of RSA foreign exchange reserves held as sterling. While the rhetoric surrounding the resistance to devaluation centred on the need to consult the sterling area and the need to take their interests into account,49 it must be remembered that the UK had not found this to be an obstacle to the devaluation in 1949 nor were they to find it so for the devaluation of 1967. In the environment of buoyant demand which characterised the British economy in the 1950s, moreover, it is by no means certain that a devaluation would have solved the problems of the British balance of payments. With only 1. 5 per cent unemployment, the prospects for increasing the supply of exports to improve the current surplus seemed remote. A price adjustment would not improve the supply problems of the British economy which contributed to the weak competitive position of British exports. Meanwhile, increases in the prices of imports would contribute to inflationary pressure. Thus, Cairncross and Eichengreen have concluded that in the 1950s ‘it did not require much imagination to foresee the risks of creating more inflationary pressure on the heels of a devaluation’.50 Nor, indeed, could devaluation alone be considered a solution to Britain’s balance of payments problems. A devaluation in the 1950s would have required

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accompanying measures to restrict demand in order to prevent domestic inflation from eroding any ensuing price advantage. In this sense devaluation may have increased the need for deflationary demand management techniques rather than releasing the domestic economy from such restrictions. Nor, certainly, is devaluation to another fixed exchange rate a cure for speculative pressure since confidence in the new rate would depend on faith in the government’s ability to effect more structural changes in the internal economy to prevent a further devaluation. To avoid all these pressures, the policy chosen by the British authorities was what might be termed an administrative approach to freer trade and payments. Thus, the obstacles to external convertibility were gradually removed from 1953 to 1955 until sterling held by non-residents of the sterling area was de facto convertible. This decision to achieve external convertibility gradually through administrative measures effectively excluded the sterling area from external monetary policy. THE ADMINISTRATIVE APPROACH TO CONVERTIBILITY The momentum toward convertibility was sustained primarily through pressure from the Bank of England. With the growing respectability of the transferable sterling market and after the disappointing international response to the Collective Approach in March 1953, Bank policy began to focus on the transferable sterling market as the target for the next adjustment to exchange control. By November 1953, the Bank and the Treasury had agreed on the desirability of uniting the bilateral and transferable sterling areas to simplify exchange control. The Chancellor was advised that the move was consistent with what were now termed Britain’s ‘long-term’ objectives for convertibility via the Collective Approach.51 It was clearly in the direction of establishing one external value for sterling and would probably reduce the risk of the major move to convertibility when it came. It was also expected to have a beneficial effect on sterling’s international status. Exchange markets were buoyant at the end of 1953 so it would represent a movement from strength. This had always played a large part in the UK’s plans for convertibility and was considered an important prerequisite for success. It was also hoped that unification would eliminate the complicated network of restrictions and simplify the use of sterling, making sterling more usable and attractive and therefore more valuable, perhaps increasing the buying power of UK importers. Sterling area exporters also stood to benefit from a hardening of the transferable rate since this would reduce the competitive edge at which continental exporters could offer sterling goods using cheap sterling. It was also noted that unification would benefit UK exporters because they would no longer be so restricted in the payment they could receive. No objections were expected from the sterling area.

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Unification was seen as a technical reorganisation rather than a significant departure from current practice. It did not actually affect the convertibility of sterling to dollars since payments from transferable account to dollar account were still restricted. There was, then, no need to consult the sterling area on the decision and no grand announcement would be made. The innovation was to be camouflaged by the re-opening of the London gold market at the same time. It was hoped that such an approach would ease the transition and prevent any shocks to confidence.52 On 24 November 1952, Rowan cabled the British Embassy in Washington about the proposals and by the end of the month the final drafts of cables to the Dominion central banks and to transferable sterling countries were ready to be sent out. By 30 November 1953, the plan could have been implemented within a week of authorisation by the government. At this point, the plan was stalled. A Commonwealth Economic Conference had been called for January 1954 and the Chancellor decided to delay unification until after the conference. It was considered undesirable for such a policy to appear to have emerged from the Commonwealth talks so the announcement was postponed to February or March 1954.53 The Treasury, without any objections from the Bank, wanted the decision to be viewed as exclusively British and not as a joint sterling area decision. This was in part due to the desire to avoid publicity for the move. It was also meant to signify the independence of the UK in determining sterling policy. Sterling, after all, was the national currency of the UK and the rules governing its use were the sole domain of the British government. This contrasts with the policy a year earlier of presenting the Collective Approach as a product of sterling area discussions and reflects the different nature of the two proposals. The Collective Approach depended on a widely spread base of support which would be reinforced by sterling area unity. Unification, on the other hand, was a unilateral decision by the UK to remove payments restrictions in the general interest of freer trade and payments. The sterling area did not play a significant role in the chances for the policy’s success nor, therefore, in its development. In fact, however, unification would affect the sterling area through relaxation of the controls on their merchants, as well as through the possible impact on sterling area reserves and the international status of sterling. The timing of the Commonwealth Economic Conference in Sydney provided an opportunity for the Chancellor to mention the proposal discretely to the rest of the sterling area and a brief was prepared for this purpose by Coppleston of the Bank on 17 December 1953.54 The administrative nature of the change was emphasised to the sterling area delegates. It was not to be considered a part of the Collective Approach or any move to convertibility and so was ‘not in any case a matter for joint Commonwealth decision’. The delegates were assured that the effect on sterling area exports would be favourable and that the transferable sterling rate would be firmer. No objections were recorded among the sterling area members, perhaps because contrary to the Chancellor’s advice they did

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consider it to be progress toward convertibility at last. In any case, the conference was preoccupied with development finance. In their final communiqué the delegates reaffirmed their commitment to the Collective Approach and in the short term they pledged to maintain firm internal policies to strengthen the reserves. Unification was introduced, as planned, with a minimum of fanfare on 22 March 1954. By the end of March, the transferable rate had strengthened, fulfilling the optimistic predictions of the Treasury and the Bank. The rate climbed three cents to $2.78 in March and then to a decade peak of $2.79 through April and May. Reserves were bolstered by sales of Russian gold to the re-opened London market and the balance of trade through the Spring improved over the same period in 1953. The trade deficit for the first six months of 1954 was £46m compared to £146m in 1953. By June, however, the buoyancy of the transferable market had evaporated under the pressure of rumours of a devaluation and the indefinite postponement of convertibility. From June to September, the reserves fell by £116m and the transferable rate in New York fell to $2.74. There was a brief reprieve in September after the Chancellor’s speech to the IMF/IBRD denying rumours that convertibility at a fluctuating rate was imminent, but by November the transferable rate was down to $2.71, allowing commodity shunting to take place. On October 6, the Governor of the Bank of England reported to Playfair that he ‘had impressed upon the Chancellor the importance of taking explicit action on Exchange Control relaxations etc. and giving up the writing of long memoranda upon convertibility’.55 Bank impatience with the Treasury intensified as the external position of sterling deteriorated. Pressure from the sterling area for freer payments was also mounting. In a note to Rowan, Stevenson reported that he had been approached by Woodrow of Australia regarding the UK attitude to the transferable market.56 The Australians had expressed a desire to sell their gold for transferable sterling where the price was five to seven shillings more per ounce than the official market. This appears to have startled both the Treasury and the Bank.57 Woodrow was told that, while exchanges of gold for transferable sterling would be tolerated among foreigners, such practice by members of the sterling area ‘would clearly be upsetting’ since it represented a breach of discipline and threatened the central reserves of the sterling area. Woodrow was also warned that entering the transferable market would divert gold and dollars from Australian reserves and the UK would not feel obliged to allow Australia to exchange sterling on the official market to make this up. This episode emphasises Australia’s growing frustration with sterling area exchange control and the widening gulf between the priorities of Britain and the overseas sterling area. In the third week of January 1955, the Bank came back on the offensive with a bundle of three policy papers for the Treasury. In the first, Governor Cobbold noted that the conditions for the Collective Approach were not realisable in the next year ‘and probably not for some time after that’.58 In the meantime, the

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exchange position was ‘beginning to lag behind what is actually happening in foreign exchange markets throughout the world’. Cobbold estimated that the resulting weakness of sterling was sustainable for perhaps two or three months but certainly not for a year or longer. He suggested a series of immediate measures which included keeping the official and transferable rates together without a formal act of commitment to avoid embarrassing the government. A second paper, prepared by L.J.Menzies, Deputy Chief Cashier, gave startling examples of the growing strength and repectability of the transferable market.59 Apparently, not all London banks were aloof from the market and an example was given of a financial delegation from the Netherlands Antilles that had recently quoted offers for transferable sterling which had been made to them by a London bank. Also, in mid January 1955, a London merchant bank had been allowed to establish an agency in London to deal in transferable sterling for nonresidents. Foreign central banks were also patronising the market, including those of Japan, France and Uruguay. In February 1955 Connolly at the Bank for International Settlements wrote that ‘the thought arises whether it is not a very strange thing for the main market in sterling to be left to the mercy of the international dealers while all the official ammunition in cash and know-how is spent in the minor field of operations in London’.60 The conflict between the Bank and the Treasury on further steps toward supporting the transferable sterling rate was due to the Bank’s belief that the strain in the transferable market was primarily due to technical obstacles rather than underlying balance of payments troubles of the sterling area, while the Treasury tended to attribute the weakness of transferable sterling in early 1955 to the sterling area balance of payments. The Bank believed that changes in the sterling area balance of payments could only manifest itself in foreign exchange markets after a six-month delay. The weakness of sterling must therefore have been due to the technical problem posed by the transferable market. Thus Cobbold asserted that ‘the strength of sterling is being sapped away, materially, because payment to the sterling area is increasingly made through cheap sterling and psychologically because of the existence of an active market in cheap sterling at a considerable discount’.61 By February the Treasury was convinced. On February 16, Bank Rate was increased by 1 per cent, to 5.5 per cent and the next day hire purchase arrangements were further restricted and the Capital Issues Committee was advised to consider only urgent applications. On the same day authority was given to the British negotiators in the EPU to agree to an increase in the gold-credit ratio to 75 per cent. One week later, after the transferable sterling rate had continued to fall, the Chancellor cabled the UK Treasury and Supply Delegation in Washington that permission had been given to bring the transferable rate up to meet the official rate; the Commonwealth Dominions were informed of the decision. By the end of February the transferable rate had been raised four cents to $2.76\£. Connolly described the operation as ‘some monster pulled up from the depths’ with the ‘seaweed and

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barnacles’ of various black markets clinging to its back.62Defacto sterling convertibility at the fixed official rate had been achieved. CONCLUSION The commitment to freer trade and payments enthusiastically embraced by the overseas sterling area in 1952 spelled the end of the prominence of the sterling area in British external monetary policy-making. Through ROBOT, the Collective Approach and the administrative approach to convertibility, the sterling area was progressively marginalised. Once discrimination and restrictions were abandoned as long-term tools of policy the sterling area, as the system which enforced them, receded in importance. With the declining importance of the RSA in British trade and the waning of the imperative for discrimination, the sterling area was no longer the focus of British policy. Pressures for relaxing trade and payments came not only from the sterling area countries themselves but also from Europe and America, so that Britain was responding to wide international pressures. In the second half of the 1950s, plans emanating from Continental Europe to coordinate European payments after convertiblity took up an increasing amount of policy-makers’ energy. In particular the European Monetary Agreement and the European Free Trade Area preoccupied minds in Whitehall. Although a semblance of the sterling area remained after de jure convertibility was announced in concert with Europe at the end of 1958, its essence had already been extinguished in the wake of changing priorities both in Britain and in the overseas sterling area as countries increasingly focused on their own development and trade links independently of their sterling area relations.

6 CONCLUSIONS

The sterling area has been a neglected aspect of British post-war economic policy and as a result the conclusions of contemporary authors have remained the primary basis for judgements on its impact on the British economy. By focusing on the three core relations which made up the sterling area, this study points to the necessity for a revision of this traditional judgement. The sterling area was a complex and tangled web of political and economic relations which operated at levels of high policy as well as at a day-to-day functional level. This study has concentrated on the economic relations rather than the loosening political ties which bound the Commonwealth together in the 1950s. Recent research has suggested that a better understanding of the economic relations of this period may have important implications for explaining the waning of the Commonwealth and the disintegration of the Empire in the 1950s.1 The author leaves this promising avenue to future researchers. While the economic performance of Britain has generated an enormous literature and consumed the careers of many historians and economists, we seem to be coming only gradually closer to a complete understanding of the forces underlying post-war trends. This study of the sterling area illuminates one aspect of a relatively small period in this post-war experience and makes an essentially negative contribution: that the sterling area cannot be blamed either for the problems of Britain’s balance of payments or of British industry. The primary aim of this book is to contribute to a greater understanding of Britain’s external economic relations after the 1940s. The recent historiography has mostly stopped at the devaluation of 1949 and taken up again with the devaluation of 1967. In between, however, dramatic changes were taking place in Britain’s position in the international economy. In 1950, Britain was the centre of a well-disciplined discriminatory system based on the common need to protect the value of sterling and to keep merchandise and capital markets as open as possible. By 1960, Britain’s closest economic relationship was with continental Europe, sterling was convertible and the interests of the members of the sterling area had diverged. In the years between, the Korean War marked the beginning of the peacetime realignment of the international economy by ending the dollar shortage and altering the balance of power within the sterling area. The price fluctuations in primary products

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associated with the war gave the overseas sterling area greater purchasing power on the one hand, and on the other emphasised the danger of relying on primary production to support national income. The RSA countries became impatient for liberalisation of trade and payments in order to fulfil their development ambitions. Britain was still a necessary market for goods and capital but evidence was mounting that it would no longer be a sufficient centre for economic allegiance. On the part of the British, after 1952 the sterling area began quietly to recede to the fringes of economic policy. The sterling area no longer promised a strong or reliable market for British goods although it was still an important destination for capital. The sterling balances had settled down to a stable level which was to remain relatively unchanged until the devaluation of 1967. The commitment to a wider role for sterling through convertibility meant that the discrimination and restrictions which defined the sterling area receded from the policy of Britain as well as from that of the RSA. The sterling area system was always seen as a temporary measure, born of the necessity to generate trade and income during a time of shortages, rather than as a permanent institution which promised a long-term alternative to freer trade and payments. Neither the UK nor the overseas sterling area seriously considered retiring into a trade bloc after the Korean War. In the unbalanced decade of the 1950s, however, the sterling area allowed a degree of multilateralism in trade and payments that smoothed the recovery of its members as well as the rest of the world, though by the middle of the decade Britain’s focus was moving more resolutely toward coming to terms with continental Europe. Furthermore, sterling area policy was not synonymous with Britain’s strong pound policy. Britain wanted to keep the fixed exchange rate of sterling with the dollar because of the stability this generated for domestic prices and employment. This was made obvious in the ROBOT discussions. It became clear after 1952 that the exchange rate reflected confidence in the British economy rather than vice versa, and this led to a concentration on internal disinflationary policies throughout the sterling area instead of direct controls on international transactions. This book has tackled four clichés about the sterling area which might usefully be categorised as the sword, the featherbed, the leaking artery and the handcuffs. Chapter 2 addressed whether the sterling balances represented a sword hanging by a thread over the head of the British central reserves, threatening to fall at any time in response to shifts in the prevailing wind. The disaggregation of the balances revealed that a more accurate metaphor would be a collection of sewing needles each held by sturdy darning thread over a rather thick scalp reinforced by a springy head of hair. Half the sterling balances were built up through colonial monetary and fiscal systems and sustained by conservative policy which emanated not only from Britain but also from local leaders. Independent members of the sterling area maintained working balances in sterling that reflected their relations with the British market both for merchandise

CONCLUSIONS 131

and capital. This relationship was definitely weakening, as was shown in Chapters 3 and 4, but Britain continued to be the major economic link for most members of the sterling area. The threat of diversification of reserves needs to be recognised but it had not progressed far by the 1950s, nor would we have expected it to have. The decline of sterling as an international currency from its elevated position before the First World War seems inexorable from the position of the 1970s, but in the 1950s it still offered a source of liquidity and was a useful medium for transactions within the sterling area. Close to half of the world’s trade was still denominated in sterling. Moreover, it has been shown that the central reserves were not as thin as has been represented by the official figures. Other short-term assets and the IMF quota provided an extra layer of insulation, although this was not always used optimally. Chapter 3 challenged the cliche that the sterling area provided a ‘feather-bed’ into which lazy British exporters sank and eventually smothered instead of being forced into the harsh but invigorating competition of continental trade. Before 1952 Britain no doubt benefited by being able to export to the sterling area and earn hard foreign exchange at a time when the American market was difficult to penetrate. Sterling area exports to Europe also contributed to economic recovery and improved the British position in the EPU. It has been argued elsewhere that these markets allowed the fulfilment of Britain’s full employment policies immediately after the war.2 After 1952, however, the sterling area became an increasingly competitive arena for British exporters and one in which they did not perform well. At the same time, instructions from Whitehall no longer encouraged exports to the sterling area since the hope for a triangular balance of trade had been abandoned. Blaming the sterling area for Britain’s poor export performance in Europe is rather like blaming the hospital bed for the patient’s illness. The European market was expanding so fast in the 1950s that penetration should not have been difficult for aggressive and efficient producers. That exporters may have stuck to declining markets needs to be explained through an investigation of British marketing and production rather than blamed on the sterling area system. An issue that has plagued the history of Britain in the international economy since 1870 was addressed in Chapter 4. An assumption has persisted that excessive investment overseas was a leaking artery that drained the lifeblood of domestic industry, leaving it weak and anaemic. Looking at the actual amount of investment in the sterling area and the returns it generated, dispels this picture for the 1950s. The ratio of foreign investment to domestic capital formation was so small and British investment apparently so relatively unproductive that the possibility of a significant negative impact on British growth must be dismissed. The final metaphor which has been addressed is that of the British policymaker handcuffed by the ties that bound the sterling area together. Unable to offend or cut through these links, the interests of the British economy were set aside or ignored. Chapter 5 investigated this allegation with respect to exchange rates and found that the constraint on British policy-makers was overwhelmingly the

132 BRITAIN AND THE STERLING AREA

domestic political and economic commitments of the post-war governments. The consensus built up during the war that full employment and stability were to be the primary goals of governments was the main determinant of policy rather than fears of offending the sterling area. It must be remembered, however, that Britain was not determining policy in a vacuum and there were other constraints on their options. Reinforcing the sterling area would not have been acceptable to other members. Abandoning the sterling area by unilaterally blocking the sterling balances and thus removing sterling as an international currency and retreating into a trade island of its own was neither politically feasible nor economically recommendable. In hindsight, Britain’s hesitations about European integration were perhaps misguided, but the sterling area was not the main obstacle to Britain’s enthusiasm. Certainly if Britain had never been a great international economic power their attitude might have been more similar to other middle power European countries, but it was recognised that the sterling area in the 1950s was not a reliable basis for a future international role for Britain. Indeed, Britain committed itself from an early date to widening the role of sterling beyond the sterling area by freeing trade and payments. This story has ended at 1958 when de jure convertibility was introduced in concert with Europe. This marked the effective end of the rationale for the sterling area although the apparatus and vocabulary lingered on until the early 1970s when the fixed exchange rate was abandoned. Two years after convertibility Britain turned resolutely away from its Commonwealth connections and applied to join the EEC for the first time. If ever the Commonwealth needed proof that its future did not lie in a bilateral relationship with Britain, this was it. Six years later, after a climax of the balance of payments problems that had plagued the British economy since the war, sterling was devalued, giving way to the Basle agreements which formalised the end of the pooling of reserves. It was asserted in Chapter 1 that the British economy was undergoing a fundamental realignment in its relationship with the rest of the world during the 1950s. This is especially apparent with respect to Britain’s relationship with the rest of the sterling area. By the mid-1950s a change was apparent in the structure of the sterling balances, in the trade relationships of the sterling area and in the direction of British sterling policy in general. From 1955 the process of accumulation of sterling balances was reversed, the reliance on the UK as an export market was declining for most members, the London capital market tightened up and, although the volume of investment continued to expand, members of the RSA were encouraged to look elsewhere for foreign capital. Thus, the traditional components of the system were all eroded through this period and the tools of British management of the sterling area became obsolete. The mid-1950s also marked the beginning of the deterioration of the RSA balance of payments with the non-sterling area so that the surplus necessary for its proper functioning came to depend on South African gold sales and Middle Eastern oil exports rather than on more traditional RSA raw material exports. By this time, the British authorities had abandoned hopes of coordinating sterling

CONCLUSIONS 133

area trade policy or sterling-area-wide programmes of domestic demand management. After the Collective Approach collapsed, UK balance of payments policy focused increasingly on getting the British economy in order, independently of the RSA, by relying on fiscal and monetary controls to affect the external balance. The increasing reliance on domestic restrictions after 1952 was thus due to the virtual abandonment of a common sterling area policy rather than part of Britain’s management of the system. In the 1960s, academic interest in the theory of optimum currency areas was sparked by a brief article by R.A.Mundell.3 More recently, the costs and benefits of monetary integration have received greater attention in the context of plans for European monetary union.4 The sterling area had many of the characteristics of a currency area and it is worth exploring what its experience contributes to an understanding of such systems.5 First, the sterling area was not a complete currency union. All members had their own national currencies, although the degree of independence varied. In the case of the colonies, national currencies were virtually interchangeable with sterling because colonial monetary systems were based on 100 per cent sterling reserves. The properties of the sterling area system do, however, approximate a currency area defined as ‘an area within which exchange rates bear a permanently fixed relationship to each other’ and where there is a ‘permanent absence of all exchange controls, whether for current or capital transactions, within the area’.6 The members of the sterling area operated firmly fixed exchange rates with each other, denominated their trade in sterling, and for the most part enjoyed free capital and current payments. The exceptions to these general rules were some trade restrictions within the area (e.g. Australia imposed quantitative restrictions on sterling area imports after 1952) and some capital controls (e.g. in 1957 South Africa imposed controls on capital flows to the UK in response to the increases in the British Bank Rate). Despite these exceptions, the sterling area enjoyed many of the benefits of a currency area described in the theoretical literature. These include the elimination of speculative capital flows, reserves pooling and reduction of transactions costs. With respect to the first, speculative capital flows among members were virtually eliminated except for a brief period during 1949– 50 when it was believed that the Australian pound would revalue to a par with sterling. Overseas members of the sterling area also enjoyed the benefits of reserve pooling and economised on the volume of reserves necessary to support their surpluses and deficits as a whole. This was because movements in their balance with the rest of the world in part offset each other so that while some members were consistent drawers on the central reserves, others were consistent depositors. The UK benefited from the system insofar as the RSA were net contributors to the reserves since the UK was a persistent drawer. The question of reducing transactions costs is less easy to assess. Certainly, there would be some economies of scale through having half the world’s trade denominated in sterling and there were no doubt fewer transactions costs associated with trade among sterling area members where there were no exchange

134 BRITAIN AND THE STERLING AREA

controls, compared with trade with the rest of the world. Chapter 3 showed, however, that there is little evidence that the system generated new trade relationships amongst RSA members. Most of the trading relationships were on a bilateral basis with the UK and with regional trading partners. It is possible, however, that trade along the lines of these traditional patterns was expanded due to lower transactions costs. Against the benefit of lower transactions costs for members must be set the costs of enforcing the restrictions on the non-sterling area. Thus, the sterling area system can be seen either as allowing the freer use of sterling among some countries or as necessitating cumbersome controls against the rest of the world. Without the sterling area it would still have been necessary for Britain to maintain exchange controls in the post-war period and there is no evidence that the sterling area inhibited the process of relaxation of restrictions on trade and payments. The first interpretation of the sterling area, that it allowed greater freedom in the use of sterling and reduced transactions costs, must dominate. Certainly, one of the justifications for the sterling area system used by the British authorities was that it allowed for greater use of sterling in international transactions than would otherwise have been the case. If the sterling area system had not emerged from the Second World War, it is likely that the larger RSA members would have pegged their exchange rate to another major currency such as the US dollar, thus joining a different currency area. Only India briefly considered floating their national currency against both the dollar and sterling. This was in the context of the Collective Approach discussed in Chapter 5 and can be seen more as a political bargaining tool rather than a viable economic plan. Through the end of the 1950s and into the 1960s it became apparent that some Australians believed that they were part of the wrong currency area and made efforts to realign the Australian economy to the USA. There was no serious consideration, however, of any member defining a currency area by their own political boundaries in the way that Canada did during this period. Whether this implies that being part of a currency area was optimal for members of the RSA, however, requires further research. Among the costs of a currency area, the most important is the loss of economic sovereignty associated with fixed exchange rates. Chapters 2, 3 and 4 have shown that the tools of British management of the sterling area (free capital flows from the UK, acceptance of short-term liabilities and unrestricted imports), did not impose major costs on the UK economy. Chapter 5 showed that the sterling area system did not significantly inhibit UK economic policy. The balance of payments constraint of the UK economy during the 1950s was the effort to maintain the fixed exchange rate between sterling and the dollar rather than between sterling and the various currencies of the RSA. Furthermore, as by far the largest economy in the sterling area, the UK was the system’s leader and it was up to RSA countries to adjust their economic policy to that of the UK. The growing unwillingness to do this was beginning to drive the system apart by the end of the 1950s. The interesting aspects of the cost of the currency area

CONCLUSIONS 135

association are thus in the policy choices of the RSA members rather than the UK. This issue is beyond the scope of this book but suggests that research into the experiences of the RSA members will provide some interesting insights into the functioning of the sterling area in this period. The most important aspect of the sterling area as a currency area is where it fell short of the theoretical prerequisites. A primary weakness was the lack of common policy goals after the end of the dollar shortage. The RSA’s ambitions for developing secondary industry, especially in Australia and India, and for more basic economic development in the case of the colonies, did not coincide with the British interest in maintaining these countries as a source of supply of raw materials and foreign exchange. This was especially evident in Chapter 3 which described the end of the hopes for a triangular balance of trade, the abandonment by the RSA of discrimination in favour of the UK and the increasing emphasis in British policy on restraining internal demand. The efforts at coordinating sterling area demand management failed because the policies appropriate to a developed industrial economy like the UK, which emphasised price stability and balance of payments equilibrium, were not appropriate for countries which put more emphasis on development and growth. Of course, the British economy may have been better served if growth had been higher on the list of priorities but this debate must centre on the ranking of British policy options. Chapter 5 showed that the sterling area system did not interfere with the choice of UK policy priorities. The experience of the sterling area emphasises the importance of common economic goals, especially with respect to growth rates and development, to the successful functioning of a currency area. The institution of a currency area itself cannot be expected to generate complementary economic policy among its members. Rather, a commitment to common economic goals must be a prerequisite to the formation of the system. Even in this case, however, priorities may change with time, making the currency area less viable if these new goals are considered more important than the country’s association with the currency area. This has been an important obstacle to European monetary union. In the early post-war period the sterling area members shared a common need to contend with the international dollar shortage, but as this receded the motivation of the sterling area association eroded. Members continued to maintain fixed exchange rates but the exceptions to the freedom of current and capital transactions multiplied and the policy emphasis of some members shifted to Europe and the USA. This experience suggests that another prerequisite for a successful currency area is that the countries forming it should have a similar level of economic development. Although this may lessen the complementarity of members’ production and trade, the coordination of policy in the longer-term will be more assured. The literature surveyed in Chapter 1 showed that many critics of the sterling area system have suggested that its only advantage was the misplaced belief that it offered Britain greater international prestige. The archival evidence, however,

136 BRITAIN AND THE STERLING AREA

indicates that the Treasury and the Bank of England were aware that the sterling area system did not always generate prestige for the British economy and that the controls on the use of sterling which defined the system often brought sterling into disrepute. This was reflected in the continued search for ways to introduce sterling convertibility and by the gradual abandonment of discriminatory trade controls as an instrument of sterling area policy after 1952. The sterling area system allowed an international role for sterling beyond that which it might have had if those countries had pegged to the dollar, but the sterling area was not the basis from which it was hoped that sterling would regain a truly international status. Suggestions that the sterling area should be expanded as a way to increase the use of sterling internationally were quickly dismissed. The route to convertibility, on which the international role of sterling depended, was eventually achieved by British administrative measures. The other members of the sterling area were left watching events from the sidelines after the death of the Collective Approach in 1953. After the Second World War, the leadership of Britain in the international economy was reduced to a regional role centred on the sterling area. Previous studies have assumed that the UK maintained its leadership within the sterling area at some cost to the domestic economy and to the freedom of policy choices. This study has presented evidence that the effect of the sterling area system on the British economy and on British policy has been exaggerated. Furthermore, the essential instruments of British management of the sterling area became ineffective through the 1950s, thus causing the erosion of British leadership during this decade. The main conclusion is that by the end of the 1950s the UK was no longer ‘managing’ the sterling area. The balance of payments problems that were the focus of British economic policy in this period cannot be attributed to the existence of the sterling area.

NOTES

1 INTRODUCTION 1 See Table 4.6. 2 Of the more recent literature, see e.g., S.Pollard, Britain’s Prime and Britain’sDecline; The British Economy 1870–1914, London, Edward Arnold, 1989. M.W. Kirby, The Decline of British Economic Power Since 1870, London, George Allen and Unwin, 1981. 3 For example, A.Shonfield, British Economic Policy Since the War, London, Penguin, 1958. J.M.Livingstone, Britain in the World Economy, London, Pelican, 1966. J.Cooper, A Suitable Case for Treatment: What to do about the Balance ofPayments, London, Penguin, 1968. L.J.Williams, Britain and the World Economy, London, Fontana, 1971. 4 A.R.Conan, The Sterling Area, London, Macmillan, 1952. A.C.L.Day, TheFuture of Sterling, Oxford, Oxford University Press, 1954. P.W.Bell, TheSterling Area in the Postwar World; Internal Mechanism and Cohesion 1946–52, Oxford, Oxford University Press, 1956. J.Polk, Sterling: Its Meaning in WorldFinance, New York, Council on Foreign Relations, 1956. Conan, The Rationale ofthe Sterling Area, London, Macmillan, 1961, and The Problem of Sterling, London, Macmillan, 1966. F.Hirsch, The Pound Sterling: A Polemic, London, Victor Gollancz, 1965. B.J.Cohen, The Future of Sterling as an InternationalCurrency, London, Macmillan, 1971. S.Strange, Sterling and British Policy; APolitical Study of an International Currency in Decline, Oxford, Oxford University Press, 1971. 5 For other reviews of opinions on the sterling area see e.g., Conan, The Rationaleof the Sterling Area, and M.F.G.Scott, ‘What Should Be Done About the Sterling Area?’, Oxford University Bulletin of Statistics, vol. 21, no. 4, November 1959, pp. 213–51. 6 Bell, The Sterling Area, pp. 414–17; Day, Future, pp. 60–1; Williams, Britain, p. 179; A.P.Thirlwall, The Balance of Payments: The UK Experience, London, Macmillan, 1956, pp. 148–9, G.Maynard, ‘Sterling and International Monetary Reform’, in P.Streeten and H.Corbet (eds), Commonwealth Policy in a GlobalContext, London, Frank Cass, 1971, p. 145. 7 Conan, Rationale, pp. 13–14.

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8 Report of the Committee on the Working of the Monetary System, Cmnd. 827, HMSO, 1959. Henceforth cited as Report of the Radcliffe Committee. 9 Bell, The Sterling Area, p. 368. See also Polk, Sterling, p. 234. 10 A.Hazlewood, ‘Colonial External Finance Since the War’, Review of EconomicStudies, vol. XXI, no. 54, Dec. 1954, pp. 31–52. 11 Cooper, A Suitable Case, p. 221. 12 Strange Sterling, pp. 191–2, Shonfield, British Economic Policy, p. 128, Cooper, A Suitable Case, p. 221. 13 Conan, The Problem of Sterling, p. 81. 14 Strange, Sterling, pp. 150–1; Shonfield, British Economic Policy, p. 108. 15 Shonfield, British Economic Policy, p. 107. 16 Report of the Radcliffe Committee, p. 265. 17 ibid., p. 240. 18 ‘The Sterling Area I: History and Mechanism’, Planning, vol. XVIII, no. 331, 1951, p. 63; Day, The Future, pp. 102–3; Bell, The Sterling Area, p. 407. 19 Strange, Sterling, p. 70. D.H.Robertson, Britain in the World Economy, London, George Allen and Unwin, 1954, p. 75. 20 Day, The Future, p. 75; Bell, The Sterling Area, pp. 401–7; Cooper, A SuitableCase, pp. 239–40. 21 Maynard, ‘Sterling and International Monetary Reform’, p. 142. 22 Hirsch, The Pound Sterling, p. 39; Strange, Sterling, p. 300; Cohen, The Future, p. 144; Cooper, A Suitable Case, p. 88; S.Pollard, The Wasting of the BritishEconomy, London, Croom Helm, 1982, p. 34; Williams, Britain, p. 179; S.Brittan, Steering the Economy: The Role of the Treasury, London, Pelican, 1971, p. 446. 23 Day, The Future, p. 154. See also Williams, Britain, p. 180. 24 Shonfield, British Economic Policy, p. 150. 25 ibid., p. 160. B.J.Cohen in The Future of Sterling came to the same figure as an estimate of the net amount of the City’s earnings arising from the use of sterling as an international currency (p. 116). W.M.Clarke suggests this is an under-estimate in The City’s Invisible Earnings, London, Institute of Economic Affairs, 1958, pp. 101–2. 26 Strange, Sterling, p. 75. 27 ibid., p. 69. 28 See E.J.Hobsbawm, Industry and Empire, London, Pelican, 1968, for an application of this to the pre-1914 period. For post-1945, see Stephen Blank, ‘Britain: the Politics of Foreign Economic Policy, the Domestic Economy and the Problem of Pluralistic Stagnation’, International Organisation, vol. 31, no. 4, Autumn 1977, pp. 673–727. A.Glyn and B.Sutcliffe, ‘The Rivalry of Financial and Industrial Capital’, in D.Coates and J.Hillard (eds), The Economic Decline ofModern Britain: the Debate Between Left and Right, Brighton, Wheatsheaf, 1986. D.Coates, ‘The Character and Origin of Britain’s Economic Decline’, reprinted in Coates and Hillard, The Economic Decline. Also Williams, Britain, p. 180. 29 Blank, ‘Britain: the Politics of Foreign Economic Policy’, p. 715. 30 S.Aaronovitch, ‘The Relative Decline of the UK’, in Aaronovitch et al. (eds), ThePolitical Economy of British Capitalism: A Marxist Analysis, London, McGrawHill, 1981, p. 68. 31 S.Pollard, The Wasting, p. 34.

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32 Diane B.Kunz, The Economic Diplomacy of the Suez Crisis, London, Chapel Hill, University of North Carolina Press, 1991, p. 13. This sentiment is also found in J.D.B.Miller, Survey of Commonwealth Affairs: Problems of Expansionand Attrition 1953–69, Oxford, Oxford University Press, 1974, p. 274, and in A.S.Milward, The European Rescue of the Nation-State, London, Routledge, 1992, p. 359. 33 Kunz, Economic Diplomacy, p. 14. 34 ibid. 35 ibid. p. 89. 36 B.Stafford, ‘Theories of Decline’, Socialist Economic Review 1983, reprinted in Coates and Hillard (eds), The Economic Decline of Modern Britain, 1986, p. 346. 37 P.J.Cain and A.G.Hopkins, British Imperialism; Crisis and Deconstruction1914– 1990, London, Longman, 1993, pp. 278–81. 38 S.Newton, ‘Britain, the Sterling Area and European Integration, 1945–50’, Journal of Imperial and Commonwealth History, vol. 13, no. 3, 1985, pp. 163–82. 39 Milward, European Rescue, p. 395. 40 Polk, Sterling. 41 I.M.Drummond, The Floating Pound and the Sterling Area, 1931–39, Cambridge, Cambridge University Press, 1981, p. 5. 42 The League of Nations included Argentina and Japan as unofficial members of the inter-war sterling bloc. League of Nations, International Currency Experience, 1944, p. 47. 43 Drummond, The Floating Pound, p. 24. 44 Egypt was a member of the sterling area until 1947. 45 Strange, Sterling, p. 65. 46 Thus the UK could earn foreign exchange from its surpluses with the rest of the sterling area. 47 For a thorough account of Anglo-American negotiations see L.S.Pressnell, External Economic Policy Since the War: Vol I The Post-war Financial Settlement, London, HMSO, 1987. 48 ‘The Sterling Balances and the Position of the UK’, Memo to the NAC Staff Committee, 9 March 1950. National Archives and Records Administration, Washington, D.C. (hereafter NARA) RG 469. 49 See, e.g., ‘Statement of the Sterling Balance Problem’, Memo by the Treasury Department, 13 March 1950. NARA RG 469. 50 Position Paper for the discussions with British and Canadians on Sterling-Dollar Problems: prepared by Policy Planning Staff, 3 September 1949. ForeignRelations of the United States (hereafter FRUS), 1949 (IV). 51 ‘The UK Relationship to Western Europe’, 5 May 1950. FRUS 1950 (III). 52 For a more complete discussion of the role of the sterling area in the relationship between the UK and USA before 1950 see S. Newton, ‘Britain, the Sterling Area and European Integration, 1945–50’, Journal of Imperial and CommonwealthHistory, vol. 13, no. 3, 1985, pp. 163–82. 53 Memo of a telephone conversation, 14 December 1951. NARA RG 59 Lot 52D 224 Box 1. 54 ‘UK’s Sterling Area Interest and ECA’, State Department memo, 4 May 1948. NARA RG 59 Lot 52D 224 Box 3. 55 See eg., Cain and Hopkins, British Imperialism, pp. 280–1.

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2 THE STERLING BALANCES 1 See eg. A.K.Cairncross, ‘The United Kingdom’, in A.Graham and A.Seldon (eds), Government and Economies in the Postwar World, London, Routledge, 1990, p. 30. A.P.Thirlwall, Balance-of-Payments Theory and The UK Experience, London, Macmillan, 1986, pp. 148–51. G.Maynard, ‘Sterling and International Monetary Reform’, in P.Streeten and H.Corbet (eds), Commonwealth Policy in aGlobal Context, London, Cass, p. 145. 2 See S.Strange, Sterling and British Policy, Oxford, Oxford University Press, 1971, for an influential presentation of this view. 3 ibid., p. 69. 4 J.S.Fforde, The Bank of England and Public Policy 1941–58, Cambridge, Cambridge University Press, 1992, p. 275. 5 R.S.Sayers, Financial Policy 1939–1945, London, HMSO, 1956. 6 UK External Liabilities and Claims in Sterling: 1945–62 (Old Series), Bank of England, 1968. Egypt left the sterling area in 1947 and is excluded from this analysis. 7 For an account of the sterling balances negotiations with India see B.R. Tomlinson, ‘Indo-British Relations in the Post-Colonial Era: The Sterling Balances Negotiations 1947–49’, Journal of Imperial and Commonwealth History, vol. 13, no. 3, May 1985, pp. 142–62. For the Bank of England’s involvement, Fforde, The Bank of England, pp. 251–6. 8 Sir R.W.B.Clarke, Anglo-American Economic Collaboration in War and Peace, 1942–1949, Oxford, Clarendon Press, 1982, p. 183. 9 See e.g. Bank of England 1968 series or Memorandum on the Sterling Assets of theBritish Colonies, Colonial Office Paper 298, HMSO, 1953. 10 Note from Brittain to Rowan, 11 May 1953. Public Records Office, Kew, London (hereafter PRO) T236/3352. 11 For an attempt to link the changes in colonial sterling balances to decolonisation see G.Krozewski, ‘Sterling, the “Minor” Territories, and the End of Formal Empire, 1939–1958’, Economic History Review, XLVI, 2(1993), pp. 239–65. 12 ‘The Pattern of Colonial Sterling Assets and UK Sterling Liabilities to the Colonies’ by J.G.Littler, 2 March 1956. PRO T236/4253. 13 For an account of the experience of Malaya see C.R.Schenk, ‘The Origins of a Central Bank in Malaya and the Transition to Independence, 1954–59’, Journalof Imperial and Commonwealth History, vol. 21, no. 2, May 1993, pp. 409–31. 14 That is, ‘free on board’, excluding insurance and shipping costs. 15 S.O.Olayide, D.Olatubosun, S.M.Essang, Nigerian Foreign Trade and EconomicGrowth 1948–64, Ibadan, University Press Ltd., 1982, p. 83. 16 ibid., p. 84. 17 ‘The Pattern of Colonial Sterling Assets and UK Sterling Liabilities to the Colonies’ by J.G.Littler, 2 March 1956. PRO T236/4253. 18 ibid. 19 Working Party on Colonial Sterling Assets, Report on the Financial Aspects of the Assets, 4 Sept. 1953. PRO T236/3562. 20 Crown Agents Schedule of Investments, 30 June 1956, PRO T236/4220. 21 Minute by H.Poynton, 4 May 1959. PRO CO852/1682.

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22 The Nigerian Groundnut Marketing Board and Oil Palm Produce Marketing Board allocated their development funds to the Regional Development Board from 1949. The Nigerian Cotton Marketing Board did not allocate a fixed sum to the Regional Product Development Boards. Instead it took part in cotton-related projects on an ad hoc basis. 23 ‘Sterling Balances Part I: Amount and Characteristics’ Appendix II by L.P. Thompson-McCausland, 30 January 1956. Bank of England Archives (hereafter BoE) OV44/30. 24 ‘Commonwealth Government Borrowing in the UK in Relation to Sterling Balances’, 6 May 1957. PRO BT213/96. 25 ibid. 26 Unless otherwise specified the term ‘sterling balances’ will refer to RSA balances only. 27 Memo by C.M.McLaughlin, Office of British Commonwealth and Northern European Affairs, US State Department. NARA RG59 841.10/3–31.53. 28 Memo by C.M.McLaughlin, Office of British Commonwealth and Northern European Affairs, US State Department, 5 March 1954. NARA RG 59 841.131/3 554. 29 Memo by A.M.Rosenson, Chief Monetary Affairs (OFD) to W.Willoughby, Counsellor of US Embassy Ottawa, 15 January 1953. NARA RG 59 841.00/1– 553. 30 South Africa’s obligations to the sterling area were part of the rationale for the gold arrangements. 31 Cobbold, Cameron Fromanteel; Deputy Governor, Bank of England, 1945; Governor, 1949–61. 32 Note by Cobbold, 5 March 1956. BoE OV44/31. 33 Note by Flett, 3 June 1953. BoE OV13/60. 34 Bank of England note, 13 May 1952. BoE OV13/60. In 1952 Australian liabilities included $72m of 5 per cent bonds optionally redeemable from July 1952 and compulsorily from 1955, and a $50m credit from the IMF to be repaid by 1955. 35 NAC Staff Document No. 544, October 1951. NARA RG469. The same passage appears in New Zealand’s entry. 36 Memo by National Advisory Council Staff Committee, 1 July 1952. NARA RG469. 37 Secret Notes from Dealing and Accounts Office, Gold Post. BoE OV13/61. 38 Inward Telegram from UK High Commission in Australia to Commonwealth Relations Office, 22 September 1952. BoE OV13/60. 39 Meeting between Rowan of the Treasury and Sir Arthur Rama Singh of Ceylon, 17 September 1955. PRO DO35/5633. 40 ibid. 41 ibid. 42 ‘Ceylon: Current Problems’, 22 August 1956. PRO DO35/5635. 43 Trade with the sterling area accounted for about half of Ceylon’s imports and exports in the 1950s. 44 ‘Ceylon: Current Problems’, 22 August 1956. PRO DO35/5635. 45 Minutes of the fourth meeting of the Sterling Area Working Party, 25 April 1956. BoE OV44/32.

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46 Note of a meeting at the Treasury with L.P.Thompson-McCausland, Bolton and Rowan, 6 December 1951. BoE OV44/50. 47 Economic Section paper ‘Floors and Ceilings to Sterling Balances’, 4 May 1951. BoE OV44/50. 48 Statistics Office, Bank of England, ‘Annex IV: Assets’, 25 February 1959. BoE EID1/19. 49 Report on the Working of the Monetary System, HMSO, 1956, p. 227. The Committee were only allowed to reveal that these securities amounted to between $750m and $1bn. 50 Statistics Office, Bank of England, ‘Annex IV: Assets’, 25 February 1959. BoE EID1/19. 51 ibid. 52 These discussions arose out of paragraph 13 of the Communiqué of the Tripartite Economic Discussions between the UK, USA and Canada in September, 1949. The Bank of England had earlier been devising plans to write off the balances in return for US aid but they never reached the level of approaching the Americans. For details see Fforde, The Bank of England, pp. 267–77. 53 ‘Sterling Balances’, by Herbert Brittain for the Sterling Area Working Party, 20 February 1950. PRO T236/2640. 54 ‘Sterling Balances and South East Asia’, 14 March 1950. PRO T236/2639. 55 Rowan, Leslie; Principal Private Secretary to Churchill, 1943–5; to Attlee, 1945–7; Senior Treasury Official in Washington, 1949–51; Head, Overseas Finance Division, Treasury, 1951–8; Financial Director then Chairman, Vickers, 1958–70. 56 Memo of Conversation: Director of the Office of British Commonwealth and Northern European Affairs, H.Labouisse, 6 January 1950. FRUS 1950(I). 57 Memo of Conversation between Acheson and Franks by Labouisse, 24 January 1950. FRUS 1950(I). 58 Telegram from Rowan to the UK Foreign Office, 6 May 1950. PRO T236/2691. 59 Financial Times, 24 April 1950. This was considered a deliberate attempt by the Americans to bury the proposals. PRO T236/2691. Telegrams from India and Pakistan, ‘Note: The Views of the Government of India on the Tripartite Talks’, 27 April 1950. PRO T236/2691. 60 Telegram from UK High Commissioner in Southern Rhodesia to Commonwealth Relations Office, 20 December 1951. BoE OV44/50. 61 Paper by Cobbold, 25 December 1951. BoE OV44/50. 62 It is R.N.Kershaw who finally pointed out that the sterling balances would be spent rather than blocked if the plan were a success. Note by R.N.Kershaw, Jan. 2 1952. BoEOV44/50. 63 Lucius Perronet Thompson-McCausland; Adviser to the Governors of the Bank of England, 1949–65; Consultant to the Treasury on international monetary problems, 1965–8. 64 Thompson-McCausland note ‘Governor’s Draft’, 2 January 1952. BoE OV44/50. In 1950, the Indian minister of finance, Battacharya, told the US State Department that ‘India does not wish to be placed in the position of having to screen the [aid] programs of other countries and weigh their needs against her own’, which suggests that the response to a centralised development effort would not have been favourable. Memo of a conversation, 2 October 1950. NARA RG 59 Lot 54D 224. 65 Fisher note, 2 January 1952. BoE OV44/50.

NOTES 143

66 ibid. 67 Note by Governor for Commonwealth Working Party, 25 January 1952. BoE OV44/50. 68 Governor’s note for Treasury, draft, 27 January 1952. BoE OV44/50. 69 The Governor did discuss the plan informally with the New Zealand representative, Mr Holland, who supported it as a possible way for New Zealand to join IBRD and IMF. BoE OV44/50. 70 Report on the debate, 30 November 1956. BoE OV44/56. 71 Telegrams, BoE OV44/56. 72 Report of a conversation between Rowan and Cobbold, 23 April 1958. BoE OV44/ 56. 73 Letter from Cobbold to Amory, 29 April 1958. BoE OV44/56. 74 See e.g. the debate in The Economic Journal, Dec. 1952, Dec. 1953 and Sept. 1954. 75 Chapter 4 also deals with this issue. 76 Cabinet Minutes, 20 November 1951. PRO T236/3351. 77 Note from Poynton in the Colonial Office to Johnston at HMT, 21 November 1951. PRO T236/3351. 78 Note Poynton to Johnston, 10 December 1951. PRO T236/3351. 79 Treasury Note, 28 November 1951. PRO T236/3351. 80 Note Cobbold to E.Bridges, 6 March 1953. PRO T236/3351. 81 Working Party on Colonial Assets, ‘Report on the Economic Significance of the Assets’, 11 Sept. 1953 and ‘Report on the Financial Aspects of the Assets’, 4 Sept. 1953. PRO T236/3562. 82 ‘West and East African Currency Boards: Make-up of Assets’, 7 April 1954. BoE OV67/2. 83 Colonial Office Note ‘Investment of Post Office Savings Bank Funds’, 20 June 1953. BoE OV44/83. 84 Despatch to Governors, 10 September 1954. PRO T236/3562. 85 Conference on the Technique of Development Finance, Tenth Meeting, 14 June 1951. PRO CAOG9/149. 86 Schenk, ‘The Origins of a Central Bank in Malaya’. 87 Statistical Office, Bank of England, ‘Overseas Sterling Holdings of Certain Holders’, 16 December 1957. BoEEID1/19. Only the aggregate totals were passed on to the Treasury and the Radcliffe Committee. 88 J.I.Mutch, Statistics Office, Bank of England, 24 October 1957. BoE EID1/19. The data do not allow a complete separation of sterling area and NSA holdings by type of asset so they include NSA sterling balances as well as sterling area balances. 89 ‘Debt Management’, Memorandum of the Treasury for the Radcliffe Committee, Memoranda of Evidence, Volume I, p. 111. The volume of securities excludes nationalised industries. 90 Report of the Radcliffe Committee, p. 356, Table 35. 91 ibid., p. 34, and Minutes of Evidence by C.F.Cobbold, L.K.O’Brien and H.C.B. Mynors, Q.962–71, 26 July, 1957. 92 Memorandum by the Treasury, ‘Exchequer Management’, Memoranda of Evidence, p. 82. 93 Radcliffe Committee, Minutes of Evidence, 26 July 1957, Q.967.

144 NOTES

94 ‘Monetary Policy and the Control of Economic Conditions’, Radcliffe Committee, Memoranda of Evidence, p. 95. 95 ‘Exchequer and Banking Figures’, Radcliffe Committee, Memoranda of Evidence, Appendix 2, p. 56. 96 Bank of England, Statistics Office note, 5 January 1956. BoE EID3/32. 97 Long-term rates are defined as 2½ per cent Consols; Medium rates are for 3 per cent Savings Bonds 1965–75 for 1951–8 and 2½ percent Savings Bonds 1964–7 for 1950; short-term rates are for securities maturing in 3–5 years. 98 These are the securities chosen by the Bank of England as representative for the Monthly Digest of Statistics. 99 L.K.O’Brien, ‘The Cost of a 1 per cent Rise in Bank Rate’, 23 October 1957. BoE EID1/19. This figure was incorporated into the Radcliffe Committee Report, p. 152. 100 Radcliffe Committee Report, p. 152. 101 Bolton, ‘Sterling Balances and Monetary Policy’, 4 April 1956. BoE C40/690. 102 O’Brien to Bolton, 23 April 1956. BoE C40/690. 103 ibid. 104 Radcliffe Committee, Memoranda of Evidence, Volume I. 105 Evidence to the Radcliffe Committee, 26 July 1957, Q. 875. 106 ibid, response to Q. 876. 107 See, e.g., J.C.R.Dow, The Management of the British Economy, 1945–60, Cambridge, Cambridge University Press, 1964.

3 INTERNATIONAL TRADE 1 D.H.Aldcroft and H.W.Richardson, The British Economy 1870–1939, London, Macmillan, 1969, p. 70. 2 Total trade is measured as imports plus exports. 3 Together Japan and France absorbed 15–20 per cent of Australian exports between 1951 and 1958. 4 Ceylon’s other major sterling exports were tea to Australia and South Africa. Together these two countries absorbed 15–25 per cent of Ceylon’s exports to the sterling area. 5 As late as 1956, only India and Pakistan did not offer preference to Canadian exports. Economist Intelligence Unit, The Commonwealth and Europe, London, 1960, p. 17. 6 In 1957–8 Australia and New Zealand, whose preferential margins in the UK market had been particularly pinched by inflation, negotiated trade agreements with the UK which reduced ad valorem preferences offered to imports from the UK. 7 See p. 256 of D.MacDougall and R.Hutt, ‘Imperial Preference: A Quantitative Analysis’, Economic Journal, vol. LXIV, no. 254, June 1954, pp. 233–57. The actual rate of preference on individual items was higher of course since only about half of Commonwealth trade was covered by Imperial Preference by this time. 8 Bank for International Settlements, The Sterling Area, Basle, 1953. 9 Telegram from CRO to UK High Commissioners in Commonwealth, 31 June 1949. Telegrams to the Colonies were sent on 4 July 1949 to the same effect. PRO T236/1868. 10 Economic Policy Committee Paper, 9 July 1949. PRO T236/1868.

NOTES 145

11 ibid. 12 The Economist, 23 July 1949, p. 204. 13 Telegram, Chancellor of the Exchequer to Commonwealth Finance Ministers, 3 April 1950. PRO T236/3166. 14 Telegram from Indian Finance Minister C.D.Deshmukh to Commonwealth Relations Office, 6 April 1950. PRO T236/3166. 15 Direction of International Trade, OEEC. 16 The quantum and price indexes used are from the Yearbook of International TradeStatistics, 1952, United Nations, New York, 1953. They reflect prices in terms of dollars. 17 The Commonwealth and the Sterling Area Statistical Abstract no. 74, 1950–3, London, HMSO, 1955. 18 Note from M.T.Flett to H.Wilson Smith, 18 September 1950. PRO T236/2757. 19 For an account of the Menzies government’s foreign economic and military policy see D.Lee, ‘Australia, the British Commonwealth, and the United States, 1950– 1953’, Journal of Imperial and Commonwealth History, vol. 20, no. 3, 1992, pp. 445–69. 20 Note from Flett to Wilson Smith, 18 September 1950. PRO T236/2757. 21 Gaitskell, Hugh Todd Naylor; Minister of Fuel and Power, 1947–50; Minister of State for Economic Affairs, 1950; Chancellor of the Exchequer, 1950–1. 22 Note by Flett, 19 September 1950. PRO T236/2757. 23 Letter from Ninmo to Wheeler, Assistant Secretary to the Australian Treasury, 3 September 1950. Australian National Archives, Canberra (herafter ANA) 50/ 2674. 24 Note of Meeting of Commonwealth Ministers on General Economic and Trade Questions: Dollar Import Policy, 20 September 1950. PRO T236/2757. 25 ibid. 26 Communiqué, 22 September 1950. PRO T236/2757. 27 Letters from H.Gaitskell to C.D.Deshmukh, Mr. Jayawardena, Mr Doidge (NZ), 4 October 1950. PRO T236/2757. 28 Report by Chancellor of the Exchequer for Economic Policy Committee, 25 October 1950. PRO T236/2757. 29 ‘Timetable for “The Darkening Picture”’, 5 January 1951. PRO T236/3287. 30 Telegram, Commonwealth Relations Office to Commonwealth Finance Ministers, 15 January 1951. PRO T236/3287. 31 Clarke, Richard Williams Barnes (Otto); Ministries of Information, Economic Warfare, Supply and Production, 1939–45; Assistant Secretary Treasury, 1945; Under-Secretary, 1947; Third Secretary, 1955–62; Second Secretary, 1962–6; Permanent Secretary, Ministry of Aviation, 1966; Ministry of Technology, 1966– 70. 32 ‘Timetable for “The Darkening Picture”’, 5 January 1951. PRO T236/3287. 33 Minutes of CLC meeting, 24 January 1951. PRO T236/3287. These claims were not borne out by subsequent estimates of the value of sterling area trade. 34 Telegram, 7 February 1951. PRO T236/3166. 35 Telegram from UK High Commissioner in Ceylon to Commonwealth Relations Office, 12 February 1951. PRO T236/3287. 36 Telegram from UK High Commissioner in New Zealand to Commonwealth Relations Office, 12 February 1951. PRO T236/3287.

146 NOTES

37 Butler, Richard Austin; Under-Secretary of State for Foreign Affairs, 1938–41; President of the Board of Education, 1941–4; Minister of Education, 1944–5; Minister of Labour, 1945; Chancellor of the Exchequer, 1951–5; Lord Privy Seal, 1955–9; Leader of the House of Commons, 1955–61; Home Secretary, 1957–62; First Secretary of State and Deputy Prime Minister 1962–3; Secretary of State for Foreign Affairs, 1963–4. 38 Quoted in a minute by A.K.Potter, 15 December 1951. PRO T236/3287. 39 Treasury Working Party on the Commonwealth Finance Ministers’ Meeting, ‘Objectives and General Policy’, December 1951. PRO T236/3064. 40 ibid. 41 ibid. 42 Chancellor’s Paper for the Economic Policy Committee Draft, 7 July 1949. PRO T236/1868. 43 Letter, George Bolton to Herbert Brittain, 2 January 1952. PRO T236/3070. 44 Hall, Robert Lowe; Adviser, Board of Trade, 1946–7; Director, Economic Section, Cabinet Office, 1947–53; Economic Adviser to HM Government, 1953–61. 45 Letter, R.L.Hall to Herbert Brittain, 2 January 1952. PRO T236/3070. 46 Commonwealth Finance Ministers’ Conference, Preliminary Meeting of Officials, Minutes, 8 January 1952. PRO T236/3067. 47 Commonwealth Finance Ministers’ Conference, Report of Officials, 12 January 1952. PRO T236/3068. 48 ibid. 49 Statement of Commonwealth Finance Ministers, 21 January 1952. PRO T236/ 3068. 50 ibid. 51 Telegram, CRO to UK High Commissioners in the Commonwealth for Commonwealth Finance Ministers, 4 March 1952. PRO T236/3360. 52 Reported at the Commonwealth Finance Ministers, Conference, Preliminary Meeting of Officials, 16 November 1953. PRO T236/4000. 53 Report of Mr Ninmo, Australian High Commission, 10 March 1952. ANA 50/2227 Pt. II. 54 Letter from A.S.Brown to Prime Minister, 25 March 1952. ANA 552/5. 55 ibid. 56 W.M.Corden, ‘The Control of Imports: A Case Study’, Manchester School ofEconomic and Social Studies, vol. XXVI, no. 3, September 1958, pp. 181–225. 57 Commonwealth Economic Conference, Preparatory Meeting of Officials, ‘Report on the Short Term Balance of Payments Outlook’, 11 October 1952. PRO T236/ 3295. 58 ibid. 59 Brief for the Chancellor by P.Vinter, 14 November 1952. PRO T236/3295. 60 Treasury Brief on the Short Term Balance of Payments Outlook, 19 November 1952. PRO T236/3295. 61 Commonwealth Economic Conference, Final Communiqué, Cmd 8717, HMSO, December 1952. 62 P.Harris, ‘UK Export Trends’, 1 October 1956. PRO BT241/266. 63 D.H.Robertson, Britain in the World Economy, London, George Allen and Unwin, 1954, p. 75. This sentiment was also expressed in the Board of Trade Journal, vol. 175, no. 3209, 8 August 1958, pp. 268–9.

NOTES 147

64 The figures for this analysis are from the OEEC’s Direction of International Trade series. 65 ‘Trends in Exports of the United Kingdom Compared with other Countries’, Boardof Trade Journal, vol. 172, no. 3139, 30 March 1957, pp. 665–75. 66 Interestingly, Japan increased its world market share substantially through increased competitiveness despite an unfavourable area and commodity pattern of trade from 1951–5. 67 S.J.Wells, British Export Performance: A Comparative Study, Cambridge, Cambridge University Press, 1964. 68 ibid. p. 8. 69 R.L.Major, ‘Note on Britain’s Share in World Trade in Manufactures, 1954–66’, National Institute Economic Review, no. 44, May 1968. pp. 50–6. 70 L.B.Krause, ‘British Trade Performance’, in R.E.Caves (ed.), Britain’s EconomicProspects, Washington, Brookings Institution, 1968, p. 215. 71 Note by Mr. Leckie, April 1952. PRO BT11/4958. 72 Minutes of Preparatory Meeting of Officials, 9 January 1952. PRO T236/3067. 73 Brief for meeting with Australian Prime Minister, May 1952. PRO BT11/4958. 74 Report by A.L.Burgess, 4 June 1952. PRO BT11/4958. 75 Press Statement by R.G.Menzies, 15 March 1952, in J.G.Crawford, AustralianTrade Policy 1942–1966: A Documentary History, Canberra, Australian National University Press, 1968, pp. 511–13. 76 OEEC, Direction of International Trade, as reported by Australia. 77 Economic Review of New Zealand, Economist Intelligence Unit, May 1953, p. 11. 78 Letter from Mr Geyer, South African High Commissioner to Lord Swinton, Secretary of State for Commonwealth Relations, 4 May 1953. PRO BT11/4950. 79 Treasury Paper on South Africa, 21 May 1953. PRO BT11/4950. 80 ibid. 81 Draft report for Herbert Brittain by M.T.Flett, 9 June 1953. PRO BT230/244 82 Letter from C.Kemp, UK Trade Commissioner in Cape Town, to R.C.Bryant, Board of Trade, 26 January 1955. PRO BT241/161. 83 Minutes of GATT 8th Session 21 October, 1953, Summary record of the 17th meeting, 19 October 1953. PRO BT 11/4950. 84 Draft of speech for Thorneycroft for Queen’s Speech Debate, 30 October 1953. PRO241/266. 85 Draft speech for Lord Lloyd by the Board of Trade, 23 September 1953. PRO BT241/266. 86 Economist Intelligence Unit, Economic Review of Australia, October, 1952, p. 2. 87 ibid., April 1957, p. 6. 88 Letter from W.L.Atkinson to A.M.Jenkins, 16 August 1951. PRO T236/3563. 89 Minute by W.L.Atkinson, 21 September 1951. PRO T236/3563. 90 Earlier, A.K.Potter had argued that ‘if we invite the Colonies to submit their requests for the import of American cars, this might have undesirable repercussions in the independent Sterling Area Countries’. Note from A.K.Potter to H.Brittain, 2 August 1951. PRO T236/3563. 91 Letter from Poynton to H.Brittain, 2 October 1951. PRO T236/3563. 92 EIU, Economic Review of Australia, April 1957, p. 10. 93 R.S.Gilbert and R.L.Major, ‘Britain’s Falling Share of Sterling Area Imports’, National Institute Economic Review, no. 14, March 1961.

148 NOTES

94 ibid., p. 34. 95 ibid., p. 35.

4 INVESTMENT IN THE STERLING AREA 1 See S.Pollard, Britain’s Prime and Britain’s Decline: The British Economy1870– 1914, London, Edward Arnold, 1989, Chapter 2, for an excellent review of this literature. 2 ‘UK Investment in the Sterling Commonwealth’, 6 May 1957. PRO BT213/96. 3 The request from Maudling arose from the publicity surrounding a Treasury target of £300–350m surplus on the current account which was revealed in an OEEC questionnaire. A.Cairncross (ed.), The Robert Hall Diaries 1947–1953, Oxford, Oxford University Press, 1989, entry for 11/2/53, pp. 264–5. 4 Paper by R.W.B.Clarke, 26 January 1953. PRO T229/543. 5 This was a popular estimate, arrived at by several different methods. See for example, C.A.R.Crosland, Britain’s Economic Problem, London, Jonathan Cape, 1953, p. 96. The ‘target’ of £300–350m surplus on current account was subsequently enshrined in the Economic Survey of 1953, London, HMSO, 1953. 6 Paper by Robert Hall, 2 February 1953. PRO T230/226. 7 J.C.R.Dow, The Management of the British Economy 1945–60, Cambridge, Cambridge University Press, 1965, p. 347. 8 Report on the Working of the Monetary System, London, HMSO, 1959, p. 12. 9 Cairncross, The Robert Hall Diaries, p. 265. William Strath was with the Central Economic Planning Staff. 10 Treasury Paper, 24 February 1953. PRO T229/543. 11 A.C.L.Day, The Future of Sterling, Oxford, Clarendon Press, 2nd edn, 1956 (first edition 1954), p. 154. 12 A.Shonfield, British Economic Policy Since the War, London, Penguin, 1958, p. 125. 13 The Economist, 16 January 1954, p. 183. 14 Note of a Colonial Office/HMT meeting, 9 June 1954. PRO CO1025/75. 15 ‘Report of the Sterling Area Working Party’, 25 June 1956. BoE OV 44/32. 16 Colonial Office note, May 1957. PRO BT213/96. 17 ‘UK Investment in the Sterling Commonwealth’, 6 May 1957. PRO BT 213/96. 18 The same general policy on investment in the sterling area is present in the Treasury’s submission to the Radcliffe Committee in November 1957, ‘Monetary Policy and External Economic Problems’, Treasury Memorandum, Committee onthe Working of the Monetary System: Memoranda of Evidence Vol 1, London, HMSO, 1960. 19 ‘UK Investment in the Sterling Commonwealth’, 6 May 1957. PRO BT213/96. 20 ‘Commonwealth Borrowing Outside the Sterling Area’, May 7 1957. PRO BT213/ 96. 21 HMT Paper, ‘Sterling Releases to the IBRD’, 6 May 1957. PRO BT213/96. 22 Note for the Minister of State by the Board of Trade, 26 June 1956. PRO BT213/ 67. 23 ‘Direct Investment Summary’, 6 May 1957. PRO BT213/96.

NOTES 149

24 D.M.B.Butt, ‘Capital Movements within the Commonwealth’, 6 May 1958. PRO T236/4079. 25 Radcliffe Committee Minutes, Appendix, p. 951. 26 A.R.Conan, Capital Imports into Sterling Countries, London, Macmillan, 1960, p. 84. Committee on the Working of the Monetary System: Minutes of Evidence, Appendix, HMSO, 1960. M.Scott, ‘What Should Be Done About the Sterling Area?’, Bulletin of the Oxford University Institute of Statistics, vol. 21, no. 4, Nov. 1959, p. 217. 27 Conan, Capital Imports, p.84. 28 Board of Trade Journal, 7 October 1960, pp. 803–5. 29 Annual Bulletin of Overseas Investment: Australia 1960–61, Canberra, Commonwealth Bureau of Census and Statistics, 1962. Re-invested profits in Australian companies were included in the British balance of payments estimates since the data were available. 30 Shonfield, British Economic Policy, p. 125. 31 Conan, Capital Imports, p. 70. 32 A.R.Conan, The Changing Pattern of International Investment in SelectedSterling Countries, Essays in International Finance, no. 27, Dec. 1956, Princeton University Press, 1956, p. 17. 33 Radcliffe Committee Minutes, Appendix. More recently, W.P.Michael undertook an exhaustive study of capital flows to and from the sterling area for the period 1950–4. Michael’s figures for gross private investment plus government loans amount to £ 1,053m in this period. W.P.Michael, Measuring International CapitalMovements, New York, National Bureau of Economic Research, 1971. 34 The Bank of England published a series of data on nominal capital values of UK portfolio investment through securities quoted on the London Stock Exchange by country of destination in the 1950s but this is not reliable as an estimator of flows of capital. UK Overseas Investments, Bank of England. 35 Annual Bulletin of Overseas Investment: Australia 1960–61, no. 6, Canberra, Commonwealth Bureau of Census and Statistics, 1962. 36 New Zealand: Report on Official Estimates of Balance of Payments 1960–61, Wellington, Department of Statistics, 1961. 37 Reserve Bank of India Bulletin, Dec. 1957, Sept. 1958, June 1959, April 1960. 38 Economic Report, Ministry of Finance, Federation of Rhodesia and Nyasaland, Salisbury, 1954, 1956, 1958, 1959. 39 Economic Report, Ministry of Finance, Federation of Rhodesia and Nyasaland, Salisbury, 1958, p. 38. 40 South African Reserve Bank Quarterly Bulletin of Statistics, Supplement, Dec. 1958. 41 ‘UK Investment in the Sterling Commonwealth’, 6 May 1957. PRO BT213/96, and ‘UK Long Term Capital Transactions’, 12 May 1958. PRO T236/4079. 42 S.Pollard, ‘Capital Exports, 1870–1914: Harmful or Beneficial’, EconomicHistory Review, vol. 38, no. 4, Nov. 1985, p. 491. 43 P.M.Romer, ‘Increasing Returns and Long-Run Growth’, Journal of PoliticalEconomy, vol. 94, no. 5, 1986, pp. 1002–37. R.E.Lucas, ‘On the Mechanics of Economic Development’, Journal of Monetary Economics, 22 (1988), pp. 3–42.

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44 S.Kuznets, ‘Quantitative Aspects of the Economic Growth of Nations Part V, Capital Formation Proportions: International Comparisons for Recent Years’, Economic Development and Cultural Change, vol. VIII, no. 4, Part 2, July 1960, p. 46. 45 United Nations Economic Commission for Europe, Some Factors in EconomicGrowth in Europe During the 1950s, Economic Survey of Europe, 1961, N.Y., United Nations, 1964. 46 ibid., Chapter 7, p. 5, The Economic Commission for Europe survey points to relatively low rates of labour productivity and low rates of ‘technical progress’ in the UK as factors correlated to slower growth rates. 47 See, eg., M.V.Posner, ‘Industrial Policies and Growth’, in A.Cairncross (ed.), Britain’s Economic Prospects Reconsidered, London, Allen and Unwin, 1970, p. 148. 48 W.B.Reddaway, with S.J.Potter and C.T.Taylor, Effects of UK Direct InvestmentOverseas: Final Report, Cambridge, Cambridge University Press, 1968. 49 ibid., p. 217. 50 ibid. It is possible that Reddaway’s results are distorted by the type of industry he was able to survey in the sterling area countries as compared with the non-sterling area but this cannot be determined from the data. 51 The costs to the current account due to lost interest, profits and dividends will be discussed in the next section. 52 Reddaway, Potter, Taylor, Effects, p. 338. Based on Reddaway’s findings, R.N. Cooper and B.J.Cohen analysed the effectiveness of restrictions on capital flows as a means of solving short-term balance of payments deficits in the late 1960s but their assumptions stretch the imagination. R.N.Cooper, ‘The Balance of Payments’, in Caves and associates (eds), Britain’s Economic Prospects, Washington, Brookings Institution, 1968, pp. 147–97; B.Cohen, ‘The United Kingdom as Exporter of Capital’, in Machlup, Salant and Tarshis (eds), International Mobilityand Movement of Capital, New York, National Bureau of Economic Research, 1972, pp. 25–49. 53 W.B.Reddaway, Final Report, Table IV.5, p. 358. 54 Annual Bulletin of Oversea Investment: Australia, 1960–61, Canberra. 55 ‘Final Results of the 1956 Census of The Foreign Liabilities and Assets of the Union of South Africa’, Quarterly Bulletin of Statistics, South African Reserve Bank, 1958. 56 The data exclude investment and financial trusts, direct investment of UK companies in branches abroad and undistributed profits. 57 J.Polk, Sterling: Its Meaning in World Finance, New York, Harper Bros, 1956, p. 229. Bank for International Settlements, The Sterling Area, Basle, Jan. 1953, p. 45. OEEC, Economic Conditions in the UK, p. 25. 58 ‘Commonwealth Government Borrowing in the UK in Relation to Sterling Balances’, May 1957. PRO BT213/96. 59 The Economist, vol. CLVIII, no. 5554, 4 Feb. 1950, p. 278. 60 D.J.Morgan, The Official History of Colonial Development, Vol. III, London, Macmillan, p. 38. 61 Bank of England copy of the Sterling Area Working Party Report, 26 June 1956. BoE OV44/32. 62 Indian Reserve Bank Bulletin, April 1960, p. 469.

NOTES 151

63 64 65 66 67 68 69 70 71 72 73 74

Indian Reserve Bank Bulletin, Sept. 1958, p. 1012. ibid. South African Reserve Bank Bulletin, 1957. ‘Non-Sterling Borrowing by the Sterling Commonwealth Since 1945 (Effectively 1949)’, 7 May 1957. PRO BT213/96. Letter from Flett to Christelow of UKSTD, Washington, 19 May 1952. PRO T231/ 605. Notes of meetings at HMT with Mr Wayne Taylor, 10–13 June 1952. PRO T231/ 605. HMT note on the ‘Need for Controls on Inward Dollar Investment’, 29 July 1952. PRO T231/605. D.J.Morgan, The Official History of Colonial Development Vol IV, London, Macmillan, 1980, pp. 10–11. Yearbook of National Accounts Statistics 1959 & 1960, Statistics Office of the United Nations, New York, 1960 and 1961. ibid. ‘Problems of the Sterling Area’, 3 Oct. 1955. BoE OV 44/30. Paper by M.W.Stamp, 19 Oct. 1955. BoE OV 44/30.

5 THE STERLING AREA AND STERLING POLICY 1 P.J.Cain and A.G.Hopkins, British Imperialism; Crisis and Deconstruction1914– 1990, London, Longman, 1993. pp. 285–6. 2 This, for example, was asserted by Pollard, Strange, Cooper and Brittan. See Chapter 1. 3 Report on the Working of the Monetary System, London, HMSO, 1959, p. 257. 4 Bolton, George Lewis French; Adviser to Bank of England, 1941–8; Executive Director, Bank of England, 1948–57; Director, 1957–68; Director, Bank for International Settlements, 1949–57; UK Executive Director of IMF, 1946–52; UK Alternate Governor, 1952–7, Chairman, Bank of London and South America, 1957– 70; President, 1970–82. 5 See e.g., Alec Cairncross, Years of Recovery; British Economic Policy 1945–51, London, Methuen, 1985, pp. 234–71. Also S.J.Procter, ‘Floating Convertibility: The Emergence of the Robot Plan, 1951–2’, Contemporary Record, vol. 7, no. 1, Summer 1993, pp. 24–43. 6 R.W.B.(Otto) Clarke, 25 January 1952. PRO T236/3240. 7 C.F.Cobbold to R.A.Butler, 13 February 1952. PRO T236/3240. 8 Record of Cabinet Meeting, 28 February 1952, transcribed by Forman-Brook, 21 March 1952. PRO T236\3242. 9 ibid. 10 ibid. 11 India, Pakistan, Ceylon and South Africa were under agreements blocking part of their balances, although generally not as much as the 80 per cent called for in ROBOT. 12 Record of Cabinet Meeting, 28 February 1952, transcribed by Forman Brook, 21 March 1952. PRO T236\3242.

152 NOTES

13 Minute from Churchill to Butler, 24 March 1952. PRO T236/3242. 14 Memorandum from Rowan to Butler, 25 March 1952. PRO T236/3242. 15 The Position of Sterling’, Paper for Chancellor of the Exchequer, 4 April 1952. PRO T236/3243. 16 Report by M.T.Flett to Rowan, ‘Robot and the Commonwealth Sterling Area’, 31 March, 1952. PRO T236/3242. 17 Report on Working Party on Convertibility, L.G.Melville, 3 March 1952. ANA A5461/1 item 121/18/1. 18 Brief prepared by Rowan for Butler, 26 May 1952. PRO T236/3243. 19 J.S.Fforde, The Bank of England and Public Policy, 1941–1958, Cambridge, Cambridge University Press, 1992, pp. 462–3. 20 ibid. 21 G.Krozewski, ‘Sterling, the “Minor” Territories, and the End of Formal Empire, 1939–58’, Economic History Review, vol. XLVI, no. 2, 1993, p. 252. 22 Record of a Cabinet Meeting, 28 February 1952, transcribed by Forman Brook. PRO T236/3242. 23 Memo from Churchill to Rowan, 17 April 1952. PRO T236/3243. 24 Lord Cherwell to Churchill, ‘Setting the Pound Free’, 18 March 1952. PRO T236/ 3242. 25 ‘External Sterling Plan’ prepared by the Overseas Finance Division of the Treasury for the Chancellor of the Exchequer, 4 April 1952. PRO T236/3243. 26 Record of a Cabinet Meeting, 28 February 1952, transcribed by Forman Brook, 21 March 1952. PRO T236/3242. 27 Report on the Commonwealth Finance Ministers’ Conference by A.W.Fadden, 4 March 1952. ANA A5461/1. 28 Report by L.G.Melville on the Working Party on Convertibility, 3 March 1952. ANA A5461/1 item 121/18/1. 29 The genesis of the Collective Approach is described in Fforde, The Bank ofEngland, pp. 467–73. 30 Cablegram from Wilson (Australia) to Melville (London), 30 September 1952. ANA 845/41. 31 Note by Bank of England on Commonwealth Officials’ Meeting, 21 October 1952. BE OV44/59. 32 Cablegram from Melville (in London) to Wilson (Australia), 24 October 1952. ANA Prime Minister’s Department 845/41. 33 Report by Economics Department of Commonwealth Bank of Australia, 29 August 1952. ANA 1952/1268. 34 For an account of the Canadian response, see B.W. Muirhead, ‘Britain, Canada, and the Collective Approach to Freer Trade and Payments, 1952–57’, Journal ofImperial and Commonwealth History, vol. 20, no. 1, 1992, pp. 108–26. 35 ‘Suggested US Position on Commonwealth Proposals’, State Department Draft, 2 March 1953. NARA 611.41/3–353. 36 ‘US Position for Conversations’, Treasury Department Draft, 3 March 1953. NARA 611.41/3–353. 37 Minutes of Third Meeting, 6 March 1953. NARA 611.41/3–753. 38 Minutes of Fifth Meeting, March 7 1953. NARA 611.41/3–753. 39 ibid.

NOTES 153

40 Report of the Commission on Foreign Economic Policy, Washington, D.C., January, 1954., p. 73. 41 ibid. 42 ibid. 43 ibid., p. 74. 44 ibid. 45 There was a dissenting Minority Report by D.A.Reed and R.M.Simpson which advocated a speedy return to convertibility and the gold standard. Minority Report,Commission on Foreign Economic Policy, Washington, D.C., January, 1954. 46 J.J.Kaplan and G.Schleiminger, The European Payments Union: FinancialDiplomacy in the 1950s, Oxford, Clarendon Press, 1989, p. 178. 47 ibid., p. 181. 48 See A.S.Milward, The European Rescue of the Nation-State, London, Routledge, 1992, Chapter 7, for an interpretation of the different priorities of Britain and Europe in the 1950s. 49 See, for example, the quotation from the Radcliffe Committee at the beginning of this chapter. 50 A.Cairncross and B.Eichengreen, Sterling in Decline: The Devaluations of 1931, 1949 and 1967, London, Blackwell, 1983, p. 159. 51 Paper for the Chancellor by Rowan, 19 November 1953. BoE OV44/19. 52 ibid. 53 Letter from E.Playfair (HMT) to E.Cohen (BoT), 18 December 1953. BoE OV44/ 19. 54 Brief for Sydney Delegation on Unification of Non-Resident Sterling, 17 December 1953. PRO T231/699. 55 Note of a conversation between Playfair and Cobbold, 6 October 1954. BoE OV44/ 64. 56 Report of a discussion of M.Stevenson with Woodrow (Australia), 20 December 1954. PRO T236/3969. 57 M.Stevenson note to T.L.Rowan, ‘Points made in Discussion with Bank on 17 Dec. 1954’, 21 December 1954. PRO T236/3969. 58 Paper by C.F.Cobbold ‘Exchange Policy’, 20 January 1955. PRO T236/3969. 59 L.J.Menzies, ‘The Outlook for Transferable Sterling’, 20 January 1955. PRO T236/ 3969. 60 Letter from R.G.Connolly (BIS) to Parsons, 4 February 1955. BoE OV44/10. 61 C.F.Cobbold, ‘Exchange Policy’, 20 January 1955. PRO T236/3969. 62 Letter from Connolly (BIS) to Bolton, 15 February 1955. BoE OV44/10

6 CONCLUSIONS 1 See e.g., G.Krozewski, ‘Sterling, the “Minor” territories, and the End of Formal Empire, 1939–1958’, Economic History Review, vol. XLVI, no. 2, 1993, pp. 239– 65; and P.J.Cain and A.G.Hopkins, British Imperialism: Crisis andDeconstruction 1914–1990, London, Longman, 1993, pp. 285–91.

154 NOTES

2 S.Newton, ‘Britain, the Sterling Area and European Integration, 1945–50’, Journal of Imperial and Commonwealth History, vol. 13, no. 3, May 1985, p. 174. 3 R.A.Mundell, ‘A Theory of Optimal Currency Areas’, American EconomicReview, vol. 51, September 1961, pp. 657–65. 4 See e.g., H.G.Johnson and A.K.Swoboda (eds), The Economics of CommonCurrencies; Proceedings of the Madrid Conference on Optimal Currency Areas, London, George Allen and Unwin, 1973; and R.Z.Aliber (ed.), The Reconstruction of International Monetary Arrangements, New York, St. Martins, 1987. 5 The criteria for an optimal currency area are surveyed in Y.Ishiyama, ‘The Theory of Optimal Currency Areas: A Survey’, IMF Staff Papers, vol. 22, 1975, pp. 344– 83; H.R.Heller, ‘Exchange Rate Flexibility and Currency Areas’, Zeitschriftfur Wirtschaft-und Sozialwissenschaften, 1979, pp. 115 135; and E.Tower and T.D.Willett, The Theory of Optimum Currency Areas and ExchangeRateFlexibility, Special Papers in International Economics, no. 11, 1976. 6 W.M.Corden quoted in Tower and Willet, The Theory of Optimum CurrencyAreas, p. 2.

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164

INDEX

Acheson, D. 35 aid 83; from USA 11, 34–6, 36, 37, 82, 114 Australia 133; attitude to sterling area 73, 115, 126, 133; borrowing 30–2, 90, 93, 94, 108; controls on UK exports 75, 79–2, 82, 83, 132; and convertibility 114–17, 117, 118–21; dollar loans to 30–2; domestic economic policy 71; and flexible exchange rate 120; gold 31, 125–7; independent reserves 29, 30–2; re-invested profits 92, 102; returns on investment 102–5; sterling balances 18, 24–6, 114–16; trade 31, 56–8, 63, 64, 65, 71, 72–5

banks, commercial 23, 24, 41–3, 44 Basle Agreements 131 bilateral account countries 8; unification with transferable sterling area 123–8 Board of Trade 76, 77–78, 80, 83, 87, 90, 119 Bolton, G. 47. 113 Bretton Woods 1, 11, 13 Brittain, H. 35, 70 Burma 7, 8, 55–9 Butler, R.A. 68, 70, 114, 117, 121, 123, 124, 125 Canada 7, 36, 57, 58, 76, 82, 87, 133 Capital Issues Committee (CIC) 9, 71, 87, 89, 99, 127 Ceylon: attitude to sterling area 62, 68, 71; and convertibility 114; development 35–7; independent reserves 29, 30, 31–3, 68; sterling balances 18, 24, 34–7, 115–18; trade 59, 60, 64, 71, 73 Cheap sterling 9, 124, 126–8 Cherwell, Lord 117–19 China 82, 83 Churchill, W. 115, 117–19 Clarke, R.W.B. 67, 79–2, 88, 89, 90, 113, 114 Cobbold, C.F. 28, 36, 37, 47, 114, 117, 125, 126 Collective Approach to convertibility 74, 113, 118–24, 124, 125, 126, 127, 132, 133, 135;

Bank of England (see also Bolton, Cobbold, O’Brien) 8, 31, 34, 125–7, 135; and convertibility 113–15, 120, 123, 125, 126; and floating exchange rate 113–15, 119–1; and overseas investment 47, 87, 88, 90, 91, 100, 101; and quotas 70; and sterling balances 19, 22, 32, 36, 39, 41–4 Bank for International Settlements 33, 58, 126 bank rate 44–7, 71, 90, 127, 132

165

166 INDEX

and Europe 120, 122; and quotas 119, 120; and USA 119, 120–2 Colonial Office 22, 38, 84, 89,92, 107–10 colonies 7; borrowing 23, 38, 40, 99, 106, 109; development 22, 38–41, 90; exploitation 3, 38, 39, 104–8; government policy 19, 22–4, 25, 28, 39, 41; import controls 60, 69, 73; independence 39, 41, 107, 111, 128; sterling balances 14, 19–5, 25, 28, 38– 41, 104–8 Columbo Plan 35–7 Commonwealth (see also individual countries) 13, 14, 32, 57–1 Commonwealth Development Corporation 36, 89–2 Commonwealth Development and Finance Company (CDFC) 87, 91 Commonwealth Economic Conferences 38; of 1932 57; of 1949 60–3; of 1952 74, 87, 88, 90, 111, 119; of 1954 87, 89, 90, 124–6; of 1958 37 Commonwealth Finance Ministers’ Conference: of 1950 63–6; of 1952 36, 68–4, 75, 79–2, 114, 115, 118; of 1955 31, 120; of 1956 46 Commonwealth Liaison Committee 67 convertibility (see also ROBOT and Collective Approach to convertibility) 13, 74, 75, 110, 111, 123, 129, 135; in 1947 11, 12, 18; in 1955 14; in 1958 15, 127, 131; administrative approach 113, 123–8; as sterling area goal 14, 118; US attitude 11, 13, 120–3 credit controls 46–8 Cripps, R.S. 60, 61, 64 currency areas 132–6

currency reserves 22–3, 24, 28, 40–2, 47, 116 Day, A.C.L. 4, 89 de-colonisation 4, 6, 22, 39, 41, 107, 111, 128 Deshmukh, C.D. 61–4, 67 devaluation 4, 5, 122–4, 125; of 1931 7; of 1949 x, 12–13, 61, 63, 111, 128; of 1967 33, 122, 128, 129 development 15, 75, 87–88, 89–2, 129, 134, 135; and investment 106, 109–12; Special Effort 87, 88, 89, 91; and sterling balances 34–41, 90; and trade 69–2, 75 discipline of sterling area 68, 81, 84, 107– 12, 125–7 discrimination (see also Imperial Preference, quotas, tariffs) 1, 3–4, 7, 59, 128, 135; and convertibility 119, 129; end of 14, 68, 75, 76, 79–5, 88, 107; and sterling balances 10 dollar area 8–9, 28, 53, 72–5 dollar pool 7, 10, 26–8, 29, 31, 68, 73, 81, 84, 107, 132, 133 dollar shortage 7, 12, 13, 14, 50, 61, 85, 129, 134, 135 dollar securities 9, 33–5 economic section of the Cabinet 32, 76; on investment 88–2, 100; on quotas 70 Europe: and collective approach 120, 122; Eastern 82–5; growth 14, 96, 97–98; integration 6, 11–13, 15, 111, 127, 131; market for exports 3–4, 76–9, 78, 85, 130; UK and 1, 11–13, 71, 75, 111, 118, 122, 128, 129 European Payments Union 1, 8, 14, 75, 117, 118, 121, 122, 127, 130 exchange control 7–10, 12, 91–4

INDEX 167

Exchange Rate 7, 111; fixed 5, 129, 134; flexible 113, 114, 117, 118, 120–3, 125; floating 5, 7, 113, 117–19, 121–3; overvalued 5; USA attitude 118, 121–3 exports: and investment 3, 90, 100–3, 107; UK competitiveness 2, 4, 50, 67, 70, 76–79, 83–7, 119, 123, 130 France 59, 98, 126 Gaitskell, H. 64–7, 67 General Agreement on Tariffs and Trade (GATT) 81, 82, 107, 120 Ghana see Gold Coast Gold 53, 81–4; London market 114, 124, 125; reserves 27, 28, 29–3, 46, 48, 110 Gold Coast (Ghana): independence 41, 114; sterling balances 22, 23–5, 41, 106 Hall, R. 70, 88–1 Hong Kong: gap 9; sterling balances 24, 106; trade 53, 59 Iceland 53, 56 Imperial Preference 50, 57–1 import licences 58–2, 61, 68, 73, 82 incremental capital-output ratio 97–98 independent reserves 17, 29–3 India: attitude to sterling area 61–4; borrowing 93, 94, 108; and convertibility 114; development 24, 34–7, 82, 114; end of discrimination 82–5; and floating exchange rate 110, 119–1, 122, 133; independent reserves 29–1, 110; return on investment 102–5;

sterling balances 11, 18, 24, 34–7, 44, 115–18; trade 53–7, 59, 61–4, 64, 65–8, 67, 71, 72, 82–5 inflation 14, 71, 117, 123 interest rates (see also Bank Rate) 90–3; impact of sterling area on 44–8 International Monetary Fund (IMF) 30, 33– 5, 81, 82, 118, 120, 125, 130 International Bank for Reconstruction and Development (IBRD) 30, 34, 37, 91, 125 Investment (see also Overseas Investment) 88–1; and growth 96–99 invisible earnings 88, 90, 100; from sterling area 102–7 Iraq 7, 25, 53, 59 Ireland 56, 62, 73 Italy 84, 98 Japan 59, 73, 79, 81, 82, 83, 84, 126 Jayawardena, N.V. 31, 68 Kenya 106 Korean War 14, 50, 53, 63–68, 69, 85, 89, 128–30; and sterling balances 14, 18, 19, 22–3, 23, 24, 25, 29 Kuwait 9, 25 London 31; capital market 9, 32, 38, 39, 40, 41, 45, 47, 81, 86, 87, 107, 132; City of 1, 4, 5, 111; gold market 114, 124, 125 Malaya: independence 22, 41, 114; sterling balances 22, 24, 41; trade 53, 59, 65; and convertibility 114 marketing boards 23–5, 39 Marshall Plan 12, 62 Menzies, R.G. 64, 117 New Zealand:

168 INDEX

attitude to sterling area 68; borrowing 93, 94, 108; controls on UK exports 80–3; and convertibility 114, 117; domestic economic policy 71; import controls 60, 68, 73; sterling balances 116–18; trade 56–9, 64, 68, 73, 84 Nigeria 102 sterling balances 22, 23–5, 106; imports 84 O’Brien, L.K. 44–5, 45, 46 Organisation for European Economic Cooperation (OEEC) 8, 53, 63, 82, 84, 122 oil 9, 25, 91, 94–7, 99, 101, 108, 132 overseas investment 10, 131–3; competing with domestic investment 3, 88–1, 95–8, 130–2; and development 3, 87, 89–2, 106; and exports 3, 71, 90, 100–4; profits from 102–5, 109, 92; source of 104–8, 95–8; and sterling area cohesion 90, 91, 107– 12; and sterling balances 3, 90, 104–8 Pakistan: controls on UK exports 81; and convertibility 114; development 34, 35–7, 82; end of discrimination 82; import controls 60, 71, 73; independent reserves 29; sterling balances 18, 24, 35–7, 115–18; trade 59, 62, 54, 64, 65–8, 72–5, 83; US aid to 82 profits 92, 102–5, 109 quotas 12, 59–60, 60–5, 64, 68–3, 72–7, 76, 79; and convertibility 118, 119, 120; effect in 1950 61, 62–5; effect in 1952 73–6

Radeliffe Committee on the Working of the Monetary System 2, 3, 34, 41, 44–5, 46– 8, 92–5, 113 Randall Commission on External Monetary Policy 121–3 Reddaway, W.B. 100–4 Rhodesia and Nyasaland 22, 56, 59, 93–6 ROBOT 113–19, 127, 129; and sterling balances 113–18 Rowan T.L. 35, 37, 110, 113, 124, 125 savings 95–8 Shonfield, A. 3, 4, 5, 89, 92, 95, 96 Singapore 53, 59, 65, South Africa: borrowing 90, 94, 107, 108; and convertibility 114; end of discrimination 81–4; gold sales 27–9, 48, 71, 81, 107, 132; independent reserves 29; lending 94, 132; return on investment 102–5; sterling balances 29, 116; trade 56, 59, 62, 71, 73 Southern Rhodesia 36, 71, 73, 116–18 sterling: as an international currency 2, 4–5, 6, 47–9, 124, 131, 135; confidence in 11, 32–5, 39, 45–7, 123, 126–8 sterling balances 2–3, 10, 129–1, 131; accumulation during WWII 17–18; agreements with India, Pakistan and Ceylon 18, 35–7, 115–18; and convertibility 11, 113–18; and development 24, 34–41, 90; independent sterling area 14, 19–1, 24– 6; interwar 7, 17; and investment 3, 90, 104–8; and London market conditions 22, 46– 8; non-sterling area 25; pre-war 17; ratio to reserves 2, 10, 16–17, 19, 26–8, 34, 47; and ROBOT 113–18;

INDEX 169

and trade 11, 25, 50, 68; US attitude 11–13; volatility 6, 17, 26 Sterling Bloc 7, 17, 57, 86 sterling securities 9 stockpiling 64, 74 Strange, S. 3, 4–5 Suez Crisis 5, 14–15, 31

recession 53, 76, 84; as a source of capital 15, 30–2, 32, 95– 8, 108–11; Special Relationship with UK 1, 11– 14; State Department 35, 120; Treasury 13–14, 120–2 West Germany 53, 78, 79, 82, 83, 84, 98

tariffs 12, 57–1 trade: and development 69–2, 75; and domestic policy 70–3, 74–7, 80; and sterling balances 11, 25, 26–8, 50, 68; triangular balance 26, 50–5, 59, 63, 69– 2, 75, 76, 80, 85, 130, 134 transferable sterling 8–9, 123–8 treasury (see also Brittain, Butler, Clarke) 32, 44, 135; on convertibility 123–5, 125, 126, 127; on import controls 61, 67, 68–3, 75; on investment 46, 87–91, 100, 109; on sterling balances 19, 22, 22, 37, 38, 44 Treasury Bills 10, 23, 41–7 United Kingdom (see also exports: UK competitiveness): domestic policy x, 14, 46–8, 71, 117– 19, 123; growth relative to Europe x, 78, 96–99; as a market for sterling area goods 31, 53–9; relative economic decline 2, 4–6, 96 United States 111; aid 11, 34–6, 36, 37, 82, 114; attitude to sterling balances 11–14, 25– 7, 34–6; and collective approach 119, 120–3; and convertibility 118; and European integration 11–13, 121; exports 62–9, 82, 84; and flexible exchange rate 118, 121–3; imports 3–4, 14, 53, 63, 64–9, 76, 79; loan of 1946 11, 13, 67;