Sterling area

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The sterling area, or sterling bloc, began to appear informally during the early 1930s, after the pound sterling had left the gold standard in 1931, with the result that a number of currencies were pegged to sterling instead of to gold.

Early in the Second World War, as an emergency measure, legislation was enacted throughout the countries of the British Empire to unite the sterling bloc countries of the Empire into a single exchange control area, with a number of aims, including protecting the external value of sterling. Thereafter, there was co-operation in exchange control matters between several countries which at the time were mostly dominions and colonies of the Empire, which was in the process of evolving into the Commonwealth of Nations.[1] All of the British Empire except for Canada, Newfoundland, and Hong Kong formally joined the sterling area in 1939.

The sterling area countries either used sterling as their own currency, or else they pegged their own currency to it. Even member countries with their own currency held large sterling balances in London for the purposes of conducting overseas trade.

The significance of the sterling area was seriously diminished in June 1972, when the British government (in consultation with the Irish, Manx, Jersey and Guernsey governments) unilaterally applied exchange controls to the other sterling area countries, with the exception of Ireland, the Isle of Man, and the Crown dependencies in the Channel Islands.

The sterling area did not cease to exist on any specific date, but it effectively disappeared in phases between June 1972 and 1979. In 1978 Ireland unilaterally imposed exchange controls on the United Kingdom, and in 1979 the new British government of Margaret Thatcher completely lifted all the exchange controls created in 1939.

Purpose[edit]

Before the First World War, the British pound sterling was the most important international currency, and the City of London was the world's most important financial centre. More than 60 per cent of global trade was financed, invoiced, and settled in sterling, and the largest proportion of official reserves, apart from gold, was held in sterling. Although not all the territories of the British Empire used sterling as their local currency, most of those that did not pegged their local currency at a fixed rate to sterling, as did many foreign countries outside the Empire. When Britain left the gold standard in 1931, many countries that had pegged their currencies to gold pegged their currencies to sterling instead; this group of countries became known as the "sterling bloc", though the term "sterling area" was used officially from at least 1935.[2] When the Second World War broke out, the sterling bloc countries within the British Empire shared a desire to protect the external value of sterling; legislation was therefore passed throughout the Empire formalising the British sterling bloc countries into a single exchange control area.

Canada and Newfoundland[edit]

Canada and Newfoundland did not join the sterling area because their dollar currencies had effectively been linked to the US dollar until they were forced off the gold standard in 1931 along with Britain. But while Australia, New Zealand, and South Africa all responded to the end of the gold standard by pegging their pounds to the pound sterling, Canada and Newfoundland instead pegged their dollars to the US dollar. So Canada and Newfoundland did not stand to gain by joining an exchange control bloc intended to protect the external value of sterling. The absence of Canada and Newfoundland from the sterling area was beneficial to Britain, as it curtailed capital flight to the North American mainland. Canada nevertheless introduced its own exchange controls at the outbreak of war; these were maintained until 1953. Canada's exchange controls were 'sterling area friendly', in that their purpose was more to prevent capital flight to the USA than to prevent flight to the sterling area.

Hong Kong[edit]

Hong Kong originally declined to join the sterling area, due to its position as a centre for open market activities, but it joined at the end of the Second World War.

Member benefits[edit]

At the end of the war in 1945 the sterling area remained the largest and most coherent currency bloc in the world, and it provided its members with freedom to settle payments in sterling anywhere within the area without exchange controls. Members enjoyed the benefits of stable exchange rates and permanent access to the financial resources of the City of London. Meanwhile, the British government was able to use the pooled reserves of the entire area's membership to back sterling at times when there was a US dollar shortage.

Demise[edit]

The UK government devalued the pound sterling in November 1967 from £1= $2.80 to £1 = $2.40. This was not welcomed in many parts of the sterling area, and, unlike in the 1949 devaluation, many sterling area countries did not devalue their currencies at the same time. This was the beginning of the end for the sterling area. The Basel agreements of 1968 were designed to minimise flight from sterling to the US dollar within the sterling area. On 22 June 1972 Britain imposed exchange controls on the sterling area, with the exception of Ireland, the Isle of Man, and the Crown dependencies in the Channel Islands. At the same time, Britain floated the pound sterling. According to Chancellor of the Exchequer Anthony Barber, this was to halt a recent increase in capital outflow to other parts of the sterling area.

Opponents of these changes argued that the real reason for them Britain's impending entry to the EEC, and that France was concerned about Britain's close economic ties with the Commonwealth and the sterling area,[3] even though France continued to have special economic relations with its less successful former colonies in the CFA and CFP franc zones.

One of the issues covered in the negotiations about the United Kingdom's entry to the EEC was the problem of "sterling balances", balances held in sterling in London by governments of countries which were members of the sterling area, in many cases the result of debts incurred by Britain during the war. France argued that these obligations were potentially a threat to the stability of the pound, and that this could cause turbulence for the whole of the EEC. Agreement on winding down these balances was thus a necessary part of the agreement for Britain to join the EEC, and removed the main reason for continuing the area.

Gibraltar was re-included into the new miniature sterling area on 1 January 1973, and the other sterling area countries responded as they chose—in fact, some of these countries had already taken similar measures throughout the 1950s and 1960s. Following the British government's decision in June 1972, some countries immediately copied the British government, and others did so over the next few months. Singapore continued operating sterling area exchange controls until as late as 1978, and Brunei did not alter its sterling area exchange controls until the year 2001.

After 1972 the sterling area was no longer what it had been, but the United Kingdom still recognised the existence of the 'overseas sterling area' as a distinct group of countries for the purposes of exchange control policy. In 1979, due to an improving economic situation and changed patterns of trade between Britain and the rest of the Commonwealth, Britain removed all its exchange controls: the sterling area had effectively ceased to exist.

List of member countries[edit]

References[edit]

  1. ^ http://hansard.millbanksystems.com/written_answers/1972/jul/18/sterling-area#S5CV0841P0_19720718_CWA_111
  2. ^ The National Archives: The Cabinet Papers 1915-1981 (Catalogue Reference CAB 24/256).
  3. ^ Campbell, John (1993) Edward Heath: A Biography London: Jonathan Cape ISBN 0-224-02482-5
  4. ^ Brenchley, Frank, "Britain and the Middle East:an economic history 1945-1987" [1]
  5. ^ United Nations Conciliation Commission for Palestine. [2]

Further reading[edit]

  • The New Palgrave Dictionary of Money and Finance (1992)