Sterling Area

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The sterling area came into existence at the outbreak of the Second World War. It was a wartime emergency measure which involved cooperation in exchange control matters between a group of countries, which at the time were mostly dominions and colonies of the British Empire (later the Commonwealth). These countries either used sterling as their own local currency, or else their own local currency was at a peg to the British pound. And even in the cases where member countries used their own local currency, these countries would still hold large sterling balances in London for the purposes of conducting overseas trade. The purpose of the sterling area was to protect the external value of the pound sterling. All of the British Empire except for Canada, Newfoundland and Hong Kong joined the sterling area in 1939.

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

It is impossible to state an exact date for when the sterling area ceased to exist. June 1972 is perhaps the best date for that purpose. However from a British perspective, the Republic of Ireland unilaterally imposed exchange controls on the UK in 1978, and in 1979, the British government completely lifted all its exchange controls which had originally been brought in as a wartime emergency measure in 1939. Hence, the year 1979 could be viewed as the year when the sterling area no longer had any practical significance within the UK.

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[edit] The purpose of the sterling area

The origins of the sterling area lie in the fact that prior to the first world war, the British pound sterling functioned as by far the most important international currency, and the City of London was by far the world's most important financial centre. More than 60% 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 within the British Empire used sterling as their local currency, most of them pegged their local currency at a fixed rate to sterling, as did many foreign countries outside of the British Empire. Following Britain's departure from the gold standard in 1931, many countries that had pegged their currencies to gold responded by pegging their currencies to the Pound Sterling. This group of countries became known as the sterling bloc. When the second world war broke out, the sterling bloc countries within the British Empire shared a mutual desire to protect the external value of the Pound Sterling. Legislation was therefore passed throughout the empire formalizing the British sterling bloc countries into a single exchange control area.

[edit] Canada and Newfoundland

The reason why Canada and Newfoundland did not join the sterling area was because their dollar had effectively been linked to the US Dollar until they were forced off the gold standard in 1931 along with Britain. But where countries like Australia, New Zealand and South Africa responded to the end of the gold standard by pegging their pounds to the pound sterling, Canada and Newfoundland responded by pegging their dollars to the US Dollar. As such, Canada and Newfoundland had no vested interest in joining an exchange control bloc for which the purpose was to protect the external value of sterling. The absence of Canada and Newfoundland from the sterling area was beneficial to the United Kingdom in that it curtailed capital flights to the North American mainland. Canada did nevertheless introduce its own exchange controls on the outbreak of war and these lasted until 1953. Canada's exchange controls were 'sterling area friendly' in that they were aimed more at preventing capital flights to the USA rather than at preventing capital flights to the sterling area.

[edit] The benefits of the sterling area

At the end of the second world war, the sterling area was the largest and most coherent currency bloc in the world, and it provided its members with full freedom of payments. Members enjoyed the benefits of stable exchange rates as well as uninterrupted 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.

[edit] Hong Kong

Hong Kong originally declined to join the sterling area due to its position as a centre for open market activities. However, following the end of the second world war, Hong Kong did join.

[edit] The ending of the Sterling area

The devaluation of the pound sterling in November 1967 from £1= $2.80 to £1 = 2.40 was not welcomed in many parts of the sterling area and unlike in the 1949 devaluation, many of the sterling area countries did not devalue in sympathy. This was in many respects the beginning of the end for the sterling area. The Basel agreements of 1968 were designed to minimize a flight from sterling to the US dollar within the sterling area. On 22 June 1972 Britain imposed exchange controls on the rest of the sterling area except for the Republic of Ireland, the Isle of Man and the Channel Islands. At the same time, Britain floated the Pound Sterling. The reason for this according to the Chancellor of the Exchequer Anthony Barber, was to halt a recent increase in capital outflow to other parts of the sterling area. Opponents argued that the real reason was related to Britain's impending entry to the EEC and that France was concerned about Britain's close economic ties to the Commonwealth and the sterling area[1] while at the same time France continued to have favored economic relations with its less successful former colonies in the CFA and CFP franc zones. One of the issues covered in negotiations for the UK to join the EEC was the problem of "sterling balances." These were balances held in sterling in London by governments of countries which were members of the sterling area, in many cases reflecting 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, which removed the main argument for continuing the area.

Gibraltar was re-included in the new miniature sterling area on 1 January 1973, and the other sterling area countries responded in a manner of their own choosing. 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 till 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 used to be, but it continued to exist, in that the United Kingdom still recognized 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 with the second world war now in the past, Britain removed all its exchange controls. At this point in time one could definitely say that as far as Britain and most of the sterling area countries were concerned, the sterling area had ceased to exist.

[edit] Full list of sterling area countries

[edit] References

  1. ^ Campbell, John (1993) Edward Heath: A Biography London: Jonathan Cape ISBN 0-2240-2482-5
  2. ^ Brenchley, Frank, "Britain and the Middle East:an economic history 1945-1987"[1]
  3. ^ United Nations Conciliation Commission for Palestine. [2]
  • 4. "The New Palgrave Dictionary of Money and Finance" (1992)
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