The Retirement of Sterling as a Reserve Currency after 1945: Lessons for the us dollar?
Sterling Reserves of State Institutions 1945-1973
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- Figure 7 Distribution of OSA Sterling Balances 1945-73
- Sterling and the Reform of the Global Reserves System: Delaying the Tipping Point
- Outstanding Drawings on First (1966) and Second (1968) Group Arrangements
- Sterling Agreements Countries Sterling Reserves 1968-73
Sterling Reserves of State Institutions 1945-1973 0 500 1000 1500
2000 2500
3000 3500
4000 194
5 194
6 194
7 194
8 194
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0 195
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2 195
3 195
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0 196
1 196
2 196
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8 196
9 197
0 197
1 197
2 197
3 £ m illion Nominal
Real
Privately held reserves of sterling were a fairly steady 3%-4% of world trade during the 1950s but then fell steadily to below 2% by 1969 after the confidence crises of the early 1960s.
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Within the nominal stability of sterling reserves in the sterling area, Figure 7 shows that there was a dramatic geographical shift. At the end of the war, the Indian Subcontinent accounted for 58% of total sterling liabilities to the overseas sterling area. These assets were accumulated during the war in lieu of payment for war- related expenditure in the region. 16 Almost immediately, however, the dominance of these balances was challenged by accumulations in Australia/New Zealand and by colonies in the Far East and Africa so that by the end of 1952 the Indian Subcontinent accounted for only a quarter of sterling area balances. From the mid- 1950s oil sales in the Middle East and economic growth in East Asia led to a further redistribution of sterling’s reserve role so that by November 1968 Hong Kong was largest single official holder of sterling, followed closely by Australia and then Kuwait. These three examples show some important determinants of sterling’s persistence by the end of the 1960s: empire still mattered (Hong Kong was still a colony with a colonial monetary system), inertia and size mattered (Australia was historically the largest sterling area country, although it did diversify its reserves), and denomination of commodity trade mattered (Kuwait, and later Nigeria and Saudi Arabia accumulated huge sterling royalty payments from oil companies). 17
16 B.R. Tomlinson, ‘Indo-British relations in the post-colonial era: The sterling balances negotiations, 1947-49’, Journal of Imperial and Commonwealth History 13(3), 1985, 142-62. 17 For the important case of Hong Kong’ sterling, see C.R. Schenk, ‘The empire strikes back; Hong Kong and the decline of sterling in the 1960s’, Economic History Review, 2001.
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- Figure 7 Distribution of OSA Sterling Balances 1945-73 0% 20% 40% 60%
80% 100%
1945 1948 1951 1954 1957 1960 1962 1965 1968 1971 Other
Far East Middle East E/W/Central Africa Caribbean Area India/Pak/Ceylon Aust/NZ/Safr
reserves in the 1950s, mainly through accumulation of USD assets (and gold in the case of South Africa).
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- Table 1 Share of Sterling in Total Reserves, percent
1950 1951 1952 1953 1954 1955 1956 1957 1958 Iraq 95 80 81 86 91 84 80 71 66 Ceylon
89 73 78 67 73 67 56 53 47 Australia 82 66 65 70 64 49 58 65 55 Pakistan 78 79 52 57 59 62 53 50 44 India 73 69 69 97 97 98 56 44 33 New Zealand
64 61 62 73 69 61 72 63 66 South
Africa 24 22 23 8 19 7 8 - - Source: CR Schenk, Britain and the Sterling Area, Routledge, 1994, p. 30.
However, this process was reversed by some sterling holders in the 1960s so that as Table 2 shows, by 1964 New Zealand held 98% of its reserve in sterling and Australia 79%.
Table 2: Proportion of sterling in official reserves Australia New Zealand Malaysia Singapore Hong Kong 1964
79 98 96 100 99 1965
70 97 96 98 99 1966
69 97 90 93 99 Jun-67
64 80 87 74 99 Oct-67
60 85 82 50 99 Dec-68
46 76 58 44 99 Source: Bank of England Archives [Hereafter BE] OV44/116. 1968 from TNA T312/2811, T312/2804, T312/2649, T312/2312.
As we shall see below, the share of sterling in the reserves of the sterling area countries as a whole increased further after 1968. Thus, although the share of
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- sterling in global reserves fell, the pound remained the primary reserve currency for a range of (mainly developing) countries until the mid-1970s. These developments all show that the distribution of sterling reserves in the 1950s was profoundly affected by the pattern of economic development on the geographical edges of Britain’s former formal and informal empire. Over the next decade the decline in sterling’s share of global reserves slowed as the plans for reforming the system as a whole gathered pace.
A vital feature of the management of the retreat of sterling was the continuing effort to engage the rest of world’s economic leaders in resolving the problems that the reserve currency role of sterling appeared to pose for domestic UK economic policy. Indeed as the 1960s progressed, waiting for a global solution to weaknesses in the international monetary system emerged as a corner-stone of British sterling strategy, allowing ministers to postpone unpalatable decisions about achieving this on their own. Their success is evident in the range of schemes designed to postpone the tipping point for sterling until a permanent solution to the problem of national currencies as reserve currencies could be agreed. 1. 1961-1964 Bilateral Concerté: G10+1 central banks offer support coordinated through the BIS to a range of countries (3 month bilateral swaps). UK episodes included $1 billion in September 1964 ($7 billion in current dollars), half of which came from the Fed, and $3 billion in November 1964, one third from the Fed. 18
system was developed during the exchange crises of 1960-61 when pressure on
18 Current dollars valued by CPI from Samuel H. Williamson, "Six Ways to Compute the Relative Value of a U.S. Dollar Amount, 1790 to Present," MeasuringWorth, 2008. URL http://www.measuringworth.com/uscompare/
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- sterling led to concerted efforts by European central banks to support existing exchange rates. In March and June 1961 the UK garnered bilateral support totaling $904 million from European and US central banks in what became known as Basle arrangements. As Toniolo relates, the Bank of England and the US Fed were enthusiastic about the ability of the combined forces of central banks to forestall short term speculative pressure and sought to extend or formalise the arrangements on an inter-governmental basis. Creditors in Europe were less enthusiastic about extending the system and the initiative was instead formalised through the BIS. Credits would remain bilateral but the BIS would inform each creditor of the details of the total operation, in what was termed ‘bilateral concerté’. 19 In March 1963, September 1964 and November 1964 Britain negotiated a series of lines of credit under the bilateral concerté scheme to cover short-term speculative attacks on sterling. 20 The UK juggled short term credits to support sterling, drawing on them to intervene in the exchange market and also publicizing the packages to stem speculation. By moving between multilateral support from Europe, the USA and IMF facilities, the Bank of England managed to keep the speculators at bay. While these short term facilities were successful in supporting sterling through a series of confidence crises, they did not amount to a long term solution, which Britain’s creditors increasingly preferred. 21 In mid-September 1965 Bank of England Governor Cromer rejected proposals made at a BIS meeting of central bankers to ‘fund’ sterling reserves into a longer term and more predictable debt, effectively curtailing their liquidity and ending the reserve role. He explained that it was volatility in private sterling holdings rather than in overseas central banks’ holdings that contributed to the UK’s balance of payments problems. More fundamentally, the UK’s creditors in the sterling area would not accept shifting their existing liquid sterling exchange reserves into less remunerative and less liquid long-term assets,
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1973,Cambridge University Press, 2005, pp. 381-85. 20 MJ Thornton (BoE) to Conolly, 22 September 1964. BISA GILB9 7.18(23). 21 For discussions during this period see Toniolo, Central Bank, pp. 391-94.
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- and the UK did not want to replace a debt that might never need to be redeemed for a certain liability. 22
While ‘funding’ was out, the Bank of England hoped that support might be found through the BIS network to cover the eventual diversification of sterling reserves. Rather than preventing the liquidation of sterling assets, these proposals sought to protect the UK reserves from the switch to the USD based on the model of short term support already agreed under the Bilateral Concerté. In this way, the international community would ease the impact of the decline of sterling as a reserve currency on the UK. After a series of negotiations the first Group Arrangement for sterling was concluded in June 1966.
2. BIS Group Arrangement I June 1966 – January 1971: $1 billion in 3-month renewable swaps to cover 12 months ($6.6 billion in current dollars). The First Group Arrangement moved on from the bilateral concerté to included a more formal relationship to the reserve role of sterling; the UK was allowed to draw on the credit up to an amount of 50% of the drop in UK reserves attributable to a decline in sterling reserves overseas. 23 The aim was to prevent a devaluation of sterling due to diversification of official reserves, but the hope was that the announcement of the agreement itself would forestall that process by enhancing market confidence in the value of sterling and by reducing the first mover advantage of shedding sterling reserves. A decline in sterling reserves was now less likely to prompt a devaluation of sterling. As it turned out, the Arrangement was not enough to forestall a sterling devaluation by 14.3% in November 1967. This crisis step was not due to diversification but to Britain’s own chronic balance of payments problem
22 Cromer to Ferras (and copied to other Central Banks), 16 September 1965. BISA LAR2 F01 7.18(14). 23 The support was triggered after a net reduction in overseas official holdings of sterling below a base level of £4300m due to factors other than the UK’s own balance of payments problems (the total at the time was £4500m).
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- and a collapse in confidence in the Labour Government’s ability to restore British competitiveness. Figure 8 shows how the facility was used during this crisis.
Figure 8 Outstanding Drawings on the First (1966) and Second (1968) Group Arrangements Outstanding Drawings on First (1966) and Second (1968) Group Arrangements 0 100 200 300
400 500
600 700
A ug -67 Oc t-67
D ec -6 7 Fe b- 68 A pr -6 8 Ju n- 68 A ug -68
Oc t-68
D ec -6 8 Fe b-6 9 A pr -69 Ju n- 69 Au g-6 9 O ct -6 9 D ec -6 9 Fe b- 70 Ap r-7
0 Ju n- 70 Au g- 70 Oc t-7 0 D ec -70 Ist Group Arrangement 2nd Group Arrangement
In March 1968, when speculative pressure against the USD prompted the end of the fixed price of gold and the entire reserves system seemed in peril, the British government sought to garner further support for sterling’s international role, asking for $5 billion in longer term credit to fund any further diversification away from sterling. They were turned down, but did collect pledges from central banks ($1.175 billion) to add to existing facilities of $1.436b from bilateral and previous Basle facilities, plus $1.4b in IMF standby to make up a headline total of support of just
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- over $4b (c. $25 billion in current dollars valued by CPI). 24 With this huge credit looming, Britain’s creditors sought a longer term (and final) solution.
3. BIS Group Arrangement II (Basle Agreement) and Sterling Agreements (1968-1974): The G10 central banks agreed to provide a safety-net line of credit of $2b ($12.4 billion in current dollars) on which the Bank of England could draw if total sterling reserves fell below £3080m (the level at 11 June 1966). As a quid pro quo, they insisted that the UK negotiate bilateral Sterling Agreements to commit countries holding sterling in their reserves to keep a minimum proportion of their reserves in sterling over the term of the Basle Agreement. In return, the UK offered a guarantee of the USD value of 90% of each of these countries’ official sterling reserves so long as the minimum sterling proportions were met. Countries could break the agreement and diversify, but they would lose the USD exchange guarantee. The goal was to limit the diversification away from sterling as a reserve currency through these agreements, with a guarantee underpinned by the $2b safety-net if global reserves as a whole fell sharply. The Sterling Agreements were the most important part of this arrangement since they further reduced the exchange risk of holding sterling and thus reduced the incentive for countries to abandon sterling. The arrangements thus transformed the nature of sterling as a reserve asset from a voluntary portfolio choice to a formal contractual commitment. However, during the late 1960s and early 1970s the problem was not a decline in sterling assets held overseas but how to contain an increase in these UK liabilities. A further complication was the devaluation of the USD against gold and sterling in 1971, which undermined the value of the guarantee
24 Note for the Record by RJ Wiles, 19 March 1968. TNA T318/191. See also telegram Armstrong to Chancellor of the Exchequer, 17 March 1968. BE OV53/38.
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- since the trigger point was not changed. 25 Thirty-four agreements with sterling holders were negotiated between July and September 1968 in process that was a considerable embarrassment for the UK has negotiators were left kicking their heels waiting for agreement from a range of developing states, many former colonies. The bitterness of some countries stemmed from the 1967 devaluation, which had created a sense of betrayal and a new balance of power between Britain and these mainly Commonwealth countries. The negotiations also identified the range of issues that complicated Britain’s relations with these countries, including the applications to the EEC, development aspirations, and (post)imperialism. The range of minimum sterling proportions (from 100% in East Africa to 13% in India) is presented in Appendix I. Figure 9 shows the overall proportion of sterling in reserves of those who signed a sterling agreement. This shows the recovery of sterling in the first year of the agreements and then again from the time of the primary product boom in 1971, and the steadily rising guarantee obligation if sterling depreciated.
25 The exchange guarantee was set to be invoked if sterling fell below $2.376, but the Smithsonian rate increased the sterling/USD exchange rate from $2.40 to $2.60 making it much less likely that the guarantee would be invoked since the exchange rate could fall 8.5% before compensation would need to be paid.
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- Figure 9 Sterling Share of Reserves of Sterling Agreement Countries Sterling Agreements 48 50 52 54 56 58 60 1968 III 1968 IV 1969 I 1969 II 1969 III 1969 IV 1970 I 1970 II
1970 III 1970 IV 1971 I
1971 II 1971 III 1971 IV Per cen t 0 500 1000 1500
2000 2500
3000 £ m ill ion Share of Sterling in Official Reserves LHS Amount of Sterling Guaranteed RHS
Source: BE EID15/7. The Agreements were successfully renewed in 1971, 1973 and 1974 (except for Libya and Malaysia, who opted out and diversified in July 1972 after sterling floated) with reductions in the minimum sterling proportions by 10% each time. 26 Whether the agreements were binding is doubtful. Most countries retained a substantial cushion of sterling above their minimum commitment, although seasonal variations in reserves required many to keep precautionary sterling reserves to avoid falling below the minimum, as shown in Figure 11.
26 For the case of Malaysia see, C.R. Schenk, ‘Malaysia and the end of the Bretton Woods system 1965-72: Disentangling from Sterling ‘, Journal of Imperial and Commonwealth
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- Figure10 Sterling Agreements Countries Sterling Reserves 1968-73 Sterling Agreements Countries Sterling Reserves 1968-73 0 0.5 1 1.5
2 2.5
3 3.5
4 4.5
19 68 III 196 8 IV
196 9 I 19 69 I
I 19 69 III 196
9 IV 197
0 I 197 0 II 19 70 III 19 70 IV 197
1 I 197 1 II 19 71 III 197
1 IV 197
2 I 19 72 I I 19 72 III
197 2 IV
197 3 I 197 3 II
£ m illi on 46 48 50 52 54 56 58 60 62 64
rc e n t Sterling LHS Sterling % RHS
Figure 11 Excess Holdings of Sterling above Minimum Sterling Proportion Download 282 Kb. Do'stlaringiz bilan baham: |
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