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The Development of British Exchange Control, 1939-45*

Published online by Cambridge University Press:  07 November 2014

G. Clayton
G. Clayton*
Affiliation:
University of Liverpool
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Extract

Exchange control can be considered as an extension of the principle of war-time rationing. There is a scarcity of the means available for making payments and therefore purchases abroad are limited. As a result the central authority allocates these resources according to its own list of priorities, instead of leaving the selection of the needs to be satisfied to be determined by competitive bidding in the market. This requires the control of imports and may also be taken to include restrictions on transfers of capital and other foreign payments. Another feature of exchange control—the requisitioning of assets which can be realized for foreign exchange—can similarly be regarded as part of the general policy of commandeering resources necessary for the purposes of war. But a comprehensive system of exchange control involves a further essential feature—the pegging of exchange rates. Theoretically it would still be possible for the central authority to leave exchange rates to be freely determined in the market, although the quantities demanded and supplied were controlled by such methods; for the possible dangers of inflationary increases in domestic prices could be overcome by the use of subsidies to offset exchange depreciation.

However, several important reasons can be given for a country at war maintaining fixed exchange rates. Bear speculators might have a bad effect on the country's prestige especially when the fortunes of war were adverse. Secondly, it is easier to requisition international assets on terms which do not give large windfall profits to the sellers, if extensive depreciation of the currency can be avoided. Thirdly, consideration of the “terms of trade” offers the most substantial ground for maintaining exchange stability. In conditions of total war the resources that are used to produce exports must be reduced to the minimum. For this reason the object of policy must be to achieve the best possible price for a restricted quantity of exports rather than to expand the volume of exports by offering them as cheaply as possible.

Type
Research Article
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 19 , Issue 2 , May 1953 , pp. 161 - 173
Copyright
Copyright © Canadian Political Science Association 1953

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Footnotes

*

This edited article is an attempt to reflect the ideas and beliefs of the late Professor P. Barrett Whale on this aspect of commercial policy. I owe the general debt of anyone who enjoyed the privilege of having him at hand as a generous source of ideas and encouragement. Also I owe a particular debt to Mrs. Whale at whose suggestion I consulted certain memoranda amongst his papers from which I was able to collect the necessary material. But as many of these memoranda were fragmentary and consisted of rough notes, I myself must bear the final responsibility for both description and analysis, although my role is only to attempt to interpret and reproduce his ideas.

References

1 Regulation I of Defence (Finance) Regulations.

2 The Economist's estimate for approximately the same period amounted to £187 million.

3 May, 1941.

4 A minor qualification must be mentioned. The export and import of British bank notes between the United Kingdom and any other territory, except Eire, was controlled. The general system of control, of course, is concerned with payments by transfer of bank balances.

5 See articles by W. F. Crick in The Future of Sterling published by the Staples Press for the Institute of Bankers in 1949. Also see D. Wightman, in Banca Nazionale del Lavaro, no. 17. (Since going to press there has been a spate of literature on the subject, of which the most important has been two books, The Sterling Area by the Economic Commission for Europe, and The Sterling Area by A. R. Conan.)

6 For a detailed account of this see Balogh, T., “A Drift towards a Foreign Exchange Policy,” Economica, 08, 1940.Google Scholar

7 The authorized dealers consisted of 25 banks—mainly the London clearing banks together with the Scottish and Northern Ireland joint stock banks.

8 Statutory Rules and Orders 1940 Nro 890.

9 S.R. & O. 1940 Nro 892.

10 S.R. & O. 1940 Nro 894.

11 A small exception to this and following statements may be mentioned. Payments between the United Kingdom and countries with which a clearing agreement of the older type was already in existence might continue to be made through the clearing office concerned; Turkey, Spain, and, for a time, Romania, were countries for which this alternative procedure was available.

12 The early Swedish agreement allowed the alternative of payment in kronö.

13 Costa Rica, Cuba, Dominican Republic, Ecuador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Salvador, Venezuela, and Colombia.

14 That is to say, sterling had the same value in terms of another currency whether compared by the direct exchange rate or indirectly through a third currency.