Abstract
The management of foreign exchange reserves has recently attracted attention from both policy‐makers and historians. Historical research has focussed on the nineteenth century and the interwar period, with less attention to the strategies of smaller countries in the final transition from sterling to the dollar in the post‐1945 period. This article examines the evolution of reserve currency policy from the perspective ofAustralia andNewZealand in the 1960s and early 1970s. As in the 1930s, economic uncertainty and a shift in global economic power prompted changes in reserves strategy. Patterns of trade and debt and falling confidence in British economic policy prompted a move away from sterling, but the timing and extent of this transition were affected by the fragility of the sterling exchange rate, lack of alternative assets, and continued dependence on the London capital market. The choices forAustralia andNewZealand were thus constrained, but they were able to leverage their position as holders of sterling to engage in agreements that provided an exchange rate guarantee for their sterling holdings and continued access to the London capital market. This mitigated the effect of the final global transition from sterling to the dollar while protecting their interests.
Highlights
The management of foreign exchange reserves has recently attracted attention from both policy-makers and historians.This interest was prompted in part by the accumulation of large reserves by China and other surplus countries in the 2000s, and by debates about the future of the US dollar as the balance of the global economy appeared to shift
In investigating past episodes of changing global reserves portfolios, Eichengreen and Flandreau found that the dollar briefly surpassed sterling as the main international reserve asset in the interwar period but that sterling reasserted its dominance by the time of the Second World War.[1]
This article examines the reserves policy developed by Australia and New Zealand to show how their portfolios were diversified during the 1960s and 1970s and the factors that were most prominent in their portfolio management
Summary
In April 1968 the deputy secretary to the New Zealand Treasury advised the Bank for International Settlements (BIS) that ‘as a result of the possible future pattern of trade of NZ, his country’s reserves would naturally become diversified without the need to convert. Note: Reserves are overseas assets held on the balance sheets of the Reserve Bank and central government, and exclude the overseas assets of the commercial banks as well as debt denominated in New Zealand currency but held abroad. Data are valued in Australian dollars at current exchange rates, but valuation effects are not significant until the 14.3 per cent sterling devaluation of 1967. 35 Bank for International Settlements Archives, Basel (hereafter BISA), 2/319, Reserve Bank of New Zealand Wellington 1954–91, note by R. Deputy secretary to New Zealand Treasury, 17 April 1968
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