Sterling Area

From Wikipedia, the free encyclopedia

Jump to: navigation, search

The sterling area came into existence at the outbreak of World War II. 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 currency, or else their own currency was pegged to the British pound; even member countries with their own currency held 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 Ireland, the Isle of Man and the Channel Islands.

The sterling area did not cease to exist on a specific date, but disappeared in phases between June 1972 and 1979. Ireland unilaterally imposed exchange controls on the UK in 1978 and, in 1979, the British government completely lifted all the 1939 exchange controls.

Contents

[edit] The purpose of the sterling area

Before the first world war the British pound sterling was 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 those that did not pegged their local currency at a fixed rate to sterling, as did many foreign countries outside the Empire. Following Britain's departure from 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". 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.

[edit] Canada and Newfoundland

Canada and Newfoundland did not join the sterling area 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. Consequently 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 the United Kingdom in that it curtailed capital flights to the North American mainland. Canada nevertheless introduced its own exchange controls on the outbreak of war; they were kept until 1953. Canada's exchange controls were 'sterling area friendly' in that their purpose was more to prevent capital flights to the USA than to the sterling area.

[edit] Hong Kong

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

[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 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.

[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 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 minimise a 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 Channel Islands. At the same time Britain floated the pound sterling. The reason for this according to 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 favoured 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", 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 in 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 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 UK 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 with the second world war now in the past, Britain removed all its exchange controls: 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)
Retrieved from "http://en.wikipedia.org/wiki/Sterling_Area"