Session 5: Re-Assessment of Sterling 1945-2005
Managing the decline of sterling 1960-1973: a multilateral approach1
Catherine R. Schenk
University of Glasgow
[email protected]
Draft Only – not for citation
May 2006
In the 1960s the goal of Britain’s sterling policy changed from encouraging the
use of sterling as a reserve currency, to managing its decline. On the Treasury side,
Chancellor of the Exchequer Maudling noted at the end of 1962 that 'I regard it as a
major aim of policy to free the UK economy from the inhibitions of reserve currency
status'. 2 JS Fforde of the Bank of England noted in 1964, ‘I do not think that at the
highest levels in the Bank there would be dissent from the proposition that to get rid
of reserve-currency status while maintaining our trading currency position would be a
most desirable achievement’. 3 This change in sterling policy was part of a process of
changes in Britain’s global role that included reducing overseas defence
commitments, European integration, estrangement from the USA, and
decolonisation. 4
A desire to evade the costs of having a reserve currency was easy enough to
declare within the corridors of Whitehall, but achieving this goal proved complex and
intractable. British governments were constrained in their policy options by
responsibilities not only to sterling holders, but also to the USA and to European
partners. Any public official discussion of abdicating from the reserve role of sterling
unilaterally would threaten a deluge of speculative pressure. Also, during the 1960s
there was a prolonged series of negotiations among the G10 and within the IMF to try
to devise a solution to the global international monetary system in a way that would
replace reserve currencies altogether; both the US$ and sterling. This culminated in
the approval of the SDR in 1967. Although in hindsight the failure of these
negotiations to achieve a timely solution may appear inevitable, in the 1960s they
presented an attractive alternative to politically damaging unilateral action by the UK.
British governments and the Bank of England were therefore caught in a holding
pattern while longer-term international solutions to their problems were devised.
1
The devaluation of November 1967 prompted what turned out to be a long process
of reducing sterling’s reserve role. Britain’s failure to protect the external value of
overseas sterling reserves led most states to begin to accelerate the diversification of
those reserves. The threat to the UK reserves from this process prompted the Basle
Agreement of 1968, which underpinned a framework of bilateral guarantees for the
future value of sterling reserves in return for Britain’s creditors holding a specified
proportion of their reserves in sterling. On the one hand, this preserved the amount of
sterling in international reserves, but on the other hand it marked the end of
voluntarily held sterling reserves.
Although the Basle Agreements of 1968 are usually viewed as a consequence of
the devaluation of sterling in 1967, this analysis will emphasise the longer-term
development of such support and how the negotiations with Britain’s European
partners as well as the overseas sterling area countries shaped their final structure.
This shows that the British viewed the various crises in the Bretton Woods system
during the 1960s as opportunities to garner multilateral support for the decline of
sterling as a reserve currency. The strategy was based on the view that sterling was
important to the functioning of the international monetary system and was therefore a
joint responsibility. This logic led to the negotiation of multilateral support through
the BIS first to forestall devaluation in the early 1960s, and then to manage the
diversification of reserves after the devaluation.
Sterling as a Reserve Currency in the 1960s
Figure 1 shows that the amount of sterling held in foreign currency reserves was
remarkably stable from 1950-1969, averaging just over US$7b and actually increasing
by US$2b during the crisis years from 1966-68. Figure 2 shows the decline in the
proportion of global reserves held as sterling. Most of the decline was achieved
during the 1950s, with the US$ overtaking sterling in 1955. Ironically, once the goal
to remove the reserve currency role was declared privately, the proportion of global
reserves held in sterling stabilised at about 30% until 1970 due to the lack of
confidence in the US$ as an alternative.
2
Figure 1: Denomination of Foreign Currency Reserves 1950-70
50
45
40
35
30
Other
25
US$
Ster l i ng
20
15
10
5
0
Source: IMF International Financial Statistics
F i g ur e 2 : D eno minat i o n o f F o r eig n Exchang e R eser ves
100.0
90.0
80.0
70.0
60.0
Other
50.0
US$
Ster l i ng
40.0
30.0
20.0
10.0
0.0
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973
Source: IMF, International Financial Statistics
Figure 3: Ratio of OSA Sterling Balances to Gold and Foreign
Exchange Reserves 1945-69
5
4.5
4
3.5
3
2.5
68
69
19
67
19
66
19
65
19
64
19
63
19
62
19
62
19
61
19
60
19
59
19
58
19
57
19
56
19
55
19
54
19
53
19
52
19
51
19
50
19
49
19
48
19
47
19
46
19
19
19
45
2
3
Figure 3 focuses on the challenge for British policy-makers; the ratio of outstanding
sterling liabilities to overseas sterling area holders as against the first line of foreign
exchange reserves (i.e. excluding IMF and other facilities). This shows that the ratio
tended to decline during the 1950s, a trend that stopped during the 1960s.
Within this overall pattern, there was considerable geographical redistribution,
particularly in favour of the Far East (Singapore and Hong Kong) and the Middle East
(primarily Kuwait). This geographical shift generated new problems and requires a
different analysis than the war debts of the 1940s or the colonial balances of the
1950s.
Figure 4: Distribution of OSA Sterling Balances 1945-73
100%
80%
Other
Far East
60%
Middle East
E/W/Central Africa
Caribbean Area
40%
India/Pak/Ceylon
Aust/NZ/Safr
20%
0%
1945
1947
1949
1951
1953
1955
1957
1959
1961
1962
1964
1966
1968
1970
1972
The increase in sterling held by territories in the Far East reflected the acceleration
of industrialisation, particularly in Hong Kong and Singapore, and the growth of the
money supply and government reserves that accompanied increased prosperity in
these former and continuing colonies. The former colonies kept their currencies
tightly linked with sterling and pledged on independence at the end of the 1950s to
maintain 100% sterling reserves. 5 The rise in sterling balances therefore reflected the
legacy of the colonial monetary system as well as the reality that the US$ was also
unstable and gold was in short supply. The rise of Middle Eastern sterling balances
reflected the international agreements to denominate a proportion of their oil trade in
sterling. As their mineral resources were exploited and their reserves increased, so
too did their sterling balances.
These developments all show that the pattern of economic development on the
geographical edges of Britain’s former formal and informal empire profoundly
4
affected the distribution of sterling assets. Moreover, these changes were largely
outside the power of the UK to influence. The new distribution of sterling in the
1960s subsequently affected the international political economy of the devaluation
and the negotiations to manage the end of sterling’s reserve role. In this way, sterling
was not only affected by the changes in the international monetary system but also by
the new patterns of global development; the ascendancy of oil producers and the East
Asian economic ‘miracle’.
The Origins of the Basle Agreements
The arrangement of systems of bilateral support for the international monetary system
was developed during the exchange crises of 1960-1961 when pressure on the US$
and sterling led to concerted efforts by European central banks to support existing
exchange rates. In March and June 1961 the UK garnered bilateral support totalling
$US904 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.
The creditors in Europe were less enthusiastic about extending the system. Instead,
the initiative was formalised through the BIS. The credits would remain bilateral but
the BIS would inform each creditor of the details of the total operation, in what was
termed ‘bilateral concerté’. 6
In March 1963, September 1964 and November 1964 Britain negotiated a series
of lines of credit to cover short-term speculative attacks on sterling due to the
unfavourable balance of payments. Toniolo interprets the March 1963 operation as a
test of the new arrangements. 7 The line of credit amounted to $250m and was repaid
within three months. Pressure on sterling in September 1964 was more substantial as
the balance of payments deteriorated sharply on the eve of the General Election. The
BIS was disappointed not to have been included as a participant in the September
package rather than just a reporter, particularly as they had offered to arrange a
$250m sterling swap for the Bank of England that was turned down in February
1964. 8 Bridge of the Bank of England explained that the UK wanted currencies and
not gold and so had negotiated directly with the countries concerned, keeping the
possibility of BIS support in reserve for the future. DH MacDonald, Manager at the
BIS, expressed his view that ‘It was not much fun always being a bridesmaid and
5
never the bride’ and that the BIS would have been prepared to give $450m line of
credit for three months if they had been asked. This exchange suggests that the Bank
of England had access to ample short-term resources to shore up sterling in the early
1960s. It is also evident that the BIS played a pro-active role in these arrangements.
Table 1 European Contributions to Bilateral Concerté for the Bank of England
September 1964 (US$m)
Total
Drawn in
Drawn in
Drawn in
Total
arranged
Sept. 1964
Oct. 1964
Nov. 1964
Drawn
Belgium
25
25
25
France
100
30
50
20
100
Germany
150
50
75
25
150
Italy
50
40
10
50
Netherlands 25
10
10
5
25
Switzerland 100
30
50
20
100
Total
450
145
225
80
450
GILB9 7.18(23). BIS Historical Archive.
In the last week of September the Bank of England negotiated total support of $1
billion, of which $500m was from the USA and $50m from Canada. Table 1 shows
the breakdown of the European contributions, most of which was drawn by the end of
October after the new Labour government took power. All of the credit was repaid on
2 and 3 December 1964 by drawing on an IMF standby facility just after the
conclusion of a further similar scheme on 25 November shown below in Table 2. 9
This new facility, arranged after a ‘frantic round of telephone calls’ by Lord Cromer
of the Bank of England, amounted to $3 billion of which only $275m was drawn by
the end of the year. 10 A further line of credit was concluded among European central
banks in September 1965 in response to heavy pressure on sterling in August to which
the BIS contributed $50m. 11 The situation was quickly reversed and the markets
steadied by October 1965. What these arrangements show is that the UK was
juggling short term credits to support sterling, both by drawing on the credits to
intervene in the exchange market, but also by publicising the international support for
sterling in order to stem speculation. By moving between multilateral support from
Europe and the USA and IMF facilities, the Bank of England managed to keep the
speculators at bay.
While the short-term facilities were successful in supporting sterling through a
series of confidence crises, they did not amount to a long-term solution and so
pressure mounted from Britain’s creditors to find a more permanent solution. 12 In
6
mid-September 1965 Cromer rejected proposals made at a BIS meeting of central
bankers to ‘fund’ the sterling balances into a longer term and more predictable debt.
Table 2: Bilateral Concerté for the Bank of England November 1964 (US$m)
Amount Arranged
Austria
50
Belgium
75
France
200
Germany
500
Italy
200
Netherlands
75
Sweden
100
Switzerland
80
USA
1000
BIS
250
Total
2530
Source: GILB9 7.18(23), BIS Historical Archive. Other support from Canada and
Japan brought the total to £3 billion.
He explained that variations in overseas sterling area balances did not contribute to
the UK’s balance of payments problems. Instead it was private sterling balances that
caused difficulties. He therefore diagnosed the problem as related to sterling’s trading
role rather than its reserve role. Furthermore, the UK’s creditors would not accept
shifting their existing liquid sterling exchange reserves into less remunerative and less
liquid long-term assets. 13
While ‘funding’ was out, the Bank of England hoped that support might be found
from BIS members to cover potential diversification of the sterling area reserves.
Rather than preventing the liquidation of sterling assets, it was a case of protecting the
UK reserves from the impact of this liquidation. In this way, the international
community would facilitate the decline of sterling as a reserve currency, although this
was not explicitly declared. It must be remembered that these same central bankers
were simultaneously involved in devising longer-term plans to replace reserve
currencies in negotiations among the G10 and the IMF.
In London, the Bank’s viewpoint was put more frankly by JS Fforde: ‘Often in the
past we have felt that whatever the pros and cons of maintaining the status quo there
was in practice no means of altering it. There are signs that we need no longer take
that view, because the viability of the sterling system is now of more pressing
importance to the stability of the entire international monetary structure than
before.’ 14 The alternative of a substantial devaluation of sterling had been ruled out
7
not only by the British Labour government but also most European countries and the
USA. 15 What the UK needed, therefore, was defence against speculative pressure that
might force a devaluation before longer term domestic measures could correct the
underlying balance of payments problems. On this basis Fforde made a case to the
UK Treasury advocating taking the BIS up on their offer to help coordinate European
support for cyclical variations in sterling balances that adversely affected the British
reserves. The choice was between an arrangement through the G10 or through the
BIS. The latter was favoured since it would avoid inter-governmental wrangling and
because ‘It would be wise..to see to it that any new arrangements for sterling..are of a
kind which foster a closer association between the UK and the Continent’ in the
context of European integration.
The case for a fresh multilateral approach to the sterling balances problem was set
out by Maurice Parsons at the BIS in November 1965. He argued that until 1964,
pressure on sterling could be easily dealt with through short-term support from the
central banks while British balance of payments crises could be dealt with by
domestic measures and recourse to the IMF. From 1964, however, the UK deficits
had become much larger and available short-term credit had been fully exploited. The
situation, therefore, called for a new and less ad hoc solution, with a longer term
commitment. Parsons concluded, according to a hand-written note of the meeting by
Dealtry, that the problem was: ‘how can we give assurance to world at large that
we’re not in as exposed a position as we appear to be?’ 16 This emphasizes that the
target of multilateral support was to be speculative pressures due to market confidence
in the exchange rate rather than helping to resolve the underlying weaknesses in the
balance of payments. Nor was the support to be for the permanent reduction of the
Overseas Sterling Area’s (OSA) sterling reserves.
The responses of other central banks were split, mainly over the possibility of
identifying those movements in reserves due to the UK’s own balance of payments
and those that were beyond Britain’s control. More generally, the Belgian
representative de Strycker felt the BIS should not prescribe solutions but rather should
restrict itself to describing the problem. Emminger of Germany, Ossola of Italy and
Kessler of the Netherlands all supported more positive firmer proposals. In the end
Gilbert of the BIS was instructed to prepare a paper for the governors setting out the
various pressures on sterling from diversification, fluctuations in OSA balance of
payments and in non-sterling area balances, and to propose solutions. 17 The target of
8
support was to be those drains that were likely to be reversible or cyclical rather than
supporting a long-term contraction of the sterling balances. When Gilbert had visited
the Bank of England to gather background earlier in November 1965 he was warned
that ‘facilities usable only against movements in OSA balances would be unlikely to
inspire sufficient confidence either in the holders of those balances or in the holders of
NSA private balances.’ 18 The support could not, therefore, be directed exclusively at
the monetary reserves of the OSA.
The original BIS plan was for a line of credit of $1b to which the BIS would
contribute $75m. 19 The European/BIS share of the credit was $600m and the US
agreed to roll over its existing $400m to make a total of $1b. 20 The aim was to
provide a facility large enough to ‘convince those who hold their monetary reserves in
sterling that the value of their assets could not be affected by events outside the
control of the UK authorities.’ 21 By 26 December the total amount was down to
$700m of which the BIS would contribute $70m. 22
The Bank of England was very disappointed that the arrangement was only for 12
months in the first instance and discussed various ways to re-finance outstanding
swaps after 12 months, either through the BIS or the IMF. 23 In the end the Governors
agreed that the UK should approach the IMF for a standby to refinance outstanding
swaps. 24 On 3 March 1966, Parsons met with the Managing Director of the IMF who
agreed in principle to a refinancing standby for about $500m. But he noted that this
would require drawing on the GAB, which might be controversial since it required
government support rather than merely agreement by central bankers. 25 The French
ultimately came up with a scheme to avoid this by getting a commitment from the
British government that they would not draw on the IMF during the period of the BIS
support, so that these facilities would be available at the end of the 12 months for
refinancing. Cromer noted that this ‘this proposal would have the advantage of
avoiding the publicity inherent in the UK applying for a standby and would also defer
the question of further activation of the GAB. The fact that all this is very vague I
think suits our present attitude of mind.’ 26 The effect was essentially for the British
government to ear-mark $600m of IMF drawing rights to refinance the Basle funding.
The final form of the agreement was that the facilities used should not exceed by
more than $250m the UK’s drawing rights on the IMF.
At the meeting of experts in February 1966, it was agreed that there needed to be
some contribution from the UK itself to finance the impact of 15-20% of any
9
reduction in sterling balances ‘because the introduction of self-help by the Bank of
England would make the whole arrangement presentationally more acceptable’. 27
This was not enough for some of the governors, such as Ansiaux, who were
concerned that even 80-85% cover was too much. The UK hoped to resist any
element of ‘self-help’ above 15% 28 and responded with a plan to identify the amount
of changes in sterling balances that had a direct impact on reserves based on a
complex formula. This assumed that 100% of movements in NSA balances were
reflected in falls in the value of British reserves but that only 66% of reductions in
OSA balances cost the reserves, since about one-third was used to buy British or other
sterling area goods and services. Since the BIS had estimated that sterling balances
overall were likely to fall by $1250m–1500m, the Bank of England expected the
resulting burden on reserves over the next 3-5 years to be $900-1100m, neatly
justifying the requested support of $1b. 29 After much wrangling, the final solution
was that the UK was allowed to draw on the credit up to an amount of 50% of their
estimate of the drop in reserves attributable to a decline in the sterling balances.
Throughout these negotiations Salle of the IMF attended meetings at the BIS as an
observer, since the proposal included an IMF stand-by to the UK to cover part of the
credits offered by the European central banks. However, Schweitzer, Director of the
IMF, did not want the IMF involved in the technicalities of the agreement. 30
Schweitzer insisted that any stand-by offered to the UK would have to be on the usual
terms that would require a firm ‘letter of intent’ committing the British government to
constrain fiscal spending and domestic lending. 31 The IMF was proving itself much
less amenable to the British predicament than the BIS members. In the end, as was
explained above, a stand-by was not included in the agreement.
By June 1966, the UK managed to conclude a ‘Group Arrangement’ under which
several European central banks agreed to offer up to $600m in swap credits for nine
months to support sterling in the event of net reduction in overseas 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). The bench-line was further
divided into £3080m for OSA balances and £1220m for non-sterling balances. 32 A
separate agreement with France provided a further $90m in swap facilities (unrelated
to movements in sterling balances) and the US Fed agreed to hold up to $310m in
‘guaranteed sterling’, bringing total support to the round number of $1billion or 8.3%
of outstanding sterling balances. 33 The arrangement was designed specifically to
10
protect against speculative movements that might disrupt the international monetary
system by forcing a sterling devaluation. It remained in place (despite the subsequent
devaluation and the 1968 Basle Agreement) until it was finally liquidated on 29
January 1971.
The Treasury was not as enthusiastic about the Group Arrangement as the Bank
was, particularly since it constrained the Treasury from drawing on the IMF. When
the details were finalised at the end of May 1966 Armstrong of the Treasury wrote to
Cromer
in giving his agreement to the new arrangements the Chancellor was moved
less by enthusiasm for their quality and prospective benefits to us than by a
consideration of the risks, particularly in confidence in sterling, that might be
run in rejecting them. In particular, the comparatively modest scale of the
facilities, their rigid link with movements in the sterling balances and the
complex formulae by which recourse to them is to be calculated, are all
comparatively unsatisfactory features. However, even with these limitations,
they do constitute a reinforcement for sterling. 34
At the last minute the Bank of England feared that the Treasury would reject the
proposals once a link to an IMF stand-by to refinance them was dropped. In Fforde’s
view ‘In present circumstances, but particularly in the context of any future approach
by the UK to the EEC, this could only be interpreted as an almost incomprehensible
gesture of despairing defiance.’ 35 Armstrong’s remarks suggest that the Chancellor
was persuaded on these grounds.
Nevertheless, the 1966 Group Arrangement did not inspire longer term confidence
in future collective support. Three days after the Arrangement was announced on 13
June 1966, the Chancellor wrote to Cromer
In my opinion it would be unwise in the extreme to rely on the self-interest of
others in their desire to maintain parity of sterling for a sufficiency of support
in a future crisis… I have no doubt that if devaluation of sterling were to come
about serious antagonism would be generated world wide against this country
for jeopardising the international payments system through failing to pursue
domestic policies of a type acknowledged universally by individual countries
and the international institutions as appropriate to a situation which has been
clear to all to see. 36
The Chancellor seemed to view the Arrangement as a ‘last chance’ for British
governments to get their house in order, without which the prospect of devaluation
was becoming increasingly inevitable. Gavin’s study of American international
monetary policy shows that the Chancellor’s hunch was right and that the US Federal
11
Reserve did engage in detailed top secret contingency planning in anticipation of a
devaluation after the 1966 Group Arrangement, including the option of floating the
US$. 37
Despite its limitations, the 1966 Group Arrangement quickly became the
foundation of British hopes for wider support for sterling against diversification by
the OSA. The Bank of England’s Sterling Area Working Party of 1966 recommended
in November that ‘all possibilities be explored of extending the scope of any renewed
Arrangement to include an element of longer-term credit.’ 38 They feared that the
confidence effects of the Arrangement would be undermined if it became public that
it was of fixed duration. Other than exhortation to correct Britain’s chronic balance of
payments problems, and plans to use diplomacy to try to put a ‘brake’ on the process
of diversification, this was the only positive recommendation of the report.
Gradually, it became the Chancellor’s view that ‘building on Basle’ represented the
most promising way to achieve medium or longer-term funding for the sterling
balances.
As was the case for other arrangements, the first Group Arrangement was not used
as much as anticipated, due partly to its presentational impact on confidence and
partly because a further IMF stand-by was negotiated in September 1966. 39 In the
first six months the BIS engaged in $400m of £/$ swaps but the Bank of England only
withdrew $75m, all of which was provided by the BIS so that no individual country
was called upon to contribute. 40 In January 1967 the UK began to test the waters over
a renewal of the Group Arrangement and got the impression from the BIS that this
was most likely to be possible with little or no change in the terms. 41 In March 1967
the renewal was agreed with little discussion, partly since it had been so little used.
This was soon to change.
Up to the end of August 1967 only the BIS’s $75m had actually been drawn, but
on 15 September 1967 (two months before devaluation) a further $150m was drawn,
necessitating a call on participating countries. 42 At the same time it was agreed that
the UK could draw an amount up to 80% of the cost to reserves rather than the 50%
earlier agreed. 43 A further $100m in October in advance of the devaluation, and
$525m in November in the wake of the devaluation brought the total drawing to its
maximum. In February 1968 the Governors of the BIS agreed to another renewal of
the Group Arrangement with the proviso that ‘the Bank of England should, during the
coming months, make new proposals aimed at replacing, if necessary, the existing
12
facility by a more permanent arrangement’. 44 From March 1968 the entire facility
was drawn, as was the full $90m from France. The French contribution was
completely repaid at the end of November 1968 but repayments to other countries did
not begin until 16 September 1969, after which the UK repaid $75m per month. The
debt was retired with a final payment of $150m on 29 January 1971. All countries
had participated and were repaid in equal proportions. 45
In October 1967, the BIS arranged further multilateral support for a total line of
credit of $250m from European central banks and the Fed to repay the IMF standby
Britain had drawn in December 1964 that was due on 1 December 1967. The UK
reserve position had been adversely affected by the Israeli-Egyptian war, closure of
Suez Canal and a dock strike. The BIS acted as principal and then negotiated
bilaterally with other central banks to raise the funds needed, keeping the details of
the participation of these banks confidential. 46 The whole arrangement took a month
to conclude and was finalised just after the devaluation on 20 November 1967 and
began to be repaid in June 1968. This partly involved the British Treasury selling
notes denominated in European currencies to the BIS. 47
In summary, from 1961-1967 the UK came to rely on coordinated bilateral support
for short-term sterling crises that was used in conjunction with drawing on IMF standbys. By collecting this support from central banks, the UK avoided direct intergovernmental discussions. Although it must be assumed that European central
bankers discussed these arrangements with their governments, they did not need to
formally seek approval. On top of this short-term support, the precedent for medium
term lines of credit to support the diversification of reserves out of sterling was
established under the Group Arrangement of June 1966. The negotiations also gave
the European and US central bankers a much more detailed understanding of the
sterling balances and the sources of their volatility. Meanwhile, IMF had revealed
itself as reluctant to help in the management of the decline of sterling as a reserve
currency while the BIS had pushed forward to play a leading coordinating and policy
role in devising and negotiating the European and American packages as well as
hosting the information sharing meetings among central bankers and their experts. In
contrast, the IMF began instead to pressure the British government to conform to its
view of appropriate domestic measures to contain demand as a longer-term solution
rather than helping to finance Britain’s defence against speculators.
13
The Second Group Arrangement of 1968
The choice of whether to use the BIS or the IMF for a longer-term arrangement to
support the end of sterling as a reserve asset was influenced by the difficult
negotiations with the IMF over the support they provided at the time of the
devaluation of November 1967. The UK requested a stand-by of $1.4b from the IMF,
but the terms on which it was to be offered were difficult to agree. IMF officials were
wedded to hard and firm constraints on domestic lending and government borrowing.
It had been their policy throughout the 1960s to urge this approach on the British
government, but they had continually met with relatively weak responses. On the eve
of devaluation, the IMF tried to insist on quantitative targets for total net bank assets
through restrictions on private and public borrowing. 48 Their calculations required a
cut of £400m from the government’s projected budget spending of £1b to allow some
room for private borrowing. The Treasury, represented by Sir William Armstrong,
rejected quantitative targets and advised the Chancellor to forego the IMF support if
no compromise could be reached. The Chancellor was more amenable, but Goode
(the IMF negotiator) reported that ‘in his opinion the British are confident that the
Fund cannot afford not to lend’. 49 This led to a stalemate to the point where the IMF
delegation was due to return without agreement. At the last minute a compromise was
reached whereby the British government agreed in writing to keep their public
borrowing requirement within £1b in 1968. London was then subject to missions by
IMF staff to ascertain progress and make recommendations to the IMF board in
February, March, May, June and July 1968. Borrowing from the IMF definitely put
considerable pressure on British policy-makers to conform to the credit restraint and
fiscal policies favoured by that institution. At the May 1968 visit the IMF intended to
discuss longer term funding arrangements for the sterling balances. By this time,
however, the British had ruled out the IMF as the preferred route for such an
operation in favour of the BIS. The Americans would have preferred the IMF to be
the main organisation, even making a last minute suggestion to this effect in mid-June
1968. 50
After the renewal of the BIS Group Arrangement, the Bank of England began to
devise plans for a medium-term support fund to offset future diversification of the
sterling balances of the OSA. 51 This planning was interrupted by the devaluation but
finally, with the Chancellor’s consent, the Governor of the Bank of England proposed
14
such a plan to his Basle counterparts at the regular Basle meeting in the second week
of March 1968.
Events, however, soon over-ran this effort at forward planning. The gold pool
collapsed under speculative pressure on 15 March, throwing the ad hoc supports to the
international monetary system into disarray. At the emergency meeting of governors
to determine the way forward in Washington on 16-17 March, the Governor of the
Bank of England tried to use the newly volatile environment to press for direct longterm support for sterling against possible diversification. On the 16 March he asked
for a package of US$5b in credit through the BIS, but he was turned down. Roberto
Carli of the Bank of Italy suggested a system of US$ swaps and others suggested
various formulae for blocking parts of the sterling balances but the Governor resisted
these. 52 Instead, the central banks the following day offered pledges of $1.175b in
additional short term support, mostly from the USA, as shown in Table 3 below.
Table 3: New Support for sterling arranged on 17 March 1968
$US million
USA
700*
Germany
150
Italy
75
Belgium
50
Netherlands
50
Switzerland
50
BIS
100
TOTAL
1175
*of which $500 was an increase in the FRB swap facility from $1500m to $2000m.
Source: Note for the Record by RJ Wiles, 19 March 1968. PRO T318/191.
At this point unused facilities that had already been arranged amounted to $1436m
from bilateral and previous Basle facilities, plus $1400m in IMF standby, taking the
total support available to sterling to a headline total of just over $4b. 53
After the March crisis had receded, the Governor returned to the negotiation of a
medium term facility to ‘fund’ diversification of sterling reserves in the longer term.
On 12 May 1968 the Bank of England submitted a formal request for a facility of $2b
to cover diversification of sterling reserves that was expected to be at the least £150m
p.a. and at the most £700m p.a. over the next three years, but the response was
unenthusiastic. 54 The feeling in Europe was that a further call on BIS central banks
would have to be combined with some greater undertaking on the part of the OSA.
The Swedish and Swiss representatives at the meeting of experts to discuss the matter
15
at the BIS at the end of May suggested offering an exchange guarantee for the sterling
balances to inhibit diversification. 55 This meeting was held the day that Hong Kong
finally agreed to accept the HK$ bond scheme, which was a de facto exchange
guarantee for half of their sterling balances. 56
The Bank of England and the Treasury had been firmly against exchange
guarantees for sterling throughout the 1960s. Holders of sterling had asked for
exchange guarantees after the 1967 devaluation but had been refused. Not only would
a guarantee be expensive in the event it were used, but it would also undermine
confidence in all un-guaranteed sterling and so generate an unsustainable drain on the
British reserves. Also, the US was expected to protest since it would lead to calls for
exchange guarantees for official US$ balances. 57 However, once raised by the
Europeans as a necessary offset to multilateral support, and after the principal of no
guarantees had been breached in negotiation with Hong Kong, opinion began to
change. On 24 May 1968 Leslie O’Brien (Governor of the Bank of England) wrote to
Sir Douglas Allen at the Treasury that while his public view at the moment on
guarantees was that ‘we are not prepared to entertain such a possibility’, he wanted ‘to
be in a position, when our discussions are resumed in Basle on the 9th June, to be able
to indicate to my colleagues that the provision of guarantees might be possible. This
would undoubtedly be useful in my negotiations with them.’ 58 Parsons in New York
reported on 28 May that van Lennep had also suggested that if the OSA agreed accept
limits on their use of their sterling balances ‘they would be entitled to demand a
guarantee for their sterling’. 59 Thus, while the Swedish and Swiss suggestion at the
Experts meeting did not provoke explicit support from other representatives, opinion
in London was moving toward exchange guarantees as a counterpart of the Basle
Agreements.
At the experts’ meeting at the end of May the BIS experts also strongly supported
OSA deposits of foreign exchange that could be used to finance the facility rather than
drawing on European and American credit. These discussions reveal that Europe’s
patience with the continued calls to support sterling had worn thin and more inclusive
solutions were being sought. Not only was the UK to share more of the burden, but
the OSA would also need to contribute to resolving sterling’s reserve role on a
multilateral basis. European central bankers were also mindful of the requirement to
sell their continued support to their governments. At the 9 June governors’ meeting in
Basle, for example, Stopper observed that ‘parliamentary sanction would be required
16
and he was doubtful whether the Federal Government would wish to place legislation
before Parliament unless ‘it was sellable.’ The UK’s willingness to offer guarantees
was a great improvement. Diversification had to be reduced to a minimum, at least
until the UK’s own reserves could enable the balances to be repaid.’ 60
The Governor’s request to inject a guarantee into the Basle negotiations found
support in the Treasury from WS Ryrie, who advised the Chancellor to agree and the
Bank of England began negotiations on this basis in early June. 61 The Bank of
England Sterling Area Working Party confirmed in mid-June 1968 that an exchange
guarantee would have to be offered to the OSA in order to get European support for a
BIS scheme. 62 A scheme to offer a guarantee for 80% of official sterling reserves in
exchange for limits on diversification was quickly put to the Chancellor on the 19th
June and was then discussed in Amsterdam the next day with Ziljstra, Managing
Director of the BIS, who welcomed the plan. 63 This substantially changed the nature
of the ‘funding’ arrangement and really left the amount of support promised by BIS
partners as a nominal confidence booster.
The addition of guarantees was not at first enough to persuade Britain’s BIS
partners. The minutes of the Governors’ meeting in July at the BIS recorded Ansiaux,
of the Bank of Belgium who claimed to speak on behalf of the EEC members,
complained about the share of the burden placed on European central banks. His
comments are worth quoting at some length because they give a flavour of the
frustration felt in Basle:
‘whilst the Central-bank groups were asked to enter into precise commitments
concerning both the contingent amounts to be made available, the credit risk,
the period and the rhythm of repayments, these obligations were not matched
by similar commitments from the OSA central banks. Without a reciprocal
gesture it was difficult to see how the Six could accept the present UK
proposals. Consequently, some more specific commitment from the OSA
countries was vital.’ 64
In this way the Europeans put considerable emphasis on OSA deposits at the BIS to
cover initial drawings by the UK on the facility. Ansiaux went further and proposed
compulsory deposits by OSA countries that diversified their reserves, although the
BIS believed that voluntary deposits would be more successful and desirable. 65 The
meeting agreed that the OSA countries should be encouraged to make voluntary
deposits in the BIS that would be drawn on to support sterling diversification. In July
1968, the Chancellor asked Finance Ministers in the sterling area to make deposits
17
with the BIS, concluding ‘I would strongly urge you to consider making such a
move’. 66 This cut little ice with the OSA, however. By the beginning of September,
on the eve of the Basle meeting to conclude the arrangements, total OSA deposits in
the BIS amounted to $110 million of which $50 million came in after the July
Governors’ meeting and only $20-25 million could be attributed to the UK
negotiations. 67
The final British outline of the plan was put to BIS governors on 9 June 1968, but
the response was mixed, mainly because the governors could not commit their
governments to the necessary amounts of support. Political approval proved more
difficult to collect than anticipated. Belgium, France and Italy were particularly
reluctant and their deliberations carried on throughout June. The Americans showed a
considerable lack of understanding of the complexities of the sterling negotiations
when they suggested at the end of June that the British might conclude the guarantee
agreements with the OSA within 10 days before the next Basle meeting at the
beginning of July. They were told that this was completely out of the question, and
that no negotiations could begin until the safety-net was in place. 68 Deming of the US
Treasury finally agreed to the plan on 3 July on the condition that there was general
agreement from other countries, that the US share was ¼ to 1/3 of the total and that
the subject was discussed with some key Congressional committee chairmen. 69 After
a series of visits and discussions by the UK Financial Secretary with his European
counterparts, the BIS governors met in Basle on 7 July and agreed in principle
(reluctantly in the case of Belgium and France) to offer multilateral support. The
amount and distribution was not to be set until the UK had concluded its negotiations
with the OSA. 70
The terms were finally agreed at a meeting of the BIS at the beginning of
September 1968, once agreements with 30 OSA countries covering 77% of official
sterling assets had been concluded. The formula was an extension of the 1966 Group
Arrangement. If total sterling balances fell below £3080m (the level at 11 June 1966),
there was a $2 billion safety net in place. Table 4 shows the contributions of the
participating countries. Germany and the USA were the largest contributors, with
Germany increasing its share by 4.1% compared to the 1966 agreement. The shares
of others were reduced somewhat to allow for the inclusion of other Scandinavian
countries. France claimed that it could not contribute because of its own parlous
balance of payments position.
18
Table 4: Contributions to Group Arrangement 1 (1966) and Group Arrangement 2
(1968)
GA1 (US$m) GA2 (US$m) GA1 (%) GA2 (%)
BIS
75
80
8.2
4.0
Belgium
42.5
80
4.7
4.0
Canada
60
100
6.6
5.0
Denmark
0
37.5
0.0
1.9
Germany
145
400
15.9
20.0
FRBNY
310
650
34.1
32.5
Japan
40
90
4.4
4.5
Italy
95
225
10.4
11.3
Austria
30
50
3.3
2.5
Switzerland
50
100
5.5
5.0
Netherlands
42.5
100
4.7
5.0
Norway
0
37.5
0.0
1.9
Sweden
20
50
2.2
2.5
TOTAL
910
2000
100.0
100.0
Source: GILB5, BIS Historical Archive.
In the end, the UK only drew funds from Austria, Germany, Switzerland and Italy
under the 2nd Group Arrangement, and only for a fraction of the $2b total line of
credit. 71 In September 1968 $50m was drawn and then a further $550m in October
(partly to repay the Fed $300m), but this was the peak. From February 1969 the UK
began to repay and in April there was $500m outstanding. This was covered by
$236m of OSA deposits in the BIS, and $264m drawn from other countries
comprising $15m Austria, $120m Germany, $29m Italy and $100m Switzerland. 72
Ansiaux’s emphasis on OSA deposits thus bore dividends in the form of reducing the
claim on Europe by almost half. The exchange guarantee, combined with balance of
payments surpluses and the waning confidence in the exchange rate of the US$, meant
that most of the hard-fought $2b line of credit was not in the end used. By insisting
on a sterling guarantee, the European central banks had avoided providing support for
the decline of sterling as a reserve currency. The headline $2b support had its strength
only in presentation.
19
Figure 5: Outstanding Drawings on First (1966) and Second
(1968) Group Arrangements August 1967-January 1971
700
US$ millions
600
500
400
300
200
100
Ist Group Arrangement
Ja
n70
Au
g67
N
ov
-6
7
M
ar
-6
8
Ju
n68
O
ct
-6
8
Ja
n69
0
2nd Group Arrangement
The IMF could not give its support to the Basle Agreements. Immediately after
they were concluded there was a flurry of advice to Schweitzer that the IMF should
remain agnostic over the benefits of the agreements. David Finch, for example,
argued that ‘a segregated role for sterling countries does not seem to me to merit the
support of the Fund which has consistently argued against any arrangement which
separates countries, particularly any that discriminate against non-Ten [non-G10]
members’. 73 In the end, however, the official advice was a bit more forthcoming.
The Area Groups were told that ‘In any conversation with representatives of member
countries care should be taken to avoid any judgement as to whether or not the
proposed scheme or any provision in it should or should not be accepted by any
member’. Instead, representatives should be told that the IMF supported anything that
provided stability to the international monetary system and that the present proposal
‘offers a practical means of achieving this end, subject, of course, to negotiations of
terms acceptable to the parties involved’. 74 The IMF was thus caught between its
desire for a resolution to the problem of the sterling balances and the potential that
this solution would not be in the best interests of the holders, many of whom were
developing countries. The problems that the agreements posed for holders of sterling
balances are discussed in the next section.
20
Negotiating with the Sterling Area: July-September 1968
The negotiations with overseas holders of sterling reserves was a challenging race to
get agreement before the BIS meeting in September – described by Morse as ‘a
lightening tour of the OSA countries’. 75 The deadline left only three months to
conclude the most important formal agreements relating to sterling’s future. British
negotiators were sent in teams to the many official holders of sterling around the
world, reporting back regularly to the Bank of England and Treasury on the progress
of negotiations. They were sent out to set minimum sterling proportions (MSP) that
countries would commit to hold in their reserves, to set an interest rate payable to the
UK on these assets, and to set the guaranteed exchange rate. In the end, the charge for
the guarantee was reduced gradually in the wake of resistance from the OSA and
finally abandoned in negotiations with Australia and then with all others at the
beginning of September, at a cost of about £3.8m. 76 The proportion of guaranteed
sterling was initially offered for 80% of reserves, but in mid-August this was
increased to 90% in negotiations with New Zealand, which was then offered to all
countries. The MSPs ended up considerably lower than had been hoped. This was
mitigated to some extent by secret side-agreements about the level at which sterling
would be held in excess of the formal agreement. The divergence between public and
private commitments shows the political need of OSA governments to be seen
publicly to drive a hard bargain with the UK. The bitterness and stubborn-ness 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 Commonwealth
countries and colonial territories. 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 imperialism. The most intransigent members
of the OSA were Australia, Malaysia and Singapore, all of whom had substantial
sterling balances.
The British felt the greatest sense of betrayal during the negotiations in Singapore.
Haslam at the Bank described the Singapore negotiators as ‘tough, devious and selfcentred’. 77 At the time of the devaluation, the Bank of England assumed that sterling
made up 88% of their foreign exchange reserves. But a week after devaluation the
finance minister, Goh Keng Swee, announced that Singapore had been diversifying
their reserves and that the proportion was actually only about 50%. 78 The Bank of
21
England had not been aware of the diversification because the non-sterling assets had
been accumulated secretly through new reserves rather than by converting existing
sterling balances through the London market. In December 1967, Singapore converted
a further £10m to gold, prompting a sharp letter from the Chancellor to the Prime
Minister, Lee Kuan Yew regretting the diversification and asking for advice on his
future plans. The reply from Goh stated that this was an issue for Singapore only and
gave no indication of future plans or willingness to negotiate. In March 1968, a
further £10m in sterling was converted to gold and US$.
The negotiations between Singapore and London were bitter and prolonged and the
Prime Minister and the Chancellor each wrote to Lee near the end of August 1968 to
urge him to come to an agreement speedily in order to sustain stability in the
international monetary system. At this point, Singapore was aware of the agreement
with Australia for an MSP of 40%, although not of the Australia’s informal side
agreement to keep to a target of 47%. This precedent allowed the British to offer a
similar concession of 40% to Singapore, which was in the end accepted on 6
September 1968 and letters were finally exchanged on 19 September. 79
The negotiations with Australia were similarly embarrassing. The Reserve Bank of
Australia, and its governor Coombs, was particularly forceful in their advice to the
Treasury to diversify out of sterling. 80 The talks with the Australians dragged on
through July and August, much to the frustration of the Commonwealth Secretary. 81
The Australians wanted a lower MSP than Britain was willing to offer and were also
reluctant to be committed for as long as the proposed seven years. The British
negotiating team complained of a lack of urgency and concentration on the issue by
the Australians, who were preoccupied with domestic economic concerns such as
their government budget. 82 Australia linked their agreement to an undertaking from
the UK not to impose any further controls on capital flows from London to
Australia. 83 Personal contacts between the Prime Ministers on each side couldn’t
break the deadlock and extraordinarily the Governor of the Bank of England was
eventually sent out to Canberra to negotiate in person as the deadline of 7 September
loomed. Eventually, they settled at a three-year agreement with the proviso that if the
UK imposed capital restrictions there would be ‘immediate consultation’. 84 The
Australian MSP was 40% although there was a verbal undertaking to keep sterling at
the present level of about 47-48% of reserves, the difference comprising about
£56m. 85
22
At first it seemed that negotiations with Malaysia would be quite straightforward,
particularly in comparison with Singapore. Malaysia was deeply affected by events in
Singapore given the rivalry between the two states so soon after partition in 1965.
The more self-interested Singapore approach to sterling embarrassed the Malaysian
government when the extent of Singapore’s diversification was revealed. By contrast
with Singapore’s 50% of reserves in sterling, Malaysia held 77% of reserves in
sterling at the time of devaluation and suffered correspondingly larger losses. As a
result, the Malaysians fought hard for an MSP of 30%. Agreement could not be
reached and negotiations were suspended early in August to allow the conclusion of
the agreement with Australia to take place. By September 1968, the Bank’s view
was that ‘We all feel very strongly that the Malaysians are outdoing the Australians in
their intransigence’. 86
The failure to get agreement before the Basle meeting was
‘unfortunate but not disastrous’ and consideration began over possible sanctions or
other pressure Britain might exert. 87 A week later, however, Malaysia capitulated on
the MSP and agreed to 40% plus a private side agreement similar to that of Australia
(although they quibbled over whether it would be in writing). They also asked for and
got the Australian concession on future access to the London market to refinance debt.
The agreement was finally concluded after a personal meeting between the Chancellor
and Tan Siew Sin at the end of September.
Table 5 shows the range of MSPs finally agreed. Colonies had the largest MSPs,
reflecting the continuation of colonial monetary arrangements that had required 100%
sterling backing for local currency issue and the denomination of most government
reserves in sterling. Singapore and Malaysia both took their lead from Australia and
negotiated the same 40% MSP. India had already diversified their reserves and had
the lowest MSP.
23
Table 5: 1968 Basle Agreements
Final Agreement of Minimum Sterling Proportions
East Caribbean Currency Authority
Gambia
Hong Kong
Barbados
Mauritius
British Honduras
Bahamas
Bermuda
Ceylon
Ghana
Guyana
Malawi
Trinidad
Malta
Bahrain
New Zealand
Sierra Leone
Zambia
Nigeria
Jamaica
Ireland
Uganda
Cyprus
Dubai
Iceland
Australia
Malaysia
Pakistan
Singapore
Jordan
Tanzania
Kuwait
Libya
India
100
100
99
97
95
90
80
80
80
80
80
80
80
75
70
70
70
65
60
57
55
51
50
50
45
40
40
40
40
25
25
25
18
13
Figure 6 below shows the overall proportion of sterling in reserves of sterling area
countries. This shows the steady decline from 1964 to the eve of the devaluation. A
year after devaluation, just after the Basle Agreements were signed, the proportion
had fallen to 55%, after which it held relatively stable until the end of the decade
24
Figure 6: Sterling as a Percent of Reserves Held by Sterling Area
Countries
90
85
80
75
70
65
60
55
50
45
40
1964
1965
1966
Jun-67
Oct-67
Oct-68
Dec-68
May-69
Oct-69
Dec-69
The Basle Agreements were credited with restoring confidence to the sterling
exchange rate and thus ending diversification. In fact, however, they provided a
‘bottom line’, which was often considerably lower than the pre-devaluation
proportion and sometimes even below the proportion of sterling held at the beginning
of negotiations. The agreements had been designed to deal with a decline in sterling
balances and a possible devaluation of sterling against the dollar. In the event,
however, the opposite happened: sterling balances increased substantially and the
US$ was devalued against sterling in December 1971.
The operation of the agreements was complicated by the overall increase in
sterling holdings after 1968 due to the collapse of the US$ and growth in world trade.
After dipping in 1967-1968, sterling balances held in the Far East soared from 1969 to
£1.238 in 1971. This was about the same value of sterling that India, Pakistan and
Ceylon had held in 1947. Economic boom in Australasia also boosted the total
sterling held there to £1.124b in 1972. Sterling held as foreign exchange reserves by
the overseas sterling area as a whole rose from a low of £1.65b in 1968 to £3.16b in
1972. This was not due to the Basle Agreements. Indeed the growth of sterling
balances made the Basle agreements very unwieldy, particularly after the change in
parity with the US$ after 1971. Nevertheless, during the crisis of June 1972 (which
forced the sterling float) Malaysia, Singapore and Kuwait were the only countries
whose speculative diversification of official reserves contributed to the pressure on
the exchange rate.
In the end the weakness of the US$ meant the threshold for activating the
guarantee was not breached until October 1972 and the value of sterling balances rose
25
rather than declined as the economies in Australasia, East Asia and the Middle East
prospered at the end of the 1960s. As a result the Basle Agreement support was not
required. The sterling agreements were continued after sterling floated and after
many countries had shifted their peg from sterling to the US$ mainly to reassure the
exchange markets, although it was costly compared to borrowing in the Eurodollar
market.
Aftermath
The initial conclusion of the Agreements, while tortuous, was not the end of the story.
In February 1969 the Sterling Area Working Party reviewed the prospects for the
management of sterling. They acknowledged that while the Agreements had been
effective in ending diversification, the negotiations had permanently altered the
sterling area relationship by turning the official exchange reserves from ‘banking
liabilities’ into ‘contractual debts’. 88 In future, they suggested that the management
of sterling should be treated as part of the general reduction and restructuring of
external debt, although the short-term facilities that had supported sterling and the
British balance of payments for the past decade would need to be paid off before the
sterling balances could be reduced. The working party recognised the desire in the
UK and elsewhere to reduce sterling’s reserve role and not to increase sterling
balances, but rather rashly they saw no alternative to encouraging the increase in
private sterling holdings to help offset repayments of other debt, even at the cost of
higher UK interest rates: ‘it is better, despite possible criticisms, to acquire a banking
liability and see the proceeds to meet a firm debt payment than to decline the former
and seek to defer the latter’. They also recommended that when the Basle agreements
came up for renewal in 1971 they should be extended a further two years. They
concluded that ‘unless or until a satisfactory international solution is found it would
be better for the UK to continue a policy of debt repayment and consolidation;
controlled run-down of official sterling balances; and the maintenance of sterling as a
trading and financial currency’. 89
The Sterling Agreements came up for renewal after three years, in September
1971, just when the UK was forced by its European partners to commit publicly to
running down the sterling balances in an orderly way and to divest sterling of its
reserve currency status. 90 The coincidence of the commitment to Europe and the
26
expiry of the Sterling Agreements allowed the renegotiation to take account of the
need to reduce official sterling balances rather than try to sustain them. Bank of
England and Treasury officials leapt at the possibility of offering all countries a 10%
reduction in the Minimum Sterling Proportion. This concession would ensure rapid
and relatively easy renewal by almost all the participants. The Chancellor, however,
needed persuading that this would not lead to a precipitous fall in overall sterling
balances that might put a strain on the reserves. 91 In the end, he was persuaded by the
ease with which the renewals could be agreed (particularly with Singapore and
Malaysia as large sterling holders), the fact that hints had already been made to
Australia (so they expected a reduction in MSP), and the expectations of the French
that some progress would be made in the renegotiations to reducing sterling’s reserve
role.
In the meantime, the international monetary system suffered a near fatal blow with
the suspension of convertibility and then devaluation of the US$ in August 1971 on
the brink of the final conclusion of the agreements in September. The sterling
agreements were concluded before the new exchange rates were set in Washington in
December and so the exchange guarantee, which was predicated on a devaluation of
sterling rather than a devaluation of the US$, became effectively inoperable until after
sterling floated below the threshold in October 1972. This episode cost the UK £58m
in compensation. 92 As the next deadline for the Agreements to expire approached in
September 1973, pressure on the sterling exchange rate prompted the government to
announce a unilateral six-month extension until March 1974. This reassured the
markets and avoided another round of prolonged bilateral negotiations. The new
agreement also set an upper limit on the amount of sterling that would be guaranteed,
thus reducing the incentive to accumulate guaranteed sterling. The intervention rate
was adjusted to $2.42, but was breached as sterling floated down against the US$,
costing about £100m in compensation over 6 months. The instability in the
sterling/dollar exchange rate made the agreements a more expensive form of
borrowing than other sources such as the Eurodollar market, although the system was
credited with limiting diversification and steadying confidence in the sterling
exchange rate. 93 After some discussion, the outgoing Conservative government
recommended another unilateral agreement for 9 months from the end of March 1974,
mainly because of the threat to confidence in the market similar to September 1973 if
they were not renewed. The guarantee threshold was to be expressed through the
27
effective exchange rate rather than the bilateral US$ exchange rate to reduce the cost.
The sterling agreements were finally allowed to lapse in December 1974.
Conclusions
The retreat of sterling from reserve currency status was a goal of British policymakers from the early 1960s but it was not achievable unilaterally except at what was
perceived to be an unbearable political and economic cost. The potential risks of
unilateral action needed to be balanced against the prospect for a global solution to the
problem of reserve currencies that was under negotiation throughout the 1960s. Even
as the G10 negotiations got bogged down and the SDR initiative did not resolve the
underlying systemic problems, the UK continued to seek multilateral solutions to
sterling’s reserve currency status on the premise that it was in the interest of all major
countries that this be managed in a way that did not further disrupt the international
monetary system. Britain’s partners in these negotiations were occasionally frustrated
and irritable, but the informal environment of central bankers’ discussions at the BIS
allowed a multilateral settlement to be arranged. The IMF’s political approach and
the ideological breach with the UK over credit control meant that UK negotiators
preferred the informal multilateral discussions at the BIS, even though these
sometimes proved uncomfortable. The major breakthrough of the Basle Agreement
was the formal and collective involvement of overseas holders of sterling in the
process through the minimum sterling proportion negotiations.
The detailed terms of the Basle Agreement were less important than the fact that it
forced bilateral negotiations between the UK and 34 overseas holders of sterling with
a tight timetable in the summer of 1968. A failure to achieve agreement would have
been costly not only to the UK but also to the sterling holders since the Basle
Agreement was required to underpin the exchange guarantee. The wrangling over
details of the agreements was embarrassing and awkward for the UK, which had to
concede on many points of detail if not on the general principle. They also had to
make concessions about their future policy on capital flows to the developed
commonwealth. Without the firm deadline and the prospect of multilateral support it
is hard to conceive that the UK would have engaged in such bilateral agreements or
that the sterling holders would have trusted the British government to meet their
obligations under the guarantee.
28
1
This research was funded by the UK Economic and Social Research Council Grant Reference:
R000223973. The author would also like to acknowledge the excellent research assistance of Miriam
Silverman.
2
Quoted on top of Mynors’ reply dated 3 January 1963. Bank of England Archive [hereafter BE]
OV47/63.
3
J.S. Fforde to Thomson-McCausland, 2 December 1964. BE OV53/30.
4
C.R. Schenk, ‘Sterling, International Monetary Reform and Britain’s Applications to the EEC in the
1960s’, Contemporary European History, 11(3), 2002, pp. 345-369.
5
C.R. Schenk, 'Monetary Institutions in Newly Independent Countries: the experience of Malaya,
Ghana and Nigeria in the 1950s', Financial History Review, (4) 1997, pp. 181-198.
6
G. Toniolo, Central Bank Cooperation at the BIS 1930-1973, Cambridge University Press, 2005, pp.
381-85.
7
Ibid, p. 385.
8
11/10/64 DH MacDonald conversation in Basle with Bridge. BIS Historical Archive Registry Files
[hereafter BIS] - Bank of England Policy File 2/2 Volume 3 and 4 (1.4.1949-31.8.1968).
9
27/11/64 Conversations with Preston and MacDonald. The BIS credit line was a $250m stand-by in
gold for 3 months to be implemented by 3 month swaps. BIS Registry Files - Bank of England Policy
File 2/2 Volume 3 and 4 (1.4.1949-31.8.1968).
10
FER9. BIS. Quotation from Toniolo, Central Bank Cooperation, p. 391.
11
13/9/65 memo by H.H. Mandel (Manager BIS). BIS Registry Files - Bank of England Policy File 2/2
Volume 3 and 4 (1.4.1949-31.8.1968).
12
For discussions during this period see Toniolo, Central Bank Cooperation, pp. 391-94.
13
Cromer to Ferras (and copied to other Central Banks), 16 September 1965. LAR2 F01 7.18(14)
BIS.
14
Solutions to the Problem of the Sterling Balances, JS Fforde to Armstrong (HMT), 19 October 1965.
BE OV44/151.
15
G. Toniolo, Central Bank Cooperation, p. 393.
16
Dealtry’s record of the meeting of experts at the BIS 23 November 1965. Underlined in the original.
DEA13 7.18(12) Sterling Balances 1965-1966. BIS.
17
13/12/65 BIS Paper ‘le probleme des avoires en sterling’. DEA13 7.18(12) Sterling Balances 19651966. BIS.
18
15/11/65-Report of a visit by Milton Gilbert (of the BIS) on 12/11/65 by Fforde. BE OV44/152.
19
22/12/65 Balances Sterling Confidential. DEA13. BIS.
20
The final breakdown was slightly different with USA taking $310m and France $90m.
21
13/12/65-Paper by Dr Milton Gilbert entitled The Problem of the Sterling Balances. BE OV44/152.
22
26/1/66 English draft of Paper A. Dealtry Papers DEA13 7.18(12). BIS.
23
See discussion in HMT and Bank of England January-February 1966. BEOV44/153.
24
15/2/66-Note of the meeting on the 12-14th February 66 of the BIS Governors by MH Parsons. BE
OV44/153.
25
3/3/66-Meeting of Sir Maurice Parsons with the MD of the IMF. BE OV44/154.
26
19/4/66-Letter from Cromer to Armstrong (HMT) regarding the discussions in Basle. BE OV44/154.
27
Record of Meeting of Experts on £B 11/2/66. DEA 13. BIS.
28
22/3/66-Draft of paper by Hubback summing up the discussions with the BIS. BE OV44/154.
29
18/3/66 Note from BE Parsons to Ferras enclosing a copy of letter to central bank experts. DEA 13.
BIS.
30
Schweitzer to Salle, 31 March 1966. C/UK/315 Credit Arrangements and Maintenance of Balances
within Reserve Currency Area 1965-1969, IMF Archives.
31
Ibid.
32
Telegram from Bridge to MacDonald (BIS), 3 May 1966. LAR2 F01 7.18(14). BIS.
33
Salle to Schweitzer, 18 April 1966. At the meeting in April the French expert explained that Bank of
France would have less difficulty participating if it was not linked with the level of Sterling Balances
‘as the French Govt was opposed to any support of a reserve currency as such.’
34
Letter from Armstrong to Cromer, 26 May 1966. BE OV44/155.
35
Note by Fforde to Parsons, 2 May 1966. BE OV44/155.
36
Letter sent to the Chancellor by Cromer, 15.6.66. BE OV44/124.
37
Gavin, Gold, Dollars and Power. pp. 168-71
29
38
Working Party on the Future of the Sterling Area, 2 November 1966-Final Report. BE OV44/115.
This was a Treasury/Bank of England working party. It was to review events and prospects for the
sterling area since the last report in 1956.
39
Toniolo, Central Bank Cooperation, p. 395-7.
40
9/1/67 Note of meeting of experts. DEA 13. BIS.
41
11/1/67-Note by RAB on talks between personnel at the bank and various members of BIS
concerning the renewal of the June agreement. BE OV44/156.
42
Deposits with the BIS were as follows (all at 4 7/8%) Germ 42m; Austria 9m; Belgium 12m; Canada
17m; Italy 27m; Japan 11m; Sweden 6m. Mandel minute 13/9/67. File 2/2j2 Bank of England –
sterling balances – group arrangement – policy. BIS.
43
Telegram 15/9/67 Telegram from BIS to all Central Banks. File 2/2j2 Bank of England – sterling
balances – group arrangement – policy. BIS.
44
12/2/67 Minute of meeting of Board of Directors. . File 2/2j2 Bank of England – sterling balances –
group arrangement – policy. BIS. See also 13/2/68-Extract from Morse’s Memo to the Governors
concerning the Basle Governors’ meeting on the 11 February 1968. BE OV44/159.
45
The final schedule for the $525m from countries was Germ 145; Italy 95; Belgium 42.5; Dutch 42.5;
Canada 60; Swiss 50; Japan 40; Sweden 20; Austria 30m. File 2/2j2 Bank of England – sterling
balances – group arrangement – policy. BIS.
46
The UK had wanted $300m but since the actual repayment was only $251m the European banks
rejected this amount. The EEC contribution was $167m in the end. File 6/63 Refinancing Arrangement
for the UK – Policy. BIS.
47
The BIS offered this plan at the IMF meeting in Rio and it was taken up in October 1967 and
concluded on 13 November 1967. 16/10/67 DH MacDonald conversation with Bridge. BIS
48
Briefing paper 17 November 1967 by Goode and Albin Pfeifer for IMF Mission to London
November 1967. IMF Archives, C/UK/810 Missions.
49
Whittome to Managing Director Schweitzer reporting telephone conversation with Goode, 22
November 1967. IMF Archive, C/UK/810 Missions.
50
Conversation of Deming (US Treasury) with Chancellor, 17 June 1968. BE OV44/164.
51
Bank of England, ‘The Future of the Sterling Balances’, March 1968. UK National Archives
[hereafter PRO] T318/191.
52
16/3/68 Armstrong telegram to Chancellor of Exchequer from Washington, 16 March 1963. BE
OV53/38.
53
Note for the Record by RJ Wiles, 19 March 1968. PRO T318/191. See also telegram Armstrong to
Chancellor of the Exchequer, 17 March 1963. BE OV53/38.
54
Reported at a meeting of Parsons and Maude of IMF with Deming at US Tsy, 4 June 1968. BE
OV53/39.
55
27-28 May 1968 unofficial summary of discussion at the experts meeting at the BIS. STE1 F02.
BIS. Also reported by CW Mynors, 29 May 1968. BE OV44/162.
56
Telegram from Trench to Secretary of State for the Colonies, 28 May 1968. PRO T312/1936. The
Hong Kong deal had been leaking in the press since the UK government had offered the deal at the
beginning of May. Schenk, ‘The Empire strikes back: Hong Kong and the Decline of Sterling in the
1960s’, Economic History Review, LVII (3) August 2004, pp. 551-580.’.
57
Record of a meeting in Sir D Allen’s room between the Treasury and BoE representatives, 4 June
1968. BE OV44/162.
58
L O’Brien to Sir D. Allen, 24 May 1968. BE OV44/162.
59
Letter from Maurice Parsons to the Governor, sent from the Sheraton New York concerning a talk
with van Lennep, 28 May 1968. BE OV44/162.
60
Meeting in Basle of the Governors, 9 June 1968. BE OV44/163.
61
Paper by Ryrie for the Chancellor, 5 June 1968. BE OV44/163.
62
Final Report by the Sterling Area Working Party on Sterling Balances, 14 June 1968. BE OV44/117.
63
Minute of meeting in Netherlands Bank Amsterdam on 20/6/68 with BIS President Zijlstra, Ferras
and MacDonald with Morse and Raw of BE. STE1 F02. BIS.
64
Minutes of meeting of CB Governors at the BIS 7 July 1968. GILB 5 7.18(23), BIS.
65
DH Macdonald memo 3 July 1968. GILB 5 7.18(23). BIS
66
5/7/68 Ch of Exch to Missions to pass to Finance Ministers, 5 July 1968. BE OV44/224.
67
3/9/68-Progress Report by Fenton, 3 September 1968. The low level of OSA deposits remained a
disappointment for Ansiaux. BE OV44/171.
68
Note by CJM (BE) of a telephone conversation between himself and Solomon of the Federal Reserve
System, 27 June 1968. BE OV44/165.
30
69
Meeting of the Governor and Goldman with Deming and Daane, 3 July 1968. BE OV44/165.
Meeting of the central bank governors at the BIS, 7 July 1968. BE OV44/167.
71
On 25 April 1969 of the total line of credit of $2b only $400m was outstanding of which $155.2m
was raised by deposits from OSA and $244.8m from withdrawals by other countries. The only
countries involved are Austria ($3.8m) Germany ($120m), Italy ($21m) and Switz ($100m). STE1,
F01 4/5/71 Table of 2nd Group Arrangement with BE. BIS.
72
STE1 Stevenson files, F01, 4/5/71 Table of 2nd Group Arrangement with Bank of England. BIS.
73
David Finch to Schweitzer, 22 July 1968. C/UK/315 Credit Arrangements and Maintenance of
Balances within Reserve Currency Area 1965-1969, IMF Archives.
74
Memo to Area Depts from LA Whittome, 23 July 1968. C/UK/315 Credit Arrangements and
Maintenance of Balances within Reserve Currency Area 1965-1969, IMF Archives.
75
Minute of meeting in Netherlands Bank Amsterdam on 20/6/68 with BIS President Zijlstra, Ferras
and MacDonald with Morse and Raw of BE. STE1 F02. BIS.
76
Meeting in Chancellor’s room with Snelling and Governor of Bank of England, 4 September 1968.
BE OV44/224.
77
Haslam to Morse, 2 August 1968. BE OV44/242.
78
For a summary of the episode see BE OV44/247.
79
Telegram No 898 from de la Mare to CO. 4 September 1968. BE OV44/247.
80
Telegraph from Canberra to Commonwealth Office from Mr Rooke to Ockley, 10 July 1968. BE
OV44/225.
81
Telegram No 816 from Crosec to Chancellor, 22 August 1968. BE OV44/226.
82
Ibid.
83
Telegram from Mr Gorton to Harold Wilson, 29 August 1968. BE OV44/226.
84
Telegram from Sir Johnston to CO, 2 September 1968. BE OV44/226.
85
The Sterling Area Negotiations, by Bank officials, 4 September 1968. BE OV44/171.
86
Progress Report by Fenton, 5 September 1968. BE OV44/171.
87
Meeting of the Sterling Negotiations Group, Minutes by CJ Carey, 5 September 1968. BE
OV44/242.
88
Sterling Area Working Party Report, 12 February 1969. PRO T318/192.
89
Ibid.
90
Statement on Sterling by Mr Rippon to the EEC Ministers, 7 June 1971. BE OV44/191
91
Record of a meeting in the Chancellor’s room, 23 June 1971. BE OV44/191.
92
Meeting on the 26th under Neale to take stock of the situation, 27 August 1971. BE OV44/192.
Prime Minister’s views recorded in a note from Armstrong to Ryrie, 20 September 1971. BE
OV44/192.
93
Post-Election Brief, Sterling Balances, 19 February 1974. PRO T358/158.
70
31