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Volume 9 1948~1951

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No. 378 NAI TSCH/3/S14617/A

Memorandum by the Department of External Affairs
'Possible disintegration of Sterling Area.'
'Steps to safeguard Sterling investments and Government funds'

Dublin, 27 September 1949

  1. One of the serious consequences of the recent devaluation which needs to be considered is its possible effect on the sterling area itself and the likelihood of its disintegration in the near future.
  2. The cohesion of the sterling area has hitherto depended on two main factors - the prestige of the £ sterling, based on confidence in the policy of the British monetary authorities, and the dominant position of Britain in world trade, based on the competitive strength of British industry. It would be a mistake to minimise the extent to which these two factors have been weakened by the shifts and changes of the last decade. The recent devaluation of 30%, coming on top of the devaluation of 14% in 1939 and the devaluation of 30% eight years previously, has certainly robbed the £ sterling of much of its former prestige. British domestic policies within recent years have tended to lessen, rather than to increase, the relative productivity of British industry, which already, before the war, was barely half that of industry in the United States.
  3. It is not as if the recent devaluation could be regarded as a deliberate and voluntary act of British monetary policy. The universal feeling is that it was an expedient forced on Britain in consequence of Britain's own domestic policies that, faced with the choice of revising her domestic policies or altering the exchange rate, the British Government, with an eye to its own position rather than the interests of the sterling area as a whole, chose the latter course - and, in the same circumstances, would do so again. A resultant sense of uncertainty in other sterling area countries is inevitable. The question is being asked with increasing insistence whether the sterling area can continue to exist if Britain, the centre and banker of the whole system, persists in utilising the Sterling Area Funds for her own purposes and in spending more than she contributes, with consequent strains on the exchange rate of the currency common to the system as a whole.
  4. Other circumstances exist which would favour any tendency towards disintegration which develops in the sterling area. Some of the most important members of the area, which were debtors to Britain in the past, have now a creditor position vis-à-vis that country. Several of them are in a better position, both on over-all and on dollar balance, than Britain herself. Sterling area primary production, which constitutes the bulk of the exports of other sterling area countries, is far more competitive vis-à-vis the dollar area than British industry. Sterling area countries anxious to attract foreign investment are uneasy at the effect on investors of an unstable exchange rate. Finally, the fact that the payments relations between the sterling area as a whole and other countries are determined by bilateral agreements negotiated by Britain alone (usually with an observance of the forms, rather than the substance, of consultation) is unpopular with other members of the sterling area as constituting a restriction on their autonomy in commercial treaty relations from which they would be glad to escape.
  5. What effect these various factors are likely to have on the structures and cohesion of the sterling area, only time will tell. Much will depend on the extent to which the recent devaluation succeeds in achieving its objectives. Opinion abroad is very reserved on the prospects of its doing so. In their official comment on the British Government's decision, the United States State Department said that 'devaluation, to be effective, must be accompanied by internal measures to reduce costs and increase productivity'. A survey of opinion in Wall Street made by a prominent staff writer in the 'New York Times' concludes thus:-

    'The consensus of opinion was, however, that only the passage of two or three months will disclose whether or not Britain's move has been wise. If exports to dollar areas during the closing quarter of this year show a sharp rise (an advance of 40 to 60% compared with current levels), it was said the step will have been justified. If the increase in sales falls below 30%, the consequences to Britain may be disastrous, bankers said.'

  6. It would be wrong to assume uncritically, at this stage, that the recent devaluation of the £ will by itself solve the problem which led to it. On the other hand, the prospects of action by the British Government to aid the solution of the problem by reducing living standards in Britain are, to say the least of it slight. If, after six or twelve months, the initial problem remains unsolved in spite of the devaluation of sterling, the whole future of the sterling area will certainly be placed in serious jeopardy. Our problem now is to consider what action, if any, we can usefully take to safeguard our interests so far as possible, in the event of a break-up or contraction of the sterling area.
  7. One of the most frequent criticisms brought against the monetary policies of Irish Governments in the past is that the holding of all our external assets in a single currency exposed them to special risk and deprived them of the security they would have enjoyed if they had been more widely 'spread'. Certainly, there is little doubt that, the exercise of objective prudence and foresight should have prompted the transfer elsewhere of some at least of our holdings in sterling before sterling ceased to be convertible. Our existing holdings in sterling still enjoy the advantage of free transferability within the restricted arc of the sterling area - an advantage which, however, they would almost certainly lose if the sterling area were to break up. It is an essential interest for us, therefore, with a view to providing against any such eventuality, to take whatever legislative or other steps we can to bring about a position in which our external assets, instead of being held exclusively in United Kingdom funds and securities, are distributed as widely as possible over the currencies of the other members of the sterling area. Present circumstances being what they are, it is merely a measure of elementary prudence to ensure that our foreign assets are secured, not on the economic resources of the United Kingdom alone, but on those of the sterling area as a whole. The Minister for External Affairs urges that a report making concrete proposals with regard to the steps to be taken be submitted to the Government as soon as possible.
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