Britain as a debtor: Indian sterling balances, 1940–53

Abstract

The British war effort in the Second World War depended on US Lend‐Lease and the accumulation of sterling balances by other countries, including the Empire. By the end of the war outstanding balances were equivalent to 60 per cent of British net receipts under Lend‐Lease. Of the total sterling balances, about a third was accumulated by India. This article seeks to evaluate the costs incurred by India in the reduction of balances after the war. The accumulation of balances and their use to repatriate India's sterling debt is described. British efforts to convince India to accept a partial cancellation of the balances are analysed, singling out the crucial role of Keynes. The negotiations after independence are detailed, including releases, transfers to Pakistan, settlement of pensions, purchase of military stores, and gold sales. The possible contribution of British divestment to reduce outstanding balances is assessed. The Indian case is compared with those of other holders, such as Portugal, Brazil, Argentina, and Egypt. The links between the accumulation of sterling balances and inflation are considered. In the end there was a significant reduction in the purchasing power of sterling balances, but not for the reasons anticipated by London.