Britain Holds Tight Control Of Dollars For Sterling Area

Auckland Star, Volume LXXVI, Issue 236, 5 October 1945, Page 4

Britain Holds Tight Control Of Dollars For Sterling Area

By E. C. FRANKLIN, M.A., F.R.E.S., r\EVELOPMENTS in the past week or two have brought into the forefront the powerful position of Britain as controller of dollar exchange for nearly the whole of the Empire and for numerous foreign countries within the sterling area. The exception inside the Empire is Canada, which is in a special and peculiar position because of its proximity to the United States and because of the interlocking interests of many American companies in Canadian industry and finance.

New Zealand, Australia, South Africa, India and Burma, the Scandinavian countries, the ' Low Countries, Egypt, the Argentine, and the Netherlands East Indies are to-day so strongly bound up commercially and financially with Britain that all their dollar exchange is arranged through London. This situation had its origin in the negotiation of the Ottawa agreements about 12 years ago.

At Ottawa a powerrul nucleus was formed' for the creation of the sterling bloc, and in the years which followed other countries with a large stake in the British market found it to their advantage to come in for the benefit and safeguarding of their exporting interests. It was natural that countries so closely bound' up in trade with Britain should acquire whatever dollar funds they required through London, with the result that the position and influence of London as a money market was extended and strengthened.

Lop-sided Trade Over the war years Britain's trade with the great majority of the countries in the sterling bloc became heavily one-sided, and continues to be tilted strongly in their favour and against her as their principal customer. To-day Britain stands as the greatest buyer of the world's surplus exports, and in that respect occupies a commanding trade position. She is also the repository for large accumulations of exchange, funds which the countries closely related to her in trade have amassed in recent years.

New Zealand's holdings of overseas exchange, of which all but a small fraction is kept in London, amount to £85,000,000, with the Reserve Bank sitting on £71,000,000 and the six trading banks sharing the balance. Australia's holdings, while not proportionately as great as New Zealand's, are also a powerful reserve, and Canada has an enormous sum. If the figures for India, South Africa and the others were added, to-arrive at a grand total for all the countries in the sterling'bloc, the result would be truly formidable.

It has been stated in Britain that the most prosperous of the sterling countries and a number of other nations, of which the United States is chief, have been enriched by at least £4,000,000,000 through Britain's sacrifices to win the war, and that they should now be prepared to part with some of their credits in the general squaring up of war liabilities. This .is a matter that may have to be thrashed out at a conference for which the present Washington talks may prepare the way. As conditions are to-day, the sterling creditor countries have, of course, only limited use for the funds

J they hold in London, and cannot dis-. pose of them as they might wish. They are entirely dependent on Britain for allocations of dollars, and trade is so out of balance because of Britain's restricted industrial capacity due to the war that in the absence of some major international development, the funds must continue to be swelled for some time to come. Not one of the sterling countries, except Canada, has access to dollars bj\ any other channel than through London. Period of Rationing Britain's economic needs are so great, while her financial resources are so depleted, that' she feels compelled to deny the members of the sterling bloc all but a small part of the dollar currency they could afford to purchase by the use of their abnormal sterling holdings. All the countries allied with Britain in this economic unit, which includes probably at least one-quarter of the world, must therefore accommodate themselves to a condition of severe rationing so far as dollars are concerned. They have built up their sterling funds, and, failing any other arrangement, if they cannot convert them into dollars apparently they must await the time when Britain is able to give payment in goods. It appears that there is no possibility of rapid utilisation of these big balances. Industrially Britain is not equipped to supply quickly the huge potential demand represented in these funds. For countries like New Zealand, which have their eggs in the sterling basket, it is thus clear that the outlook to-day is one of dollar exchange rationing over an extended period, and of intensive competition for British goods. To vary the metaphor, the sterling creditor countries are virtually marooned in Britain, with no bridge by which to gain access to the United States, except a narrow, periodically lowered lifting span, controlled by Britain. They have no power to pick up the proceeds of their wartime export surpluses in London and carry them away for disposal elsewhere. Hence their prosperity and economic welfare are meanwhile inextricably bound up with Britain's.

Below Old Parity Now, as to the rate or exchange. Sterling is to-day on a basis of 4.03 United States dolla'-s to the pound, substantially below the old normal parity of 4.86 dollars, i If the exchange ceased to be pegged and were allowed to go free, it is possible that the pound would diminish still further in value and the dollar increase in value. Actually, a much lower rate than the present was reached at one ' stage after the last war, when the minimum recorded was 3.20 dollars to the pound.

If a further fall occurred, the New Zealand, Australian and other currencies allied with sterling would, of course, lose value at the same ■time, presuming that their present sterling relationships remained unchanged. But should they so remain? Is there any reason -why the New Zealand pound should continue to be regarded as worth only 16/ in Britain? Would this rate continue for a single day if control were suddenly released? What, is much more likely is that our. pound would take a leap upward and in a brief time be on equality with sterling. A similar, forward move, perhaps to varying degrees, could be expected by Canada, South Africa, Australia, arid, others.

. • There is, by the way, a fairly close correspondence between the amount of inflatidn in the bank note issue which occurred during tlie war in Britain and in Nev Zealand. Taking June, 1939, as a basis of 100, the index figure for Britain in September last year was 231, and for New Zealand 217. The American index was 419, the Australian 440, and the Canadian 387. This suggests that New Zealand and Britain have held the reins of stabilisation more tightly than most other countries, and that they have been marching almost in step. Such restraint should be to our advantage in the recovery period, when major shocks to trade should be avoided as much as possible.

Britain's export problem to-day is lack of productive capacity to meet the demand, America's is lack of power to sell what she is able to produce. Now that lend-lease has ended, the outstanding barrier to American export industries which seek access to markets in the sterling area is the system of restrictions against the use of dollar exchange for trade with these countries. Tariffs would be, by comparison, relatively easy to surmount.

Talks Being Widened

It is significant that the Washington talks, at first concerned with the question of financial aid to Britain, are being widened to include, apparently, the whole trading field, including Imperial preferences, and also the question of debts owed by Britain to the countries of the sterling bloc. One result of this was the departure, late last week, of two Australian trade experts—the head of the Department of External Affairs, Mr. W- E. Dunk, and the assistantsecretary of the Department of Commerce, Mr. E. McCarthy—for Washington. It is not expected that they will participate in the British-Ameri-can talks; their mission is rather to watch developments and be available for consultation by Lord Keynes. According to Australian reports, any plan agreed upon in Washington will be taken back to London by Lord Keynes, for consideration by the British Government, which presum-ably--will consult the Dominions before adopting it.