Sterling area

Before the First World War, the British pound sterling was the most important international currency, and the City of London was the world's most important financial centre. More than 60 per cent of global trade was financed, invoiced, and settled in sterling, and the largest proportion of official reserves, apart from gold, was held in sterling. Although not all the territories of the British Empire used sterling as their local currency, most of those that did not pegged their local currency at a fixed rate to sterling, as did many foreign countries outside the Empire. When Britain left the gold standard in 1931, many countries that had pegged their currencies to gold pegged their currencies to sterling instead; this group of countries became known as the "sterling bloc", though the term "sterling area" was used officially from at least 1935.[4] When the Second World War broke out, the sterling bloc countries within the British Empire shared a desire to protect the external value of sterling; legislation was therefore passed throughout the Empire formalising the British sterling bloc countries into a single exchange control area.

Canada and Newfoundland did not join the sterling area because their dollar currencies had effectively been linked to the US dollar until they were forced off the gold standard in 1931 along with Britain. But while Australia, New Zealand, and South Africa all responded to the end of the gold standard by pegging their pounds to the pound sterling, Canada and Newfoundland instead pegged their dollars to the US dollar. So Canada and Newfoundland did not stand to gain by joining an exchange control bloc intended to protect the external value of sterling. The absence of Canada and Newfoundland from the sterling area was beneficial to Britain, as it curtailed capital flight to the North American mainland. Canada nevertheless introduced its own exchange controls at the outbreak of war; these were maintained until 1953. Canada's exchange controls were 'sterling area-friendly', in that their purpose was more to prevent capital flight to the US than to prevent flight to the sterling area.

Hong Kong originally declined to join the sterling area, due to its position as a centre for open market activities, but it joined at the end of the Second World War.

At the end of the war in 1945 the sterling area remained the largest and most coherent currency bloc in the world, and it provided its members with freedom to settle payments in sterling anywhere within the area without exchange controls. Members enjoyed the benefits of stable exchange rates and permanent access to the financial resources of the City of London. Meanwhile, the British government was able to use the pooled reserves of the entire area's membership to back sterling at times when there was a US dollar shortage.

Towards the end of the 1950s with the decline of the British Empire, political opinion rapidly shifted towards the view that trade with Europe was more important to the future of the United Kingdom rather than the historical preferential trading with the Commonwealth nations, which resulted in its attempts to join the European Communities (E.C) (the Common Market) which was formed in 1957.[5] The UK government devalued the pound sterling in November 1967 from £1 = $2.80 to £1 = $2.40. This was not welcomed in many parts of the sterling area, and, unlike in the 1949 devaluation, many sterling area countries did not devalue their currencies at the same time. This was the beginning of the end for the sterling area. The Basel agreements of 1968 were designed to minimise flight from sterling to the US dollar within the sterling area. On 22 June 1972 Britain imposed exchange controls on the sterling area, with the exception of Ireland, the Isle of Man, and the Crown dependencies in the Channel Islands. At the same time, Britain floated the pound sterling. According to Chancellor of the Exchequer Anthony Barber, this was to halt a recent increase in capital outflow to other parts of the sterling area.

Opponents of these changes argued that the real reason for them was Britain's impending entry to the EEC, and that France was concerned about Britain's close economic ties with the Commonwealth and the sterling area,[6] even though France continued to have special economic relations with its less successful former colonies in the CFA and CFP franc zones. The attempts by the United Kingdom to join EEC in 1961 and 1967, were blocked by the French, but eventually, on 1 January 1973, the United Kingdom became a EC member state after France formally lifted its veto on UK membership.[5]

One of the issues covered in the negotiations about the United Kingdom's entry to the EEC was the problem of "sterling balances", balances held in sterling in London by governments of countries which were members of the sterling area, in many cases the result of debts incurred by Britain during the war. France argued that these obligations were potentially a threat to the stability of the pound, and that this could cause turbulence for the whole of the EEC. Agreement on winding down these balances was thus a necessary part of the agreement for Britain to join the EEC, and removed the main reason for continuing the area.

Gibraltar was re-included into the new miniature sterling area on 1 January 1973, and the other sterling area countries responded as they chose—in fact, some of these countries had already taken similar measures throughout the 1950s and 1960s. Following the British government's decision in June 1972, some countries immediately copied the British government, and others did so over the next few months. Singapore continued operating sterling area exchange controls until as late as 1978, and Brunei did not alter its sterling area exchange controls until the year 2001.

After 1972 the sterling area was no longer what it had been, but the United Kingdom still recognised the existence of the 'overseas sterling area' as a distinct group of countries for the purposes of exchange control policy. In 1979, due to an improving economic situation and changed patterns of trade between Britain and the rest of the Commonwealth, Britain removed all its exchange controls: the sterling area had effectively ceased to exist.

The United Kingdom's pursuits to join EEC, from 1961 till its attainment of EEC membership in 1973, slowly phased out the privileged commercial ties of Commonwealth and UK. A period especially after 1973 especially given early discussions at the time of the UK’s entry into the EC within Europe at the time towards early Economic and Monetary Union which did not come to any fruition until the early 1990s with the UK getting a formal opt out saw further decline to the special trade links the Commonwealth nations had with the United Kingdom, and ended their privileged access to UK markets. Most members of the sterling area left the bloc to peg their currencies with the United States dollar.[5][7]

• The New Palgrave Dictionary of Money and Finance (1992)

• List of British currencies
• List of the largest trading partners of United Kingdom