Finance and Empire: The Dilemma Facing Great Britain in the 1950s

Abstract

history of Great Britain's foreign relations requires an understanding of financial relationships, owing to Britain's special role in the world-wide economic system: sterling provided the principal means of exchange in international trade since the nineteenth century. In dealing with both foreign countries and its empire, therefore, Britain had accepted the role of the world's banker and the obligation it entailed to maintain large reserves for the settlement of debts in order to secure the stability of sterling.1 Britain's cosmopolitan approach to trade and finance, derived from a nineteenth-century preference for free trade, was replaced in the 1930s by a system of imperial preferences that limited free trade to the colonies and other countries within an emerging sterling bloc. On the outbreak of the Second World War, the convertibility of sterling was suspended: free movement of goods and payments was confined to the so-called sterling area, and discriminatory measures were implemented against the rest of the world. These allowed the British to manage transactions with the dollar area through a pooling system, and they provided a mechanism whereby other members of the sterling area accumulated sterling balances whenever their exports were not balanced (or requited) by imports. The balances acted as a form of credit that helped Britain to support its balance of payments. However, they also represented claims on Britain that might one day have to be met. Britain had to find ways to limit this risk while enhancing the performance of the sterling area. Such financial considerations were an important influence in the 1940s and 1950s on Britain's relations with the United States, Commonwealth members of the sterling area, and Europe. The United States, as Britain's principal creditor, had to be persuaded to act predictably, given Britain's agreement at Bretton Woods in 1944 to move towards convertibility, but