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Dollar Shortage and the Sterling Area

A characteristic of the world's trade sińce the war has been the so-called shortage of dollars and the inconvertibility of sterling. The United States and Canada, untouched by the devastation and physi-cal destruction of war, had both had their industry and agriculture expanded to supply just those commodities in which their allies had been deficient. North America was the obvious and indeed often the only source of supply for many of the stores urgently needed elsewhere for reconstruction and rehabilitation. Everyone after the war needed dollars to buy American goods. But no one then had goods to sell to America, even if the Americans had been willing to buy. No one conseąuently could get dollars except by gift, or loan, or grace of Congress and of the Dominion Parliament. Once gone, a dollar might never be replaced. Dollars outside North America were not held as working balances but hoarded as last reserves. No one parted with dollars except to buy goods for their own necessary and national purposes from Canada and the U.S.A. No Treasury, in these circumstances, could accept an unlimited obligation to buy back their own currency for dollars. The reluctance of one Treasury to redeem their own currency with the one article, the dollar, which foreign holders principally want, was promptly reflected in the un-willingness of other Treasuries to accept the currency in ąuestion. No Treasury could afford to acąuire holdings of any foreign cur­rency (other than the dollar) larger than they immediately needed. If Treasuries were not prepared to take other currencies, except in limited amounts, it followed, sińce one currency is exchanged for another, that they could not allow the free sale of their own. But to observe all this is to observe nothing more nor less than the fact that currencies subject to these limitations cannot be freely exchanged and have become inconyertible.1 1A useful parallel may be drawn with the course of a (domestic) financial crisis in the City of London, say, in the early part of the nineteenth century. Once the boom had broken and the wave of bankruptcy had begun, City men wanted all the cash they could lay their hands on to meet their own emergencies, proved, feared or still unforeseen. The Bank of England became the only source of cash and, in the days before the Bank had, semi-officially at least, assumed its later character of a lender of last resort, there could be no assurance that cash would be forthcoming. The Bank had first to declare its willingness to lend, to disclose the securities which would be accepted and the terms to be imposed. Nobody, until that declaration had been made, would part with the cash he had, unless the alternative was bankruptcy. Nobody, conseąuently, was sure of getting cash, however good his security. Prudently managed but unfortunately placed houses A dollar shortage can be eased by an increase in the supply of dollars. It can be overcome by reducing the demand—or its conse-ąuences can (sometimes) be avoided by measures designed to in­crease trade between the members of the non-dollar world. Increase in the supply of dollars lay with the Americans. It is they who would have had to increase the value and volume of their imports, lend abroad or make grants in aid. The United States citizen does not yet buy from abroad nearly so much as British residents in the United Kingdom; and few could have really expected that, in the circum-stances of the post-war world, American industry and American labour would have welcomed an invasion of their home market by foreign manufacturers. But American imports have certainly increased. Goods brought into the United States are now, by volume, 59 per cent higher than the annual average of the three pre-war years; and United states imports of goods and services (all debits) have exceeded those of Great Britain sińce devaluation. Immense sums, too, have been advanced by way of direct aid; and if American capitalists have not lent more abroad, there has been little encouragement to do so in an age in which investment in the under-developed countries is too often seen as the engine of oppres-sion and no longer welcomed as the means of release from arduous and ill-rewarded toil. One cause of the extraordinary post-war demand for dollars has been the world's need for industrial goods of American origin. But Great Britain is also a supplier of similar goods; and the dollar shortage might have been removed altogether had British merchants been in a position to supply goods taking the place of those for which the world was then going to the United States. By a sufficient lower-ing in the price of British goods in relation to the American (and later the Japanese and German) products, and by a shortening of the time of delivery, it is at least conceivable that foreign merchants could have been attracted to Great Britain to buy in preference to the United States. Sterling goods, had so great an expansion of British exports been practicable, could thus have been substituted for the American dollar goods then so much in demand. The world would no longer could be and were, forced into bankruptcy, not because their liabilities exceeded their assets but because they had been caught by the crisis temporarily short of ready cash. Once the Bank began to advance the crisis was over. The shortage of cash was eased, good security became marketable once more and solvent firms regained their liquidity. The correspondence with the post-war international scenę is close. Convertibility could not be restored or multilateralism re-established— understood as the discharge of debts incurred in one currency with credits earned in another—until the shortage of the international currency had been overcome. be driven to buy over American counters for lack of any other source of supply—and there need have been no extraordinary de­mand for dollars sufficient to create so embarrassing a scarcity. table 10 united states and united kingdom Imports of Merchandise (f.o.b.) in billions of U.S. Dollars United States United Kingdom (£1 = $4.03) (£1 = $2.80) 1947 5-8 6-3 1948 . 7-2 7-2 1949 . 6-7 8 0 5-5 1950 . 90 6-7 1951 . 110 9-7 1952 10-8 8-3 . 1953 . 110 81 Source: United Kingdom Balance of Payments, 1946-54 (Cmd. 9291). U.N. Statistical Year Book and Monthly Bulletin of Statistics. table 11 united states and united kingdom Total Imports of Goods and Services in billions of U.S. Dollars United States United Kingdom Imports of Goods and Services Total £1 = $4.03 £1 = $2.80 "Military" * "Other" 1947 . •5 7-8 8-3 8-9 1948 . •8 9-5 10 3 9-5 1949 . •6 90 9-6 10-3 7-1 1950 . •6 11-5 12-1 8-2 1951 . 1-3 13 8 151 11-9 1952 . 1-9 13 9 15-8 10-6 1953 . 2-5 14-3 16-8 10-2 Source: United Kingdom Balance of Payments, 1946-54 (Cmd. 9291). Economic Report of the President, 1953. * Comprising purchases in foreign countries by the U.S. military forces and authorities both for use abroad and for import into the U.S.A.; expenditure of U.S. troops abroad; and 40 per cent of the total cost of basie military installations under N.A.T.O. paid for by the U.S.A. Sterling instead would be in demand and the dollar shortage would have disappeared. An effort on so great a scalę so soon after the war could not have been looked for. The task, indeed, presented by the attempt to out-sell the world against the competition put up by American efficiency, German habits of industry and the Japanese standard of life, is a formidable challenge and likely to remain so. British exports have been steadily increasing in volume and value and it is to be hoped will go on doing so. The condition of the export trades remains the constant care of Government and of leaders of industry; and in 1949 a direct step was taken to reduce the dollar prices of British goods when the official rate of exchange was depreciated from $4.03 to $2.80. But the British have been caught between the refusal (and inability) of the Americans to import and to lend; and the social and political conseąuences of exposing British industry to the fuli rigours of world competition. Temporarily at least, a way out had to be found and close co-operation with the "Sterling Area", formed prin-cipally from the countries of the Commonweałth, offered an escape from the dilemma as congenial to Imperial sentiment as to the chauvinism of those who resented Britain's dependence on the United States. The origins of the sterling area are seen by some authorities in the group of countries which, even before the abandonment of gold in 1931, had done most of their trade with Great Britain and had been accustomed to hołd their central currency reserves in sterling in London rather than in gold in their own yaults.1 The outline became more distinct during the depression. The countries of the Empire (except Canada), and certain other nations, preserved the link with sterling when the United Kingdom abandoned gold in September 1931. The Commonweałth (this time including Canada) arranged at Ottawa a year later for a measure of mutual (imperial) preference between themselves which discriminated correspondingly against trade with countries outside. The sterling area as such was formally constituted during the war. The "scheduled territories", as the sterling area is now officially known, comprised the United King­dom, Eire, Australia, New Zealand, South Africa (until 1953), India, Pakistan, Ceylon, the Crown Colonies, mandates and British pro-tected states, Iraq, Transjordan, Iceland and the Faroes. Each member undertakes (and can be reąuired if a dependency still subject to H.M. Government in the United Kingdom) to contribute to a 1D. R. Wightman: "The Sterling Area" {Banca Naziomie del Layoro Quarterly Renew, No. 18, July-Sept. 1951). common pool the gold, dollars and other hard currencies earned in trade outside the sterling area. Members are credited in exchange with inconvertible sterling at the official rate. Sterling, inconvertible outside, is accepted in all transactions between members of the sterling area; and all members hołd in London (as a sterling balance) to their credit, all sterling not immediately reąuired. The day-to-day management of the pool is entrusted to the Exchange Eąualisation Account (Bank of England) in London, and it is governed by policies laid down from time to time at meetings of the Commonweałth Finance Ministers. The reąuirements of each of the scheduled territories, including, of course, the United Kingdom, for imports from the dollar area are a claim upon the hard currency earnings of the sterling area as a whole. In determining on the dollars and the other hard currencies which may be spent in satisfying the import reąuirements of any one member, allowance clearly has to be made for the drawings of all others. The dollar imports which can be allowed in the United King­dom are thus limited by the claims of all; and conversely, of course, the balance of the United Kingdom's dollar account can be (and on occasion, has been) seriously prejudiced by an unforeseen and unwelcome extravagance in dollar purchases by one or other of the larger Dominions. The detail of the arrangements between the scheduled territories governing the drawings of each have never been disclosed nor can it be expected that they should be. The manage­ment from London of such an undertaking could never have been successful in an atmosphere warmed by the public discussion of open compromises all too openly conceded! The members of the sterling area are the sovereign independent states of the Commonweałth and colonial territories now rapidly emerging from dependence through tutelage to nationhood. They have come together voluntarily in a loosely joined association for benefits which, though mutually enjoyed, may appear nevertheless to be uneąually shared. The Dominions and the colonies supply much of the foodstuffs and the raw materials needed in the United Kingdom to feed and keep the population in work. They also supply commodities such as rubber, tin, cocoa and wool, all of which are sold for dollars in the United States. The United Kingdom is the market for much of the primary produce of the Commonweałth; and the sterling area provides a shelter behind which the industry and trade of the United Kingdom can rest, protected from exposure to the fuli rigours of world competition by the willingness of the scheduled territories to accept and to hołd sterling in return for supplies of foodstuffs, raw materials—and dollars. The Common­weałth, and particularly the colonial territories, need much capital for development. They look to the United Kingdom as the most obvious and proper source from which to draw the manufactured goods, credits and other facilities, such as technical skiłl, which they so desperately need if their materiał progress is not to be indefinitely delayed. There are always two sides to a bargain, even to one which, as in this case, is not explicitly drawn, but has been arranged more as a matter of convenience between friends, some of whom regard each other as members of the same family. The shelter afforded by the sterling area to the British export trades is conditional and not absolute. With sterling inconvertible, we have been expecting our sterling area suppliers to accept promissory notes redeemable only in British goods and services. Exports of British goods and services have to be reasonably competitive in price, ąuality and speed of delivery with the rival products of, say, the United States, Germany and Japan, or the advantages to be secured from the arrangement may redound too much and too obviously to the benefit of one of the parties, to the conseąuent detriment of the partnership as a whole. The Commonweałth and the sterling area are not quite coter-minous. Some of the scheduled territories are not members of the Commonweałth; and some members of the Commonweałth, par­ticularly Canada, are not members of the sterling area. Canada, among other things, is the supplier of wheat. Canada is a dollar country and Canadian wheat costs dollars. Canada thus occupies a special position in trade with the United Kingdom. As long as Canada remains in the Commonweałth but outside the sterling area, Great Britain will need dollars and British trade cannot be wholly sheltered behind the rampart of imperial preference and inconvertible sterling. The proposal for a common market to be established between six European countries is certainly relevant to this discus-sion, but the terms, if any, on which Great Britain will be associated with this free trade area are undecided as the text leaves the authoris hands in November, 1956.