BRITAIN's 
BALANCE-OF-PAYMENT PROBLEM AND THE DEVALUATION OF 1949 
ffHIS IS AN ORIGINAL MANUSCRIPT ffT MAY NOT BE COPIED WITHOUT THE AUTHOR’S PERMISSION 
BRITAIN’S BALANCE-OF-PAYMENTS PROBLEM 
AND THE DEVALUATION OF 1949 
by 
EZEKIEL GALLEGOS ESQUEDA, B.A. 
THESIS 
Presented to the Faculty of the Graduate School of 
The University of Texas in Partial Fulfillment 
of 
the Requirements 
For the Degree of 
MASTER OF ARTS 
THE UNIVERSITY OP TEXAS June 1952 
PREFACE 
The magnitude of the problem which is examined in 
the following pages demands a more penetrating analysis 
than this writer has been able to make. The problem contains 
too many imponderable factors and raises too unanswer­
many 
able questions; yet, its very complexity poses a challenge 
which the inquiring mind cannot easily turn down. Although 
aware of the enormity of the task and, especially, of his 
own limitations, this writer has, none the less, undertaken 
the preparation of this paper in the hope of presenting the 
general aspects of the problem in terms that can be readily 
grasped. 
The British balance-of-payments problem appears to 
defy not only permanent solution, but, at this time, also 
precise analysis. This study does not offer a solution, 
does it seek one. It merely describes the nature of
nor 
the problem and its impact on Britain 1 s external financial 
position. This study does not make an exacting analysis of 
all the factors in the British problem and of their relative 
nor does it attempt to do so. It only shows the
Importance, 
has
various trends which the development of the Problem tak­
en up to its present condition. 
of the thesis
The original object was solely to 
analyse the effects of the devaluation on Britain’s 
III 
IV 
external trade. After partial study of this subject, it 
became apparent that the devaluation was too recent for such 
an analysis to be accurate. It would have been extremely 
difficult, if not impossible, to assess all the factors af­
fecting British trade following devaluation and to determine 
what degree of influence could be attributed to devaluation 
and what degree to extraneous factors. The original pro­
ject was, therefore, abandoned, and a more general discus­
sion of Britain’s balance-of-payments problem was under­
taken. Two chapters have, however, been devoted to sterling 
devaluation. Chapter 111 deals with the background of the 
action. Chapter IV shows the direction taken by 
British trade in the first year after devaluation; but it 
attempts merely to determine whether the objectives of the 
devaluation were achieved, rather than to make an accurate 
mathematical measurement of the effects of devaluation on 
British exports and imports. 
Aside from the problem of scope, there was the 
of selecting the source material. The writer has
problem 
tried to be judicious in this respect. Where adequate and 
reliable summaries of the statistical data needed were 
used of the
found, these were instead primary sources. In 
some instances, when certain data were not available, the 
writer had to make his own computations and estimates from 
V 
available figures. Due to the difference in the basis 
and method of computation in each certain minor dis-
source, 
crepancies may be apparent in figures of the same type and 
for the same period. In all cases this writer has been 
primarily concerned with using those figures which best il­
lustrate a point or trend, rather than those which will as­
sure strict mathematical 
accuracy. 
The idea for this study originated out of class 
discussions on the subject of currency devaluation in some 
of Dr. Wendell C. Gordonf s courses. It took definite form 
in the course of personal conferences with Dr. Gordon. 
This writer is deeply grateful to Dr. Gordon for his 
assistance and guidance in the preparation of this thesis. 
His criticisms and suggestions were invaluable, and his 
words of approval and encouragement reassuring. The writer 
to Professor Edward E. the
is also grateful Hale who read 
final draft of the thesis. 
Finally, the writer wishes to acknowledge aid re­
ceived from the British Information Services, an agency of 
the British Government with offices in New York. This 
agency supplied the latest trade and balance-of-payments 
figures, as well as other information on recent developments 
May 2, 1952 
TABLE OF CONTENTS 
CHAPTER PAGE 
I. BRITAIN'S FOREIGN TRADE PROBLEM 1 
Britain’s Declining Export Trade 2 World War fls~ The Fr obletifrTntled. 20
ensif
... 
11. THE BRITISH CRISIS 55 
The Immediate Post-war Problem 57 Achlevfng An~Qverail Balance 5^ The Dollar Deficit 58 ffHe Crisis : Loss of Gold and Dollar'"Reserve 
s JO 
111. DEVALUATION OF THE POUND STERLING 79 
The Basic Causes of Devaluation 80 
The Immediate Causes of Devaluation 101 
Readjustment of~ForeTgn Currencies!* 107 
IV. THE IMMEDIATE EFFECTS OF DEVALUATION 115 
United Kingdom Merchandise Trade in the First Year After Devaluation 115 Improvement in the Balanceof^Payments. .159
.. 
Evaluation 146 
V. THE 1951 CRISIS 152* 
VI. BRITAIN’S DILEMMA 165 
182
BIBLIOGRAPHY * . . . ...... 
VI 
LIST  OF  ILLUSTRATIONS  
PAGE  
CHAPTER  I  
Chart  1.  Volume  of United Kingdom  
Trade  16  
Chart  2.  United Kingdom Terms  of  Trade  
Export  Prices  Divided  by  Im­ 
port  Prices  (1913 = 100)  16  
CHAPTER  II  
Chart  1.  Industrial  Production in the  
United Kingdom Quarterly  
Average  1946=100  49  
Chart  2.  Volume  and Value  of United  
Kingdom Exports  of Manu­ 
factures  (1958=100)  53  
CHAPTER  111  
Table  1.  Value of  United Kingdom  Ex­ 
ports  (including re-exports)  
to  the United  States  and  
Canada,  July  1948-June  1949  
(in millions  of  pounds  ster­ 
ling)  105  
CHAPTER  IV  
Chart  1.  Value  of  United Kingdom  Ex­ 
ports  to  and Imports  from  
the  United States  in Pounds  
Sterling  and  the Wholesale  
Price  Index  of  the  United  
Kingdom,  July  1949-Septem­ 
ber  1950  117  
Chart  2.  Value  of  United Kingdom Ex­ 
ports  to  and  Imports  from  
the  United States  in Dol­ 
lars  and the Wholesale Price  
Index  of  the  United Kingdom,  
July  1949-September  1950  ....  120  
Chart  3»  Value  of  United Kingdom Ex­ 
ports  to and  Imports  from  
Canada  in Pounds  Sterling  
and the Wholesale  Price  
Index  of  the  United Kingdom,  
July  1949-September  1950  ....  124  

VII 
CHAPTER  IV  , v (continued)  PAGE  
Chart  A.  Value of United Kingdom Ex­ports to and Imports from Canada in Dollars and the  
Wholesale  Price  Index  of  the  
Chart  5*  United Kingdom, July September 1950 Value of United Kingdom Ex­ports to and Imports from India in Pounds Sterling and the Wholesale Price In­ 125  
Chart  6.  dex of the United Kingdom, July 1949-September 1950 Value of United Kingdom Ex­ports to and Imports from  131  
Pakistan in Pounds Sterling and the Wholesale Price In- 
Chart  7*  dex of the United Kingdom, July 1950 .... Value of Total United King­dom Exports and Imports In Pounds Sterling and the Wholesale Price Index of  .133  
the  United Kingdom, 1950  July  135  
Chart  8.  Terms  of  Trade of  the  United  
Kingdom, July 1950 (1947=100).  .  .  140  

Chapter I 
BRITAIN'S FOREIGN TRADE PROBLEM 
It Is always difficult to determine where the roots 
of a problem lie; for, usually a problem is not appreciated 
In Its entire significance until it has reached a critical 
stage, and then the basic factors which underlie the trouble 
are obscured by the Immediate causes which precipitate the 
crisis. This appears to be the case with Britain's balance-
The
of-payments problem. crisis that Britain currently 
faces In her external payments has a grave world signif­
icance which Is not lost on the Informed and thinking mind. 
A great deal has been said and written about the British 
problem. It has been discussed by the leading statesmen 
and government officials of the English-speaking countries. 
It has been analyzed by economists the world over. Current 
the
periodical literature abounds with material on subject. 
It Is a topic of study In academic circles. Yet, most of 
this discussion and study appears to be concerned with the 
Immediate background of the Problem. It seeks to explain 
Britain's difficulty In terms of relatively recent develop­
ments. Unfortunately, little has been said about the funda­
mental causes of the problem. Little has been written about 
the nature of the forces that operated over the long run to 
the
generate problem. 
1 
Britain's balance-of-payments problem, although ag­
the Second World War and although it reached the
gravated by 
critical stage in the post-war period, is of long standing. 
It is primarily a foreign trade problem, for it stems from 
a growing imbalance in Britain ! s foreign trade which can be 
traced back to the nineteenth century. The nature of 
Britain’s trade problem must be understood if the true mean­
ing of the balance-of-payments problem is to be appreciated. 
It is, therefore, the purpose of this chapter to analyse 
certain long-term trends in Britain's foreign trade which 
gave rise to the balance-of-payments problem and set the 
stage for its climax. 
Britain's Declining Export Trade 
Britain has been dependent to a marked extent on 
international trade. It is difficult for the average 
land of
American, living in a virtual self-sufficiency, to 
understand the tremendously important role that foreign 
trade plays in the life of the British nation. The con-
of a stoppage in the flow of trade to and from 
sequences 
the are all too obvious to merit detailed
United Kingdom 
elaboration here. It is an accepted fact that in order to 
live Britain must import. She must import food to feed her 
3 
people and raw materials to supply her industries. But, 
in order to import, she must export her manufactured 
goods 
to obtain the foreign currencies with which to pay for the 
foodstuffs and raw materials that she needs. 
During the greater part of the nineteenth century, 
Britain had little difficulty in maintaining this flow of 
of
imports and exports. Her far-flung empire provided most 
the foodstuffs and raw materials that were needed to feed a 
an
growing population and to operate expanding productive 
establishment at home. British manufactured goods, as well 
as such vital Industrial materials as coal, pig iron, and 
steel, had no serious competition in world markets, and the 
flow of to foreign countries was maintained with
exports 
relative ease. Britain was mistress of the seas, and her 
navy could, without serious difficulty, protect the empire 
and keep open the trade routes leading to and from the United 
Kingdom. These three factors, (l) a world-wide empire, 
and in the
(2) a virtual monopoly in manufacturing produc­
tion of industrial materials, and (3) a strong navy assured 
to Britain a position of power and wealth never before en­
joyed by any other nation in history. It was by such means 
that a small ''nation of shopkeepers", living on an island which 
a fraction of the food and raw materials
can produce only 
could extend its dominion over the globe without
it needs, 
4 
danger of being effectively challenged by any foreign power 
and could champion free trade between nations without danger 
to
of losing ground foreign competitors. 
Toward the end of the nineteenth and at the begin­
ning of the twentieth centuries this situation began to 
change. The rise of Germany on the Continent, the arrival 
of the United States as a world power, and the growing 
of
strength Japan in Asia posed a challenge to Britain’s 
of world Material
position leadership. progress had pro­
ceeded at a phenomenal rate in Germany during the last 
quarter of the nineteenth century, and that nation was rapid­
ly attaining political and economic predominance on the 
European continent. The sudden rise of the United States, 
following the Spanish-Amerlean War of 1898, to a world-power 
status gave her a leading role in the Western Hemisphere and 
an important position In the Western Pacific and China. In 
Asia, the "westernization" of Japan had begun to bear fr*uit, 
and that country was beginning to make a serious bid for 
in the Far East.
ascendancy 
What was more Important, however, as concerns Britain’s 
was the rapid Industrlallzatlon of those three
foreign trade, 
well as others like Buss la, and India.
countries, as Canada, 
While the industrializing process was going on in these 
places, Britain profited from her exports of capital goods 
5 
to them, but as they began to produce goods for themselves, 
their purchases of British goods were reduced accordingly. 
Until 1913 this trend, although already noticeable, was 
still having only a negligible effect on British exports. 
Between 1913 and 1937, however, the volume of British ex­
ports to the industrialized and industrializing countries 
was reduced by one-half. Exports to three of these countries, 
India, Japan, and Russia, "actually fell by two-thir»ds." At 
the same time, exports to countries which remained predomi­
nantly primary producers "hardly fell at all."^ 
1 
MacDougall, G* D. A. Britain's Foreign Trade 
Problem”, Economic Journal, Vol. LVII, March P* 81. 

While the industrializing countries were thus cap­
turing their own domestic markets and pushing out British 
goods, an even more serious threat to Britain’s export trade 
was the growing competition which the products of Germany, 
the United States, and Japan were offering to British goods 
on the world market. This competition began at about the 
turn of the century, but up until the First World War its 
effects had not made themselves felt, mainly because of the 
rapid expansion of total world trade which enabled Britain 
p 
to expand her own trade up to the outbreak of the war. 
2 
Abrams, M. (ed.), Britain and Her Export Trade (London: Pilot Press, 1946X7 P* 
After 1913, however, such competition became increasingly 
serious. In the case of coal, for Instance, although 
Britain continued to produce about one-fifth of the total 
world production, her share in the volume of the world ! s 
coal exports fell from 55 percent in 1913 to 37 percent 
in 1938* In the same period Germany, despite her terri­
torial losses in 1918, Increased her share from 23 to 31 
percent.'' Even more important than this decline in 
5 
Ibid., pp. 244-243. 

Britain f s relative share of world coal exports was the ab­
solute decline in British coal exports, as compared with 
and
German coal exports. Between 1913 1938, while British 
exports (in millions of metric tons) were halved, German 
exports (in millions of metric tons) remained approximately 
li 
the same. Similar evidence is to be found concerning 

4 
The Economist, March 2j5, 1946, p. 461. 
of cotton goods. Between 1913 1937 the volume
exports and 
f
of world trade in cotton goods fell by 38 percent. Britain s 
7 
share in this declining total fell from 65 to 26 percent, 
while Japan’s share increased from practically nothing to 
39 percent. In 1937-38 Japan's share was 50 percent greater 
than Britain's absolute decline was even greater 
5 
Abrams, op. clt., pp. 251 and 256. 

Between 1912 and 1938 British exports of cotton goods (in 
millions of square yards) fell by about 80 percent. During 
6 Calculated from figures In Abrams, op. cit., p. 255* 
the same period Japanese exports increased substantially (no 
specific figures are readily available). Britain's exports 
of all manufactured articles also declined considerably 
after 1913* Between 1913 and 1936-38 the quantum of United 
of fell
Kingdom (including Ireland) exports manufactures 
by 37*1 percent. At the same time, Germany's exports of 
manufactures fell by only 16 percent, while those of the 
United States increased by 54.8 percent and those of Japan 
by 371*6 The Impression given by the above figures 
League of Nations, Industrialization and Foreign Trade (1945), PP* 162-163. 
8 
Is that In the period between the two wars, British exports 
declined, not only as regards their share in total world ex 
ports but also absolutely. 
It is beyond the purpose of this study to analyse 
the various factors contributing to this loss of markets to 
foreign competition. Suffice it to point out that most 
British industries continued to use out-dated equipment and 
techniques after the First World War, while the new indus­
the ata
trial nations, coming on scene later date, were 
able to adopt more modern equipment and techniques without 
suffering serious dislocations. As a result, British 
productivity decreased relative to foreign productivity, and 
Brltaln f s ability to produce and export was reduced relative 
to that of her competitors. 
While the industrialization of foreign countries 
(and especially the growing competition of Germany, the 
United States, and Japan) must be taken as the fundamental 
of the long-term decline in Britain's export trade,
cause 
to the after
two other factors contributing decline 1913 
be considered. These were (l) ’’the growth of
must also 
other trade barriers which limited the total
tariffs and 
world trade In manufactures”, and (2) ”the over-valuation 
which reduced our share of that
of sterling 
® 

trade”. 
8 
MacDougall, loc. clt., p* 80. 
Tariffs and other trade restrictions underwent an un­
precedented growth In the Inter-war period. In continental 
Europe the general tariff level rose considerably above the 
pre-Vorld War I level. More Important for Its effect on 
British exports was the fact that "the tariff level on 
manufactured goods nearly doubled between 1913 and 1931*"^ 
9 
MacDougall, loc> clt., p. 85. 

In the United States, the Fordney-McCumber Tariff Act of 1922 
rates
provided for the highest In American tariff history 
up to that time, and the Smoot-Hawley Tariff Act of 1930 
raised duties for some commodities 50 to 100 percent above 
the 1922 levels. The adoption of the latter Act was followed 
by higher tariffs In Canada, Cuba, Mexico, France, Italy, 
Spain, Australia, and New Zealand. Even Britain abandoned 
her traditional free-trade policy with the adoption of emer­
gency duties In 1931 and her first general tariff In February 
10 
1932. Tariff rates were also raised considerably In 

10 League of Nations, Commercial Policy In the Inter war Period: International Proposals ar^NatlonalTolTcfes (Geneva, 19^2J, p. 52. 
Asiatic countries like India and Japan. One of the few ex­
ceptions to this general Increase In tariffs was Latin­
Also in wide in the inter-war period was
usage 
11 
Commercial Policy in the Interwar> Period: Inter­national Proposals lonat^PoTicle p.
s, 
bilateralism. Many countries facing balance-of-payments 
difficulties "restricted their imports from countries with 
which they had balances". "sum of all
'unfavourable' The 
the 'unfavourable' balances between pairs of countries 
represented one-quarter of international trade." Cutting 
off to that sum of "unfavourable" balances
Imports equal 
12 would have thus reduced total world trade by one-fourth. 
12 
MacDougall, loc. clt., p. 86. 
Other trade barriers, such as exchange controls, quotas, 
also gained wide-spread adoption, especially during
etc., 
of multilateral trade broke down
the 1930's when the system 
and the trading countries turned to commercial warfare. 
From the of the world economic crisis in 1929,
beginning 
ever-increasing efforts were made to restrict imports by 
"the
non-tariff measures. After 1931 such measures became 
instruments of commercial policy", and tar-
most important 
-I^s 
iffs took secondary importance. Tariff levels, however. 

13 Tariff Levels and the Economic Unity
Lieprnann, H., of Europe, translated by H. Sterming (London: Se'drge “Allen* 40-41.
& Unw'fn~£td., 1938), PP* 
11 
remained high throughout the 1930'5, despite numerous 
international attempts to bring about a general reduction or 
at least to do away with the worst features of the tariff 
situation. It is obvious that the growth of trade barriers 
in the inter-war period could result in
only a general shrinkage of total world trade. More important, however, 
was the effect that such restrictions had on world trade 
in manufactures. Although between 1913 and 1937 the world's 
output of manufactures doubled, "international trade in 
manufactures failed to rise”. As a matter of fact, be­
14 
MacDougall, loc. clt., p. 85. 
tween 1913 and 1936-38* the quantum of world trade in manu­l^ 

factured articles fell by 7*9 percent. 
15 
Industrialization and Foreign Trade, p. 157• 
The second factor responsible for the decline in 
f after 1913 was the overvaluation of ster-
Brttains exports 
ling In relation to other currencies. Between 1913 and 1922 
Britain's exports of manufactured goods (in volume) "fell 
by some in relation to those of the United States, and 
this relative fall continued steadily during the rest of the 
'twenties.” Although there was a sudden reversal of this 
trend In 1932, It continued its downward course after 1933­
The relative decline In Britain's exports between 1913 and 
1930 may be attributed to the high prices of her manufactures. 
During the 1920's Britain was attempting to sell her manufac­
tures "at gold prices one-third higher than those of the 
United States In comparison with 1913”* The same Is true 
with respect to Germany. Between 1925 and 1931 British gold 
prices were considerably higher than German gold prices In 
comparison with 1913, and Britain's exports of manufactures 
to those of
(in volume) fell steadily in relation Germany. 
This Inverse relationship between the volume and gold price 
of Britain's exports Is also apparent when compared with the 
next
exports of Japan and France, Britain's largest competi­
tors In the inter-war period. The continuing decline In 
Britain's share of the world market for manufactures was 
temporarily checked by the depreciation of sterling In 1931, 
a which for* a time made British goods cheaper than
measure 
those of her competitors. The fall In Britain's export 
prices in relation to those of the United States, Germany, 
rise in the volume of
and France resulted In a sharp relative 
of manufactures. The same, however, was
British exports 
for It must
not true with respect to Japan, be remembered 
at about the
that Japan depreciated her currency same time 
extent than Britain. At
and to a much greater any rate. 
13 
following the depreciation in 1931, Britain's "share in the 
total quantity (not value) of world exports of manufactures" 
that
increased by one-third and remained at approximately 
level for four years. The rise in British exports of manu­
factures relative to those of the United States and Germany 
was not maintained as long. When the United States depre­
ciated the dollar in 1933 and Britain's export prices rose 
again relative to those of the United States, British ex­
ports of manufactures fell steadily in relation to those of 
the United States up to the outbreak of the Second World 
War, After when British export prices relative to 
German export prices began to rise, Britain's exports of 
manufactures, in relation to those of Germany, fell off 
again. The rise in British exports relative to French ex­
ports following the depreciation in 1931 continued steadily 
until 1936. In that year, however, France devalued the 
franc, and Britain's relative exports again fell sharply. 
It has been noted that there was no increase in
already 
Britain's of manufactures relative to those of
exports 
Japan as a result of sterling depreciation. The steady de­
cline which had preceded the depreciation continued uninter­
the
rupted during most of the 1930*5. In brief, favorable 
trend shown by Britain's exports of manufactures following 
in As
the depreciation of sterling 1931 was short-lived. 
14 
other countries depreciated their currencies, the exchange 
value of sterling rose, and Britain’s quantitative share 
of the world's exports of manufactures fell off again. 
16 
MacDougall, loc. clt., pp. 103-107. 
Britain's share was a declining share in a declining world 
trade in manufactures. 
It is thus that the
obvious growing competition of foreign countries, the growth of other
tariffs and trade 
barriers in the inter-war period, and the overvaluation of 
sterling in relation to foreign currencies could only have 
a disastrous effect on Britain! s export trade in the long 
run. the sixty or before the First
During seventy years World War, the volume of United Kingdom exports and the 
volume of United Kingdom imports' both rose steadily and more 
or less in line with each Between 1913 and 1938, 
17 
Ibid., pp. 78-79. 
the volume fell steadily, while the
however, of exports volume of imports continued to rise (see Chart l). If both 
taken as 100 in 1913, the volume of exports in the five
are 
years before the Second World War averaged 65, while that of 
15 
Imports averaged 125 Thus, "the volume of exports, relatlve­• 
ly to that of imports, had been halved." ° 
18 
The Economist, August J>o, p. 351* 
This growing imbalance in British foreign trade in 
the period between the two wars gave rise to Britain’s balance 
How to balance her
of-payments problem. did Britain manage 
in the face of between
external payments an ever-widening gap 
her exports and imports? Or rather, how did Britain manage 
for volume of while the volume
to pay an increasing imports 
of her exports was declining? There are three possible ex-
state of affairs.
planations for this 
after on
First, during the generation 1913, Britain, 
the whole, enjoyed increasingly advantageous terms of trade 
means that a unit
Chart 2). This simply representative
(see of British exports could be exchanged for an increasing volume 
of While this was not true during the First World
imports. in the 1920's "(except in the boom years at the end of
War, the terms of trade index stood at 120 (1913=100)
the decade)" and in the early 1930’s it rose 140 or higher,
to 
or higher, 
"in 1938 it stood at IjQ .The reason for Britain’s 
19 
Ibid. 
Chart 1. 
Volume of United Kingdom 
Trade 
Chart 2. United Kingdom Terras of Trade Exnort Prices Divided by Import Prices 
(1913=100) 
17 
Increasingly favorable terms of trade of the
was, course, high prices of her exports relative to the prices of her 
imports. (The high prices of British manufactures relative 
to the of
prices foreign manufactures was pointed out above 
in the discussion of the overvaluation of sterling). While 
of British
the prices imports were no higher in 1938 than 
in 1913, the prices of British exports rose by about two­20
fifths.
20 
MacDougall, loc* clt., p. 79. 
Secondly, Britain's earnings from "invisible" ex­
ports were for a long time more than enough to make up the 
deficit in "visible" trade. The most important of these 
invisible items was shipping. In 1913 receipts for shipping 
services were sufficient to pay for 71 percent of Britain's 
visible trade deficit. Although this percentage fell 
in the inter-war in services
steadily period, 1938 shipping 
were still sufficient to cover 26 percent of the visible 
trade deficit. 21 With the total earnings from visible and 
21 
Abrams, op, clt., pp. 211 and 229. 
invisible trade, Britain was able to finance the growing 
volume of her for
Imports many years. In 1913 total 
visible and Invisible exports not only paid for total Im­
ports, but exceeded them by about 30 percent. Between 
1923 and 1929 the favorable margin was about 7 percent. Be­
tween 1950 and 1937* however, visible and Invisible exports 
and
paid for only 97 percent of Imports, In 1938 for only 
22 
92 percent. 
22 
MacDougall, loc. clt., pp. 79-80. 
This leads to the third explanation. To pay for the 
excess of total Imports over total visible and Invisible ex­
ports, Britain had to draw on her overseas capital, 1.e., she 
had to sell or repatriate some of her foreign Investments. 
In 1938 the overall deficit In Britain's balance of payments 
amounted to 70 million pounds sterling, or "less than 2 per­
cent of the total overseas capital of the country." J 
The Economist, August 23* p. 310* 
Although this represents a small portion of total capital 
that Britain could not continue
assets, it is apparent 
to live her overseas without serious
indefinitely on capital 
as creditor
consequences for her position the world's leading 
nation. The events of World War II were soon to prove this 
point with forceful clarity. 
19 
To summarize what has been said 
so far: Certain 
long-term trends indicate a steady decline in Britain's ex­
port trade, especially after 1915. The fundamental 
cause 
of this decline was the industrialization of foreign 
countries, and particularly the growing competition of 
Germany, the United States, and Japan. But two other 
causes were also responsible for Britain's falling exports 
after 1913: (1) "the growth of tariffs and other trade 
barriers which limited the total world trade in manufac­
tures”, and (2) "the over-valuation of sterling which re­
duced our share of that trade”. 
The resulting 
loss of exports, coupled with an increasing volume of im­
ports, gave rise to Britain's balance-of-payments difficul­
ty. Despite the adverse trade balance, certain factors 
helped Britain to balance her international accounts: 
(1) favorable terms of trade, (2) earnings from invisible 
and sale
exports, especially shipping, (3) or repatriation 
of overseas capital. Although the depreciation of sterling 
in 1931 provided some relief for Britain's declining export 
trade, it proved to be only a temporary remedy because of 
the wave of competitive depreciations that followed. After 
trade deficit continued its
about 1935 the growing pre-1931 
trend. 
20 
World War II: The Problem Intensified 
The outbreak of the war in 1939 posed new and more 
serious problems for Britain, not the least of which was 
the necessity of adapting her entire economy to the require­
ments of total war. Regardless of Immediate and future 
all available resources had to be devoted
consequences, 
primarily to the production of military goods for the suc­
cessful prosecution of the war. Industries, which In peace­
time had produced civilian goods for domestic consumption 
and for sale abroad, had to be converted to the production 
of guns, tanks, planes, and other military equipment; work­
ers who had been employed In the export Industries, had to 
be shifted to war Industries; and raw materials which had 
been used In making manufactured articles for export, had to 
be used to the Instruments of war.
produce 
But, aside from this drastic change In the condi­
other factors
tions of supply of exportable goods, also 
contributed to the contraction of Britain’s export trade 
the war. One of the first effects of the war was to
during 
cut or at least to weaken many of the trade links that tied 
to overseas
Britain to the European continent, countries, 
and to her empire. The conquest of Europe by Hitler’s 
markets
legions closed most of the European to British 
Germany’s counter-blockade of the United Kingdom
goods. 
and her vigorous submarine warfare against British ship­
ping seriously hampered British trade by Isolating the 
United Kingdom from many of Its overseas and empire markets 
and by reducing the carrying capacity of Brltalnf s merchant, 
fleet. Many of Britain's former customers were either 
forced to Industrialize In order to produce their own 
24 
manufactures or to replace British goods with those from 

24 
Industrialization was stimulated by the war in 
countries such as Canada, Australia, India, and Brazil (MacDougall, loc. clt., p. 83). 
other countries that could still export, the United
e.g., 
25 States. As the war progressed and Hitler's air blitz 
25 
Abrams, op. clt., p. 18; and Dacey, W. M. "British Reconversion and Trade", Forelgn Affairs, Vol. 23, January 1945, P. 253. 
struck at Britain's centers of production, British industries 
suffered considerable physical damage which cut down their 
and reduced even further the
productive capacity proportion 
available for export.
of their output 
The result of these developments was a drastic re­
duction In Britain's exports. By 1943 merchandise exports 
(excluding munitions) had fallen to 29 percent of their 
22 
volume, a drop of 71 percent in five years. Although 
there was a marked 
recovery by 1945, exports in that year 
were only at 45 percent of the 1938 level. The value of 
merchandise exports (excluding munitions) fell from 471 
million pounds in 1938 to 233 million pounds in 1943, and 
then rose to 393 million 	pounds in 1945* 1943
i.e., by the 
value of exports had fallen to 49-5 percent of their 1938 
value and then risen to 83.4 percent in 1945 Thus, al­
26 Britain and World Trade (London: PEP, 1947)* P* 
64. 	The percentages indicating the changes in the value of this writer.
exports were computed by 
in both volume
though exports picked up 	and value after 
1943, the first four years of the war saw a sharp decline, 
with regard to volume.
especially 
On the side of imports, the picture was similar in 
so far as volume was concerned (an important difference be-
as their value will be
tween exports and imports regards 
chief of the in the
pointed out below). The cause drop 
to cut
volume of imports was, of course, Germany's campaign 
Britain's life-line by means of a relentless submarine 
attack against British and Allied shipping. The resulting 
meant that all un­
scarcity of shipping space necessarily 
essential imports had to 	be ruthlessly cut, and that 
23 
priority had to be given to goods and materials vital to 
the war effort. 
Where possible. Imports were replaced by 
domestic This
products. was especially true In the case 
of food. By 1941 retained Imports of food, drink, and 
tobacco had been reduced of
to 72 percent their pre-war 
volume. An Improvement In 1942 and 1943 to 73 and 78 
percent respectively, was not maintained In 1944, when 

such to of
Imports fell again 75 percent the 1938 1eve1. 27 
27 
The Economist, August 11, 1945, p. 199 and table 
on 201.
p. 
But, while food Imports declined, Britain’s war-time 
domestic output increased "by more than 70$ in terms of 
calories and of protein, and by 120$ in units of shipping 
if 28 space In an effort to save carrying space and at the
. 
28 
MacDougall, loc. clt., p. 74. 
same time to pack as large a volume of essential goods Into 
of
available shipping, Imports bulky commodities, such as 
feeding-stuffs, timber, Iron ore and scrap, and wood-pulp, 
were drastically cut, and, as far as possible, replaced by 
home products. In some cases, seml-flnlshed and finished 
goods were substituted for raw materials, e.g., seml-flnlshed 
24 
steel was substituted for iron and aluminum was
ore, 
substituted for bauxite. were in
Certain foods Imported 
dehydrated or concentrated form so as to reduce bulk and 
we ight 
29 
The Economist, August 11, 1945> P* 199* 
Like food, imports of raw materials and manufactures 
also had to be curtailed. By 1945 retained imports of raw 
materials and articles mainly unmanufactured had fallen to 
of their 1958 volume. There was a slight increase
59 percent to 61 percent in 1944. The explanation lies partly in in-
especially of iron ore and
creased domestic production, 
in the substitution (mentioned above)
timber, and partly 
of semi-finished materials for primary products. Imports 

of finished manufactures were high relative to Imports of 
still remained below the pre-war
raw materials, but they 
in 1944, when they stood at 105 percent
level, except of 
"50 

the 1958 volume. 
30 
and table on 201.
Ibid., p. 199 p. 
result for total Imports was a reduc-
The overall 
a less drastic reduction than
tion In their volume, albeit 
In 1942 the volume of retained
In the case of exports. 
imports (excluding munitions) fell to 70 percent of the 1938 
volume, in 1944 it rose to 80 percent, and in 1945 it fell 
again to 63 percent. With regard to the value of Imports, 
the situation was altogether different. The value of re­
tained imports (excluding munitions) increased from 858 
million pounds in 1938 to 1,291 million pounds in 1944 and 
then fell slightly to 1,051 million pounds in 1945, i.e., 
the of
by 1944 value imports had risen to 150 percent of 
their 1938 value and then fallen to 122 percent in 1945.^ 
31 
Britain and World Trade, p. 64. The percentages indicating tHe changes In tlie value of Imports were com­puted by this writer. 
Throughout the war, then, while the money value of exports 
remained well below the 1938 level, the money value of 
imports exceeded the 1938 level by a considerable amount.* 
*AII the above figures on the volume and value of merchandise exports and Imports exclude munitions. A large share of lend-lease trade is, therefore, left out of the 
totals. Imports and exports of lend-lease raw materials and agricultural products, however, are included. During 
the the United Kingdom received $13,498.7 million In
war, 
lend-lease 

goods from the United States. Of this total, munitions made up $6,783.0 million (The Economist, Septem­ber 1943, 355). This figure is not included in the
8, p. total value of Britain's imports. Reverse lend-lease, i.e., lend-lease goods exported by the United Kingdom to the United States, amounted to $3,796.9 million. Of this sum, muni­tions made up $976.7 million (Ibid.). This figure is not included in the total value of Britain's exports. If the and exports of munitions were
value of Imports included, 
total value of Britain's

the disparity between the imports and exports would obviously greater.
be 
26 
This substantial increase in the 
value of imports, 
while 
their volume was decreasing, may be explained by the 
steady rise in import prices the
during war. In terms of 
1938 prices, the average price of Imports showed an in­
crease of 91 
percent by 1944. At the same time, the aver­
age price of exports increased by 78 percent. This faster 
rise in the 
average price of imports was due partly, it 
should be to the fall in the of
noted, value sterling in 
1939, and to the
partly fact that exports were priced f.0.b., 
while imports were priced c.i.f. The high cost of trans­
portation and insurance was thus included in the 
import 
prices, but not in the export prices. Transport costs 
during the war increased much more rapidly 
than the 
aver­
age price of exports.^2 
32 The Economist, August 11, 1943, p. 200 and table on 201.“"
p. 
The effect of a rise in the of
money value Imports 
fall in the value
and, simultaneously, a money of exports 
on Britain’s balance of payments is at once obvious. It 
simply meant that the pre-war trade deficit was increasing-^ 
33 
During the three years, 1936-38, the trade def­icit averaged 3°9 million pounds annually. In 1945 the deficit amounted to 658 million pounds (Calculated figures in Britain and World Trade, pp. 54 64).
and 
27 
and that Britain’s problem was becoming increasingly dif­
ficult. The difficulty appears even more serious when it 
is noted that Britain suffered substantial losses in her 
invisible exports during the war. It should be remembered 
that before the war the greater portion of the visible trade 
deficit was covered by earnings from invisible exports. In 
the three years, 1956-58, invisible receipts averaged a net 
total of 545 million pounds a year. This figure was suf­
ficient  to  pay  for about 89  percent  of  the average  trade  
54  
The greatest  war-time  loss  in Britain’s  invisible  

54 
Calculated from figures in Britain and World Trade, p. 54. 
in income from overseas capital investments.
was
earnings 
such income
Over the three-year period, 1956-38, averaged 
a net sum of 205 million pounds annually. This figure alone 
of trade 
was sufficient to cover 52 percent the average 
deficit.3s 1945 net receipts of dividends and interest
By 
55 
Ibid. 
had fallen to million
British investments 97 
on overseas 
This amount covered only about 15 percent of
pounds 
56 Cmd. 6707, Statistical Material Presented During Station-
the Washington Negotiations -CLondonTHis Majesty*s officer December 1945T7 P*
ery 
of the trade deficit. There are no figures available 
on earnings of other British Invisibles during the war. 
Prom figures on war-time shipping losses. It can be assumed 
that shipping Income, which averaged a net sum of 105 mtl­
-37 
lion pounds a year In 1936-38, declined, though perhaps 

37 
Britain and World Trade, p. s^* 
not In the same proportion as Income from overseas invest­
ments. At the beginning of the war, the United Kingdom 
had a merchant fleet of 22.1 million deadweight tons. Dur­
ing the war total losses amounted to 18 million tons, but 
million tons) was made
a good part of this loss (15.3 good 
With 3»5
by new building, captures, and acquisitions. 
million tons In acquired vessels being returnable, Britain’s 
June amounted to 15.9 million
merchant fleet on 30, 
38 tons, or less than three-quarters of the pre-war tonnage.^ 
38 
8.
Cmd. 6707> P* 
that British war-time were
It must be remembered imports 
c.i.f. All earnings of British vessels carrying
priced 
therefore, be cancelled
imports to the United Kingdom would, 
out their inclusion in the c.i.f. value of imports, and
by 
would be
net shipping income on the balance of payments 
substantially less than the actual total of 
shipping earn­
ings. This would make the war-time loss of earnings seem 
small on 
the balance of payments. Net shipping Income In 
the 
first post-war year, amounted to 29 million 
39 
pounds, a sharp drop from the 1936-38 If this

average. 
39 Calculated from figures in Cmd. 8065, United Kingdom Balance of Payments 1946 to 1950 (London:' His J Majesty's Stationery Office, October I95O), p. 7. 
figure were calculated at 1938 prices, it would be even 
smaller, for freight rates Increased considerably during 
the war, and by were about double level.
their pre-war 
Without data on 
total invisible earnings during the It
war. Is Impossible to determine what part they played In meeting 
Britain's adverse balance of visible trade. In 1946 total 
invisible receipts amounted to 438 million pounds; 
however, invisible payments In 1946 totalled 610 million pounds 
(of which government overseas expenditures made up 363 mllllbn
alone 
pounds), so that actually there was a deficit of 172 mll­
-40 In Britain’s Invisible trade. Instead
lion pounds Thus, 
40 
Ibid. 

of financing the greater part of the visible trade deficit 
and relieving the balance-of-payments difficulty (as In the 
invisible trade added
pre-war years), Britain's even more to 
the 
overall balance-of-payments deficit In 1946. Whereas, 
In the three 
years, 1936-33, Brttaln‘s balance-of-payments 
deficit averaged 44 million pounds ln 1946 the 
41 
Britain and World Trade, p. 54. 

lipdeficit amounted to 348 million pounds. The peak in the 
42 
Cmd. 8065, p. 7. 

deficit, however, was reached during the war years, when it 
4"5 averaged about 700 million pounds annually. 
43 
Britain and World Trade, p. 55­
In order to the large war-time deficits,
cover 
Britain had to use four methods of finance. First, the 
Government was forced to draw on reserves of gold and 
dollars. These reserves fell from a total
United States 
millionof 605 million pounds on August 31, 1939 to 74 
pounds on December 31, 1940. By June 30, 1943 they had 
to million pounds, but were still 152
been restored 453 44 million pounds below the 1939 Secondly,
level. the 
44 
Cmd. 6707, P* 11­
of
liquidation overseas capital, which had been employed 
to a small extent to meet the pre-war deficit, was ac­
celerated. In 1938 the nominal value of United Kingdom 
overseas Investments was estimated at 3,725 million 45 
the
pounds. During war the Government sold or repatriated 
45 
Britain and World Trade, 

p. 57. 
/T 
1,118 million pounds 
of this total, representing a loss 
46 
Cmd. 6707, p. 9* 

of 50 percent of Britalnf s capital Investments abroad. 
Thirdly, Britain accumulated large external liabilities 
the war. At the end of 1959 Britain*s
during August 
debts abroad totalled 4j6 million pounds. By the end of 
June 1943 they had increased by 2,879 million pounds to 
far the
3,355 million pounds. Of this amount, by larger 
million pounds, consisted
portion, 3,052 of sterling 
and the remainder, 303 million pounds, consisted 
47 
of overseas loans. 1 Fourthly, net imports of lend-lease 

balances, 
47 
Ibid., p. 10. 

goods other than munitions were covered by the lend-lease 
aid urogram which was adopted by the United States in 
March 1941. 
32 
Britain’s 
reserves of 
gold and United States dol­lars, although substantially depleted In the 
first two years of the had
war, to
been replenished a considerable extent by 1943* Their loss 
over the whole war period was, therefore, not extremely serious. The depletion of 
over-assets, while much
seas greater during the war than In the 
pre-war period, also as serious as might
was not 
appear at first. 
A loss of 30 percent In capital Investments abroad 
Indicates that a large portion of Britain’s 
overseas 
wealth remained Intact. This view tends to be 
substantiated the fact
by that in 1945 gross receipts from foreign In­
vestments still amounted 
to 170 million pounds 
as compared with little more than 200 million pounds before the war.^ 
48 
MacDougall, loc. clt., p. 70. 
The realization of 
overseas assets, however, played a vital 
role In the Initial phase of Britain’s war effort. These 
assets enabled Britain to pay for essential Imports, for 
military operations abroad, and for "cash and carry" ship­ments of munitions and other equipment from the United 
States while that country was still at peace and before liQ 
lend-lease aid went into effect. The greatest cause 
for 
40.
Abrams, op. clt., p. 
33 
concern, however, was the accumulation of large external 
liabilities. These liabilities, most of which were in the 
form of 
sterling balances held in London banks, provided the 
principal means of financing Britain's overseas military expend­
itures and purchases of war goods. Without them, Britain 
could not have obtained the 
means necessary waging 
total war. The greatest share of the sterling balances 
was accumulated by countries in the sterling area, especially 
India and While these debts no
Egypt. incurring presented 
great difficulty, their repayment, which would require ex­
ports in excess of those needed to pay for current imports, 
was to pose a serious problem for Britain in the post-war 
period. The increase of 2,879 million pounds in Britain's 
external debt between September 1959 and June represents 
an extremely heavy burden that the country could ill afford 
to incur. In the words of Lord Keynes, Britain "fought 
this war on the principle of unlimited liability and with 
more reckless disregard of economic consequences than 
it 50 
others more fortunately placed. 
50 
In Britain and World Trade, p. 55•
quoted 
from the realization of 
overseas
While proceeds 
and the use of gold and dollar reserves
assets
capital 
34 
contributed considerably to meet the war-time balance-
of-payments deficit, it is obvious that the greatest part 
of the deficit was covered by the accumulation of external 
liabilities. The sum of these three, i.e., the total dis-
to million
investment of the United Kingdom, amounted 4,198 
pounds for the period between September 1959 and June 1945* 
This sum represents the loss of overseas wealth suffered by 
Britain in order to finance her war Such a loss 
51 
Cmd. 6707, P* 12. 
could only portend disaster for Britain’s international 
capital position after the war. 
Chapter II 
THE BRITISH CRISIS 
It has 
been shown in the second part of the first 
chapter how the Second World War intensified balance-
of-payments difficulty, and how, in order to meet the 
grow­
ing deficit, the United Kingdom had to resort to external 
disinvestment on an extremely large scale. Such extensive 
disinvestment ended, for all practical purposes, Britain's 
traditional creditor-nation status. She emerged from the 
war with a large foreign debt, with net income her over­
seas investments substantially reduced, and with her reserves 
of gold and foreign exchange considerably diminished. All 
this should not, however, be taken to mean that Britain had 
become a net debtor. As noted in the first chapter, a 
large portion of her overseas investments remained intact, 
and at the end of the war she was still earning a substantial 
gross income on her investments. But, though still a net 
creditor, Britain was not financially strong. In addition 
to the investments liquidated during the war, which repre­
overseas
sented about 30 percent of her total assets, be­
tween 10 and 15 percent were "temporarily or permanently 
lost as a result of enemy action," and about 20 percent 
had "little more than speculative value." Thus, actually 
35 
36 
"not more than 35 to 40 of
percent prewar oversea Invest­
ments will return an Income during the transitional period." 
More important was the fact that by the end of the war 
Britain f s net Income from investments abroad had been 
drastically reduced. As noted in the preceding chapter, 
such income amounted to only 97 million pounds in 1945. 
This fact overshadowed any optimism arising from the 
thought that Britain was still a net creditor, for "it is 
the size of the net income from overseas which will be im­
portant in determining the external postwar financial posi­
tion of the nation."^ 
1 
Heatherington, D. F. "British Postwar Balance of International Payments", Foreign Commerce Weekly, Vol. XX, August 25, P-3* 
Because of the immediate problems it raised, the 
most disastrous blow to Britainf s external financial posi­
tion was the accumulation of the large overseas debt dur­
ing the war. To free all the sterling balances immediately 
after the war would have required a sum greater than the 
for the
total of Britain f s merchandise exports seven years 
the war, and the use of all gold and dollar re-
preceding 
serves would have covered only one-fifth of the total claims 2 
outstanding. 
2 
Ibid. 

37 
The Immediate Post-war Problem 
For purposes of this study, the chief importance of 
the war-time change in Britain's international capital status 
lies in its influence on the post-war balance of payments. 
As pointed out in the preceding chapter, the loss of earn-
other
ings from shipping, foreign investments, and invisibles 
during the war, rendered invisible trade inadequate to meet 
Britain's traditional visible trade deficit. Instead, net 
invisible losses were adding to the overall balance-of-payments 
deficit. 
At the end of the war Britain faced an even greater 
deficit. The expansion of exports would have to await the 
reconversion of war industries to peace-time production. 
During this transitional period, however, large imports of 
capital goods, raw materials, and food would be needed to 
reconstruct war-torn industries and to supply domestic de­
mand to a degree commensurate with a reasonable standard of 
living. Britain's Immediate post-war problem, then, was that of finding the means to finance an Increased balance-
deficit in a transitional period when receipts
of-payments from British exports would be inadequate to pay for the 
necessary for the rapid reconversion and reconstruc
imports tion of production facilities. The cessation of lend-lease 
aid from the United States immediately after the war elimi­
nated that medium as a possible solution of the problem. 
The further reduction of gold and dollar reserves and 
the further liquidation of overseas assets would not only 
ruin Britain financially, but would be insufficient to 
cover the impending deficit. Except for limited use, both 
these media had to be ruled out. 
One other alternative remained: an Increase In the 
the
foreign debt. The magnitude of existing sterling 
balances, however, made the Government wary of Increasing 
the country f s external liabilities, or at least anxious to 
keep a further Increase to a minimum. The problem was ful­
ly recognized even before the end of the war by the Chancel­
lor of the Exchequer, Sir John Anderson, In his Budget 
speech of April 24, 1945: 
For the first three years after the war I fore­see a very heavy deficit on current account In the balance of payments. In other words, for the Imports which will be absolutely essential to feed our people, and to provide raw materials for Industry, we shall have to incur further Indebtedness. How large that Indebtedness Is 
and how long It lasts, depends on two questions to which In large part we ourselves can provide The first is the sense of
the answers. urgency with which we treat the expansion of our export even if that means waiting a little
trade, 
longer before we satisfy our personal 

wants in fu11.... The second question is how far we shall be willing to enforce a strict economy In ex-
What we must avoid
ternal cash expenditure.... is commitments which might be beyond
unnecessary 
our continuing strength, and we must closely 
limit external expenditure which does not pro­duce a fairly quick return.^ 

3 Quoted in Heatherington, loc. clt., p. 45. 
The only possible solution, however undesirable, seemed to 
be further Indebtedness abroad In the form of long-term 
credits. 
With many misgivings and despite much criticism at 
home, the British Government, therefore, decided to enter 
into a financial agreement with the United States which 
would enable Britain to adjust her balance of payments 
other than through a drastic reduction of imports. The 
actual agreement, concluded on December 6, 1945 and known 
not
as the Anglo-American Financial Agreement, reflected 
Britain's need for immediate financial assistance to
only 
make this adjustment, but also "the American desire that 
any such adjustment be made only within the framework of 
a multilateral Aside from this desire to restore 
4 
Polk, J. and Patterson, Q. "The British Loan”, 
Foreign Affairs, Vol. 24, April 1946, p. 432. 

multilateral trade, the United States was also anxious 
to end all outright "gifts” and to substitute for a "giv-
American
ing” system a "lending" system. Hence, the ne­
insisted that any further assistance to Britain
gotiators 
in the form of a loan rather than a continuation
should be 
of lend-lease aid. A section of the Agreement provided 
for full settlement of lend-lease. The United Kingdom 
40 
agreed to pay the United States $650 million, and the slate 
was thus wiped clean. c;J Under the principal terms of the 
5 Polk and Patterson, loc. clt., p. 433. 
Agreement, the United States agreed to extend a line of 
credit of $3,750 million to the United Kingdom. The purpose 
of this credit, as stated In section 3 of the Agreement, was 
to facilitate purchases by the United Kingdom of goods and services in the United States, to assist the United Kingdom to meet transitional post-war deficits In Its current balance of to
payments, 
help the United Kingdom to maintain adequate re­serves of gold and dollars and to assist the 

Government of the United Kingdom to assume the 
obligations of multilateral trade, as defined In 
this and other agreements.^ 
6 Cmd. G7OB, Financial Agreement Between the Govern 
ments of the United States and the United Kingdom (London: 
His Majesty rs’"stationery offfee, December "154*5P» 2. 
The loan was to be Interest-free until December 31, 1951, 
at which time repayment would begin, and be made In 50 annual 
installments, at an interest rate of 2 percent per annumJ 
7 
Ibid. 

On March 6, 1946 a similar agreement was concluded with 
Canada whereby the United Kingdom was to receive a credit 
of and
$1,250 million for the same purpose on the same 
o 
terms of repayment as the American loan/ These credits. 
8 
Cmd, 6904, Financial Agreement and Agreement on the Settlement of War Claims Betveen the Governments of" the United' 
s
Kingdom ~and^Canada~[London: Hi’s Majesty T Stationery 
Office, September 194b), p. 3. 
then, were meant to enable the United Kingdom to obtain the 
imports needed for the quick reconversion of its war-time 
economy without the immediate pressure of balancing its 
international payments* 
Despite the absence of this immediate pressure, the 
British Government took great care not to squander the 
American and Canadian loans in a mad dash for imports. 
Quantitative import restrictions were imposed and only 
those Imports essential to the reconversion effort were 
permitted to enter. Such a policy necessitated the adop­
tion of a of *austerity” at home, a measure which
program 
entailed great sacrifices for the British consumer. The 
result was only a moderate rise in the volume of imports. 
In 1945 the volume of retained Imports of the United 
62 the volume. it had
Kingdom was percent of 1938 By 1948 
This
risen slightly to 8l percent of 1938. represents an 
increase of 30 percent in the three years, 1946-48.^ 
9 
The Scope Yearbook of Industry, Trade and Finance 
1951 (London: Scope Books Ltd.V 1951), P» 554 

* 
The rise in the value of retained imports, however, was 
substantial. From 1,052.7 million pounds in 1945, it rose 
to 2,015.0 million pounds in 1948. In 1945 it was 122 per­
cent of the 1958 value. By 1948 it had risen to 235 per­
cent. This represents an increase of 92 percent in the 
years, 1946-48. Thus, while the Government was talcing 
10 
The Board of Trade Journal, February 15, 1947, The
p. 277, and Pebruary 5, p. percentages
• 
indicating the rise in the value of retained imports were computed by this writer. 
steps to limit the volume of imports to those goods which 
were essential to the reconversion program, their value 
nearly doubled in the three post-war years, 1946-48. This 
condition may be explained in part by the trend in the 
values of imports. Index numbers of the average
average 
values of total imports show an increase from 193 percent 
an
of the 1958 level in 1945 to 289 percent in 1948, or 
46 in 1946-48.8ut index numbers of
increase of percent 
Annual Abstract of Statistics, No. 87, 1938-1949 His Majesty »s Stationery office"/ 1951T, P-287.
(London: 
accurate
values cannot be relied upon as an Indlca 
average 
trends. Their chief worth Is In reducing
tion of price 
values to the price levels of the base year (in
current 
43 
this case 1938). They can only be used as a rough guide to 
price movements from year to year, "since they are in­
fluenced  by  changes  in the composition  of  trade  as  well  as  
by  price  ¦1 pmovements.”  The  indices  of  Import prices  for the  

12 
Annual Abstract of Statistics, No. 87, 
1938-1949, footnote to table on“p7 287• For -auTl explanatfon ofhe meaning of average value Indices and the difference between them and price indices of imports and exports, see The Board of Trade Journal, April 13, 1946, 420. 
p. 
early post-war years show a continuation of the steady war­
time increase in British import prices. In December 1945 
of total were of the 1938
prices imports 195 percent 
1 l^ average. By December 1948 they had risen to 297 percent. 
15  
Annual  Abstract  of Statistics,  No.  85, 1937-1947,  
p.  248.  
14  
The  Board  of  Trade  Journal,  February  5,  1949,  
p.  239.  

This indicates an increase of 52 percent in 1946-48. The 
offers 
18 altogether satisfactory, explanation for the substantial 
rise in import prices a more acceptable, though not 
15 The import price indices indicate the in
changes the aggregate a representative quantity of Imports.
value of 
This quantity is multiplied by the unit value computed from Trade Accounts of the Board of Trade for the
the monthly 
44 
month In question and for* the base year* 1938. In comput­
ing the unit value, some of the less important headings of United Kingdom imports are aggregated with one or* of the principal headings listed in the Trade Accounts to obtain a representative collection of headings. Thus, 
“the of
movement unit values for such an aggregation of is of
headings not necessarily a measure the true price movement of any one of the items included, if the make-up within the aggregated heading is changing significantly. (The Journal, April 13, p. also
Board of Trade gTves a~de tailed account~o7 the method of compiling the price indices.) 
increase in the value of (despite only a slight Increase 
in the volume of) retained imports. 
While the value of British Imports was rising fast 
in the immediate post-war strenuous efforts were
years, 
being made by the Government to expand exports as quickly 
The Financial with the United
as possible. Agreement 
States could not be expected to postpone indefinitely the 
immediate need for exports to pay for imports, and in order 
to balance her current accounts, it was Imperative that 
Britain raise the volume of her exports substantially above 
Before the conclusion of the Financial
the 1938 level. 
io was estimated that British exports would have
Agreement, 
to be increased by 50 percent above the 1938 volume in 
order to just for the pre-war volume of imports. The
pay 
likelihood of imports in excess of the pre-war volume dur­
ing the transitional period and after, as well as the financial burdens incurred in the and the
Agreement need 
for overseas expenditures to build up an enlarged volume 
of new trade, raised the target to 75 percent above the 
1958 volume. The greater portion of the increase was 
16 
Cmd. 6707, Statistical Material Presented During the Washington Negotiatlons~TLondon: His Majestyl!* Statfonery Offfee7 cember p. 5* 
to be concentrated on manufactures, and In order for total 
exports to rise by 75 percent above 1938, It was estimated 
that the volume of exports of manufactures would have to 
l^
rise by a little over 100 percent. 
17 The Economist, December 15, P* 850. 
such a be
Obviously, large target could only 
achieved by a quick resumption of full-scale industrial 
production, and especially by a substantial expansion 
of Britain's export industries. While the export drive was 
left primarily to the initiative of private businessmen, the 
Government played an important role in assisting and regu­
for
lating the program. Exporters were given priority 
the end
manpower and materials (although of positive labor 
controls made a priority for manpower quite ineffective, 
of the low levels in some of
especially because wage the 
46 
principal export industries). Industries were encouraged 
to form or reform export groups to assist in meeting export 
quotas. The Government's staffs for assisting and advising 
traders at home and abroad were strengthened. And shipping 
18 was allocated as rapidly as possible. The Immediate 
18 The Economist, November 3, P* 621. 
problem for Britain, however, was not one of marketing, but 
of This that of secur­
production. raised another problem, 
an share of total production to meet export
ing adequate 
demands. It was natural that with a high level of domestic 
demand, British manufacturers should consider production 
for sale at home more attractive than production for sale 
abroad. Thus, in order to make adequate facilities avail­
able for export production, the Government had to place 
IQ on domestic demand. v This deferment of
restrictions 
Britain and World Trade (London; PEP, 194?)> p. 11l 
from the satisfaction of home needs to the satis­
production 
faction of export demands intensified the "austerity" im­
to "aus­
restrictions. Needless say,
posed by the import 
to be extremely unpopular 

with the British
terity" proved 
47 
people, but it is difficult to suggest an alternative 
policy that might have offered better prospects of suc­
cess 
. 
Despite the efforts of the British Government to 
increase production as rapidly as possible, total indus­
trial production of the 
United Kingdom Increased only 
slightly over pre-war production. In 1946 industrial 
production in general was 96 percent of 1938. By 1948 it 
was 116 percent, an increase of only 16 percent over the 
pre-war level in the first three post-war years. Compared 
20 Computed from figures in International Financial Statistics, Vol. 111, January 1950,’~pTT5C37 
with production in 1946, the increase in 1947-48 was slight­
ly greater* In 1947 the monthly average of total industrial 
was of the
production 108 percent 1946 monthly average. By 
1948 it had increased sharply to 121 percent, a rise of 21 
percent over 1946 in two years. The quarterly index shows 
increase. In the fourth quarter of 1947
a still greater 
total production was 119 percent of the 1946 quarterly 
In the of 1948 it was 126 
average. fourth quarter percent (see Chart l). Thus, although the increase in total pro­
duction during 1946-48 appears slight when compared with 
the 1938 level, it was considerable during 1947-48 when 
compared with the 1946 level. Production in the manufactur­
ing industries, the key to export expansion, also increased 
considerably (almost pari passu with total production) when 
compared with 1946. In 194? the monthly average of pro­
duction in manufacturing industries was 109 percent of the 
1946 average. By 1948 it had risen to 125 percent. The 
quarterly index shows that in the fourth quarter of 1947 
production in manufacturing industries was 120 percent of the 
1946 quarterly average. In the fourth quarter of 1948 it 
PI was 128 percent (see Chart 1). 
21 Annual Abstract of Statistics, No. 87, 1958-1949, pp. 
128-123: 
The export drive conducted by the British Govern­
ment produced remarkable results in an amazingly short time. 
The volume of United Kingdom exports rose from 46 percent 
of the 19j58 volume in 1945 to 99 percent in 1946. This 
of in one
represents an increase 115 percent year. By 
had risen to 156 percent of the 1958 volume,
1948 exports 
which indicates an increase of 195 percent in the three 
22 1946-48. Although the 1948 volume was still 
years, 
22 
The Scope Yearbook of Industry, Trade and Finance 
1951, P. 5W­
the of
considerably below export target 75 percent above 
Chart 1. Industrial Production in the United Kingdom Quarterly Average 1946= 100 
50 
increase
1938, the rapid in the first three post-war years 
as an
must be regarded admirable achievement. The value 
of United Kingdom exports increased tremendously in the 
same three-year period. From 399 million pounds in 1945, 
it 
rose to 1,583 million pounds in 1948. In 1945 it was 
84.7 percent of the 1938 value. 1948 it had risen
By to 
an
338.1 percent. This represents increase of 297 percent 
in the three years, 1946-48. As in the case of 
imports, 
25 The Scope Yearbook of Industry, Trade and Finance 1931. p. SST. 
rise in the value of
the exports may be explained in part 
the rise in the average values of exports. In 1945
by 
these average values stood at 185 percent of 1938. By 1948 
of
they had risen to 247 percent, Indicating an increase 33 
24 in 1946-48. The prices of exports rose in the
percent 
24 
Annual Abstract of Statistics, No. 87, 1938-1949, 
287.
?. as the values. 
same proportion average In December 1945 
were of the
export prices 194 percent 1938 By 
25 Annual Abstract of Statistics, No. 83, 1937-1947, 
248.
p. 
51 
December 1948 they had risen to 259 percent. This also 
The Board of Trade Journal, February 5, 1949. 
p. 259. 
indicates an increase of 53 percent in 1946-48. The observe 
tlons and explanations that were made above concerning the 
average values and prices of imports, also apply to the 
average values and prices of exports. 
The most notable, and most important. Increase in 
United Kingdom exports was in manufactured articles. In 
1945 the volume of exports of British manufactures was 45 
percent of the 1938 volume. In 1946 it stood at 111 percent 
of 1938, indicating an increase of 146 percent in one year. 
By 1948 exports of manufactures had risen to 155 percent 
of the 1938 volume, indicating an increase of 244 percent 
While
in the three years, 1946-48 (see Chart these 
27 The Board of Trade Journal, March 2. 1946, p. 220, February ISV 194?/ p'.’ "282, "and 'February 5# p. 233. 
figures represent an enormous gain, it must be remembered 
that the target set for exports of manufactures was about 
100 percent above the 1938 voluem. In 1948, as shown above, 
percent above 1938. The value of exports
they were only 55 
of manufactures increased prodigiously. In 1945 It amounted 
52 
to 506.8 million pounds. By 1948, It had risen to 	1,576.6 
million pounds. While In 1945 the value was 84 percent of 
the 1938 value, in 1948 It was 277 percent. This represents 
an Increase of 250 percent In the value of exports 	of manu­2^
factures In the three years, 1946-48 (see Chart 2). 
28 Annual Abstract of Statistics, Wo« 87, 1938-1949, 
p. 197-Tlie percentages indicating the rise In the value of exports of manufactures were computed by this writer. 
While the increase in total industrial production, 
especially in production of manufactures, and the vigorous 
export drive launched by the British Government were 
primar­ily responsible sharp In British exports,
for the rise 	two 
other causes must be mentioned. First, Britain was selling 
her exports in a sellers' market, i.e., in a market in 
which demand far exceeded available supplies. The 	immediate 
post-war years saw an urgent need in many countries for 
capital goods to reconstruct war-ravaged industries and 
consumer goods of all kinds to meet war-deferred demands. 
Because of this high level of demand, a large increase in 
the volume of British sales was to be expected despite the 
high prices of exports. Secondly, the end of the war saw 
the disappearance of German and Japanese competition from 
market. The importance of this factor in Britain's
the export 
export increase, however, is uncertain. It must be 
Chart 2. Volume and Value of 
United Kingdom Exports of Manufactures (1938=100) 
54 
remembered that Germany and Japan were importers as well 
as exporters before the war, and their ruin was almost 
certain to bring about a reduction of total world trade. 
Such a reduction would tend to be damaging rather than 
beneficial to Britain's export trade.^ 
29 The Economist, November 3> 1945, p. 621. 
Achieving An Overall Balance 
While 
the value of British imports nearly doubled 
in the years from 1946 to 1948, the value of exports near­
ly quadrupled. Obviously, this would indicate a narrow­
ing of the trade and a healthy sign for Britain's
gap 
balance matter of the
of payments. As a fact, visible 
to the
trade deficit, according figures given above, de­
clined from 658 million pounds in 1945 to 432 million 
in The current account section
pounds of the United 
30 
The figure for 1945 is the one given in the first chapter. As calculated from the value of retained imports and the value of United Kingdom exports given above, the 
visible trade deficit for 1945 amounts to 653*7 million 
The for 1948 is obtained from the value of
pounds. figure retained imports and the value of United Kingdom exports 
given for that year.
above 
Kingdom general balance of payments, 1946-June 1950, as 
prepared by the British Treasury, shows that the trade 
55 
deficit was reduced to 1?6 million pounds in 1946, sharply 
increased to 425 million pounds in 1947, and again reduced 
to 
31 207 million pounds in 1948. These figures, however, are 
31 
Cmd. 8065, United Kingdom Balance of Payments 1946 to 1950 (London; His Majesty's Stationery 6fftee7 October T§s(s), p. 7« 
based on yearly values of Imports and exports which differ 
considerably from those given in preceding pages. One of 
the chief reasons for this difference is the fact that imports 
and exports are both valued f.o.b. in the Treasury analysis, 
while in preceding pages imports are valued c.i.f. and ex­
ports f.o.b. Whatever the difference in the figures and 
the basis of their computation, it is clear that Britain's 
visible trade deficit was considerably reduced in the years 
from 1946 to 1948. 
More important, however, for its influence on the 
balance of payments, was the trend in Britain's invisible 
trade. As pointed out in the first chapter, there was a 
deficit of 172 million pounds in Britain's invisible trade 
in 1946. This was due primarily to the heavy overseas ex­
penditures of the Government (363 million pounds net). The 
visible and invisible trade deficits contributed to an over­
all balance-of-payments deficit of 348 million pounds in 
1946. In 1947 the invisible trade deficit was reduced to 
56 
155 million pounds. The large visible trade deficit of 
425 million pounds, however, made for an overall deficit of 
558 million pounds. By 1948 net government overseas expend­
itures had been reduced to 87 million pounds, and Britain 
enjoyed a surplus in her Invisible trade of 127 million 
This
pounds. surplus, coupled with a reduction to 207 
million pounds in the visible trade 
deficit, reduced the over 
all deficit to 80 million pounds in 1948. 
Actually, a 
52 
Cmd. 8065, p. 7. 

balance in Britain’s current transactions had been attained 
in the second half of 1948. The Treasury’s analysis of 
the balance of payments, 1946-1949, shows that the visible 
trade deficit during the second half of 1948 had amounted 
to 44 million pounds, but a surplus of 89 million pounds in 
invisible trade, had resulted in an overall balance-of­
payments surplus of 43 million pounds for the half-year.^ 
53 Cmd. 7795 , United Kingdom Balance of 
Payments 1946 to (London: His Majesty 1 s Stationery Office, October 19^9) P* 5»
> 
Over the whole year, however, the overall balance was still 
in deficit. The attainment of a balance in Britain’s ex-
the end of the must
ternal payments by third post-war year 
57 
be regarded as a phenomenal achievement when It Is remembered 
that the overall deficit averaged about 700 million pounds 
during the war years. It could not have been attained with­
out great sacrifices on the part of the British people. 
In the first half of 
1949 British imports and exports 
continued the upward trend which they had shown In the first 
three post-war years, 1946-48. Retained imports for the 
of
first half-year 1949 were up to 85 percent of the 1938 
volume, indicating an increase of 5 percent over 1948. 
United Kingdom exports rose to 151 percent of the 1938 volume, 
indicating an increase of 11 percent over 1948. The value of 
retained imports for the first half of 1949 amounted to 
1,088.9 million pounds. This Indicates an increase of 68.4 
million pounds over the last half of 1948. United Kingdom 
exports for the first half of 1949 were valued at 891.8 
million pounds. This shows an increase of 52.0 million 
over the last half of 1948. The for the
reason
pounds 
greater increase in the value of Imports was a drop of 7 
percent in the volume of exports from the first to the second 
of 1949, which kept down the value of exports for
quarters 34 
the half-year. 
34 
Calculated from figures in The Board of Trade Journal, August 6, P* 242. 
58 
The Treasury’s analysis of the United Kingdom 
general balance of payments, 1946-June 1950, values Imports 
at 958 million pounds (f.0.b.) and exports and re-exports at 
915 million pounds (f.0.b.) for the first half of 1949. 
These figures make up a visible trade deficit of 43 million 
pounds for the half-year. Invisible trade for the same 
period, however, netted a surplus of 59 million pounds, 
making for an overall surplus of 16 million pounds In the 
balance of This surplus, although considerably 
55 
Cmd. 8065, p. 7* 
smaller than the one attained in the last half of 1948, main 
talned Britain’s solvent position In her external payments. 
The Dollar Deficit 
The attainment of a balance In Britain’s current 
transactions gave rise to much optimism In both Britain 
and the United States and led more enthusiastic spirits to 
economic
believe that Britain's complete Independence had 
been achieved. There was, however, one important flaw In 
The was an overall balance and
the situation. balance 
tended to conceal the continuing problem of Britain’s dol­
lar deficit. That is to It tended to conceal the fact
say. 
59 
that Britain’s current 
dollar earnings were still inadequate 
to 
pay for her imports from the dollar area, and that the 
surpluses which she was with
running elsewhere, e.g., 
Western Europe and the rest of the 
sterling area, could not 
he used to cover her deficit with the 
dollar countries. The 
problem was adequately stated in the Economic for
Survey 
1949, presented by the Chancellor of to
the Exchequer 
Parliament in March 1949: 
The present general balance conceals a varied and complex pattern financial relationships.
of 
With some 

countries, particularly the Western Hemisphere but also in the Middle East, we con­tinue to be heavily in deficit. With others, in­
cluding some of our partners in O.E.E.C. /Organiza­tion for European Economic Cooperation/ and a number of countries in the rest of the 
sterling 
area, we continue to have a large surplus. But 
as long as the non-dollar world remains 

critically short of dollars, it is not possible for us in general to earn from the countries with which we 
have surpluses the dollars which we need to 
finance our dollar deficit.^6 

56 Cmd. 7647, Economic Survey for 1949 (London: His Majesty's Stationery Offfee, March P« 22. 
This deficit in current transactions with the dollar area 
remained the crucial problem in Britain's effort to attain 
full economic independence. 
The dollar deficit stemmed from the fact that while 
well as
Britain's dollar experts (as exports in general) 
were necessarily limited during the reconversion period. 
60 
the bulk of her essential imports had to come from dollar 
countries because 
they were the only sources of supply at 
the time. In 1946 British exports to the dollar area amounted 
to 
only 98 million pounds ($396 million), while dollar im­amounted
ports to 389 million pounds ($1,565 million). An invisible trade deficit of 4l million pounds ($167 million) 
made for 
a deficit of 332 million pounds ($1,336 million) with the dollar area. The overall 
balance-of-payments deficit in 1946 was 348 million pounds. In 194? dollar ex­
ports increased slightly to 127 million pounds ($512 million), but dollar imports substantially to 565 million
Increased 
pounds ($2,279 million). The invisible trade deficit also increased substantially to 136 million pounds ($549 million), resulting in a dollar deficit of 574 million pounds ($2,316 
overall balance-
million). This figure was larger than the of-payments deficit of 558 million pounds for 1947* The 
year 1947 was the critical year. Thereafter, the dollar 
deficit began to diminish. In 1948 it was reduced to 
273 million pounds ($1,105 million). For the first half of 1949 it amounted to 142 million pounds ($571 million). Thus, in the first half of 1949 while Britain was enjoying 
16 she had a deficit 
an overall surplus of million pounds, ($571 million) with the dollar area.
of 142 million pounds 
57 
Crad. 8065, pp. 8-9 and pp. 24-23. 
These figures are for the deficit in the balance of current 
transactions with the dollar area. into account
Taking 
of
other transactions the United Kingdom (investment, etc.), 
the dollar deficit of the rest of the sterling area, and the 
net gold and dollar payments made by the whole sterling area 
to other (non-dollar) countries, the total net gold and dol­
lar deficit amounted to 226 million pounds ($9OB million) 
in 1946, rose sharply to 1,024 million pounds ($4,131 million) 
in 1947> and then fell considerably to 423 million pounds 
($1,710 million) in 1948. For the first half of 1949 it 
totalled 239 million pounds ($962 million)." 
58 
Cmd. 8065, pp. 24-25. 
The British Government took various steps to reduce 
limit the dollar deficit. These steps usually involved 
or 
restrictions on dollar imports and intensive efforts to ex­
pand exports to dollar markets. Import policy was concerned 
from dollar to non-dollar 
more with diverting purchases 
than with direct restrictions on dollar imports. In 
sources 
the Government to
order to effect such a policy, took steps 
production in the non-dollar world, especially
encourage 
and under-developed areas. Direct

in the primary-producing 
work was carried on under Government auspices

development and the Colonial Development
the Overseas Food Corporation
by 
62 
Corporation, and long-term contracts were made with primary 
producers guaranteeing them a market in other Commonwealth 
countries and in Europe. As a result of these measures. 
39 
Cmd. 7647, p. 29. 

which amounted
imports from the Western Hemisphere, in 194-7 
to 46 percent of total United Kingdom imports, were reduced 
to the pre-war (1938) proportion of 52 percent in 1948. 
Meanwhile, imports from the rest of the sterling area were 
increased from 53 percent of total imports in 1947 to 57 
from the O.E.E.C. countries rose
percent in 1948, imports 
from 15 percent to 18 percent, and imports from other 
40 12 On the side
countries rose from 6 percent to percent. 
40 
Ibid., p. 21. 

of the Government conducted a vigorous export drive
exports, 
Practical assistance was 
on the North American market. given 
to Increase their salesto manufacturers and exporters eager 
markets. As a result, there was a
In American and Canadian 
In exports to North America, and promisingnotable Increase for manufactures which had not been
markets were built up 
United States or Canada before the war. Despite
sold In the 
of total United Kingdom
these efforts, however, the proportion 
to North
exports going America remained slightly below the 
41 pre-war level. United Kingdom exports to the Western 
41 
Crad. 7647, pp, 28-29. 

Hemisphere rose from 94 percent of the 1938 volume In 1947 
to 139 percent In the last half of 1948, an Increase of 48 
. 42 percent. 
42 
Ibid., p. 19* 

the British Government to with
The efforts of cope 
the dollar deficit were meant to keep it from extending 
could not have been
beyond manageable proportions. They to eliminate it completely, at least not in the
designed short run. A large dollar deficit was, therefore, unavoid­
able, and the real problem was to find the means of financing 
it. To meet this problem, Britain had to rely chiefly on 
external aid. In the first two post-war years the bulk of 
the net gold and dollar deficit was met by drawings on the 
and Canadian loans. In 1946, 149 million pounds
American drawn on the American loan and 130 
were
($6OO million) 
on the Canadian loan. In
million pounds ($523 million) 
1947, with an enormous deficit of 1,024 million pounds 
million pounds ($2,850

($4,131 million) to finance, 707 
million) came from the United States line of 	and 
43 
In the second quarter of 194? drawings on the United States line of credit covered 236 million pounds ($950 million) of a quarterly deficit of 242 million 
pounds ($973 million). In the third quarter similar draw­ings covered 323 million pounds ($1,300 million) of a quarterly deficit of 381 million pounds ($1,537 million). 
105 million pounds ($423 	million) from the Canadian line of 
credit. The greater part of the remainder of the deficit 
was covered by drawings on Britain! s gold and dollar re­
-44 
in the amount of 152 million pounds (s6lB million).
serves 
44 
Cmd. 8065, pp. 26-27. 

States line of
The heavy drawings on the United 
strain on the American loan funds. 
a
credit put severe 
to last five the loan
Although It had been expected 	years, 
In little more than a year after
had virtually disappeared 
It melted away with amazing rapidity after
It was granted. 
under terms of
sterling convertibility was established, the 


1947.^
the Financial Agreement, 	In July 
45 
"The British Crisis: A Problem
J. 	H. Vol. Octo-
Williams, 
In Economic Statesmanship", Foreign Affairs, 28, 
ber 1949, P-4. 

to finance the dollar deficit
While the drawings 
Inroads on the loan, there were other more
made heavy 
for
important reasons Its rapid exhaustion. Professor 
1
Lionel in
Fobbins, an article in Lloyds Bank Review^ 
46 
Robbins, L. "inquest on the Crisis”, Lloyds Bank Review, New Series, October 194?, pp. 1-2?. 
offers three explanations. First, the greater rise in im­
port prices relative to export prices, i.e., a deteriora­
tion of of
the terms trade against Britain, following the 
ratification of the Financial Agreement, produced "a fall 
in the purchasing power of the loan, a shrinkage in the 
which it made
breathing space possible." Secondly, the un­
settled world conditions of the post-war period called for 
the
heavy government expenditures overseas "on maintenance 
of essential
of armed forces and the provision supplies." 
Both of these factors caused a serious drain on British 
this is Professor Robbins’ main 
resources. Thirdly (and 
a
explanation of the loan’s exhaustion), there was colossal 
of capital from the United Kingdom, chiefly to the
leakage 
area in the form of substantial withdrawals of the
sterling 
The facts seem to substantiate Mr.

sterling balances. 
the of In
Robbins' arguments concerning leakage capital. 
inflow of
1946 there was a net capital 194 million pounds. 
1947 the United Kingdom experienced a net capital out-
In flow million pounds. The non-sterling area, princi­
of 302 
pally the United States and Canada, contributed a net 

66 
capital inflow of 14 million pounds 
to 
the United Kingdom. 
On the hand, the 
a
sterling area acquired capital out­
flow 
of 316 million pounds from United Kingdom,^
the 
47 
Ellis, H. S. "The Dollar Shortage in Theory and Fact The 
, Canadian Journal of Economics and Political Vol*
3cience, 14, August 1945, pT JUUI 
Professor Robbins puts a substantial share, but not 
all, of the blame for the on
flight of capital convertibility. 
He notes that the rate of withdrawal after 
July 15, 1947, when 
went
convertibility into effect, greatly exceeded the rate 
of withdrawal prior to that date. 
He points out, however, 
that convertibility, per se, was not completely responsible 
for the loss of capital: 
The 
convertibility obligation,...was an obligation to maintain not but
total convertibility only con­vertibility on current account. This means in plain 
English that the foreigner was entitled to tu~n in­
to dollars, if he pleased, not his capital but his 
current earnings. 
48 
Robbins, loc. clt., p. 18. 
of that
His implication is, course, it was convertibility of 
withdrawals over and above current earnings, and not con-
that was to blame for the
vertibility itself, tremendous 
of capital. The effect of the withdrawals of
leakage 
49 
Ibid., pp. 15-19. 
sterling balances, converted 
into dollars, on the American 
be
loan fund, can appreciated when It Is 
noted that of the 
capital outflow of J>l6 million pounds going to the sterling 
area, 266 million pounds were used to cover the area f s dol­
lar deficit, thus making for a loss of dollars not only by 
but the whole
the United Kingdom by sterling area. 50 There 
50 
Ellis, loc. cit., p. 366. 

Is no doubt that the primary effect of sterling convertlbll 
Ity was to accelerate the dollar drain. It was this ad­
ditional strain on Britain's dwindling dollar resources 
that brought about the suspension of convertibility on 
weeks after Its The
August 20, just five Inception. 
Economist, absolving the Government of much of the blame, 
saId: 
This particular objective to restore convertibil­ity unilaterally by July 15th last was not a chosen objective nor was it a party objective. It was an Inescapable part of the price for a loan which most people were agreed Britain had to have, a which Britain honestly tried to pay, but
price which was so high that It was all too likely to break the bank. It would certainly have done so 
within a few days had Britain decided that 
very In the extremity It had to stand by
even present the letter of the bond. During the month of July, the sand In the dollar hour-glass was running out at rate of sl7i million per day. In
the frightening 
decision
the seven working days before the new was taken the dally loss was at just twice that rate 
million was lost In the five days to August
$176 
million In the first two days of this
15th and $66 
68 
week. such a
At rate, the US dollar credit 
would have 

run 
out early next month /Septem­
ber 19477.51 
51 The Economist, August 23, 19*7, p. 331. 
The virtual exhaustion of 
the American loan towards 
the end of 194? left Britain without her 
chief of
means 
not
financing only her persistent dollar deficit but also 
her overall 
balance-of-payments deficit. The tremendous 
rise of the net gold and dollar deficit from 226 million 
pounds (S9OB million) in 1946 to 1,024 million pounds 
($4,131 million) in 194? and the rise of the over-all def­
icit from 348 million pounds in 1946 558 million pounds
to 
in 1947, rendered Britain's position critical. the
But, 
British difficulty was only a part of the general economic 
crisis that engulfed Western Europe in 1947. This crisis 
the intense of
was precipitated by winter 1946-47 which 
caused wide-spread crop failures and heavy cuts in coal 
supplies. It was characterized by enlarged dollar deficits, 
internal inflation, and, consequently, political instabil­
in most of the countries on the Continent. This situa­
ity 
tion led to the of the Marshall Plan
adoption for long­
term assistance by the United States to Western Europe. On 
the basis of the report prepared by the 16-nation Committee 
at Paris
of European Economic Cooperation in September 1947, 
President Truman submitted to Congress in December a 
long-range program of assistance for European recovery. 
After lengthy debate, Congress passed the Economic Coopera­
tion Act, embodying the President's proposals. In April The European Recovery Program (the designa­
official 
tion for the Marshall Plan) was more than just another 
post-war loan or grant to Europe. It was an attempt to 
Integrate American aid with European economic cooperation 
and self-help. Its chief alms were to Increase Industrial 
production and create Internal financial stability In the 
and to attain a of
participating countries solution 
Europe's dollar problem. As a result of Marshall aid, 
European recovery proceeded rapidly. Industrial production 
rose above the pre-war level, the Inflationary spiral re­
ceded and Internal economic stability was gradually 
achieved, and Europe's foreign trade expanded considerably. 
The funds made available to the United Kingdom 
took the place of
through the European Recovery Program the American loan as the chief medium for financing Britain's 
deficit. In 169 million pounds ($682 million)
dollar dollar deficit met E.R.P. funds.
were
of the net gold and by 
Of the remainder of the deficit, 80 million pounds ($325 
the South African Gold Loan and

million) were covered by 
(In the first quarter of the year) million pounds ($3OO 

loan.
the last drawings on the American In the
million) by 
first half of 1949 E.R.P. funds covered 165 million pounds 
of the
($665 million) deficit for the half-year. Gold and 
dollar reserves covered 51 million pounds ($205 million). 
Cmd. 7928, United Kingdom Balance of Payments 1946 
r
Hfs
to lp49j No. 2 (London; MaJesTy Stationery Office,
s 
Aprfl I9sff)V PP* 7 and 9; Cmd. 8065, pp. 26-27­
These indicate clearly vital
figures the role played by 
Marshall aid in Britain's recovery efforts. Without the 
funds provided by E.R.P., Britain would have been forced 
to cut her dollar imports even more drastically than she 
was already doing through the policy of Import restriction 
and diversion. The E.R.P. receipts permitted her to con­
tinue those imports of food and raw materials essential to 
the completion of the reconversion program and available 
in the dollar countries.
only 
Loss of Gold and Dollar Reserves
The 1949 Crisis: 
By the middle of Britain was enjoying a 
and more stable external position than she had
stronger 
time since the end of the war. Her
experienced at any 
industrial recovery had been achieved with amazing suc­
her export trade was increasing rapidly, and for the 
cess, 
before the war she had achieved overall
first time since 
in her current international transactions. In
viability 
of Commons
delivered in the House on July 6, 19^9,
a speech 
Slt» Stafford Crlpps, Chancellor of summarized
the Exchequer, 
the situation In terms:
happy 
Today, as a result of the conclusion of the Brussels Pact, the establishment of the OEEC /Organization for European Economic Recover17 and the signature of the Atlantic Pact, our own position and that of the other countries 
con­
cerned has 
been immeasurably strengthened. We have behind In the
us United Kingdom two of
years expenditure on capital goods on an unprecedented scale, and of uninterrupted eco­nomic 
progress. We have taken a variety of measures to deal with the in
inflationary situation with which 19*47 we were threatened. Our production is at a record level in the whole of our history, and our exports are as high as they have ever been 
as
and half as high again in mid-1947* 
We have practically reached a state of 
over­all balance In our overseas trade. All this has 
been made possible by the great efforts of our own people and by generous help
the of the United 
States and Canada, especially through the European Recovery Program which Is so large a 
factor In the progress that Is being made 
55  
Vital Speeches  of  the Day,  Vol.  XV,  July  15, 19^9,  
p.  585.  

these favorable signs, the situation
But, despite 
contained certain disturbing aspects which presaged a new 
crisis In Britain’s international payments position. By 
mld-194-9 the sellers' market for British exports had dis­
appeared. European production, as mentioned above, had 
been raised above the pre-war level, and, consequently, 
for British goods which had characterized
the urgent demand 
had fallen off In
the Immediate post-war period the Western 
72 
European countries. had
British exports, which previously 
been absorbed on the basis then had to
of need alone, 
compete on the basis of quality and price considerations. 
In other words, the sellers’ market had given way to a 
buyers’ market. Such a change in demand conditions por­
tended a probable decline in Britain’s export trade. Further­
more, British imports, already severely restricted, could 
withstand further cuts
not without endangering production 
targets and without increasing the burden of austerity. A 
reduction of exports, in such circumstances, would certainly 
the small overall surplus that had been achieved in
erase 
the balance 
of payments. 
A more serious development, however, was the un­
favorable turn in Britain’s dollar position in the first 
of Despite the sharp decline in the net
six months 19*19. 
and dollar deficit from 194? to 1948, there was a
gold 
rise in the first half of 1949 over the last
considerable 
1948. For the last six months of 1948 the deficit
half of 
amounted to 169 million pounds (s6Bl million), while for 
It amounted to million
months of 1949 239
the first six 
pounds ($962 million). There was an even sharper rise from 
the second quarters of 1949. During the first
the first to 
deficit totalled 82 million pounds ($330 mil-
quarter the 
the second quarter it totalled 156
lion), while during 
73 
sty million pounds ($632 million). The first six months of 
54 Cmd. 7928, pp. 7 and 9; Cmd. 8065, pp. 26-27. 
1949 thus Indicated a reversal of the favorable trend that 
the previous year had shown in the status of the dollar 
deficit. It is significant that in the same period when 
an
Britain was enjoying overall balance in her current 
transactions, her dollar deficit was again increasing, and 
although the problem of financing an overall deficit had 
been obviated for the time being, the problem of financing 
the dollar deficit remained. The latter problem became ex­
tremely disquieting when the dollar deficit increased beyond 
the funds made available to Britain and the sterling area 
under E.R.P., through the Canadian loan, and through the 
International Monetary Fund. In the second quarter of 
on the Canadian loan and E.R.P.
1949 drawings receipts 
(there were no drawings on IMF) covered only 91 million 
pounds ($570 million) of a quarterly deficit of 156 mil­
lion pounds ($652 million). The remainder, 65 million pounds 
($262 million), was met from the gold and dollar reserves 
55 
of the sterling area. As a result, the reserves fell 

55 
Ibid. 
74 
from a total of 471 million pounds ($1,912 million) as of 
March 31 to 406 million pounds ($1,651 million) as of June 
This was in contrast to the situation in the first 
56 
Cmd. 8065, p. 28. 
quarter of 1949. During that period drawings on the Canadian 
loan and on IMF and E.F.P. receipts amounted to 96 million 
pounds ($586 million). This sum exceeded the quarterly 
deficit of 82 million pounds ($550 million) by 14 million 
and the and
pounds ($3B million), gold dollar holdings were 
increased by the latter amount. In the fourth quarter of 
1948 gold and dollar holdings had been increased by 20 
million pounds ($79 million).^ 
57 
Cmd. 7928, pp. 7 and 9; Cmd. 8055, pp. 26-27. 
The drain on reserves in the second 
quarter of 1949 called for immediate corrective action by 
the Government. Such action was indeed being taken by the 
middle of 1949. Said Chancellor Crtpps in his July speech 
to the Commons: 
His Majesty's Government....acted at once in pursuance of what must remain the major objective of our financial policy, the safeguarding of the reserves of the sterling area. 
Before the middle of June we had, much to 
our to

regret, been compelled by events give 
75 
instructions to all our purchasing depart­ments that they were to postpone new dollar to the maximum extent
purchases practicable. That standstill arrangement will be continued for at least three months and until after the 
discussions to which I am about to refer with John W. Snyder, Secretary of the United States Treasury, and Douglas C. Abbott, Cana­dian Minister of Finance, and the conference of Commonwealth Finance Ministers/. 
Existing contracts and committments will remain in force, but will be
specific authority required for any new dollar purchases and will only be given where a clear case of urgent 
national interest is established. Dollar expend­iture, other than on imports, will only be per­mitted where essential, and then at a reduced rate. 
Unless the sterling area succeeds in re­storing the volume of its sales to the dollar area, these restrictions upon dollar expenditure will have to be continued.s° 
58  
Vital Speeches  of  the Day,  Vol.  July 15,  1949,  
p.  585.  

Early in July, talks were held between British Government 
officials, John ¥. Snyder, Secretary of the United States 
Treasury, and Douglas C. Abbott, Canada’s Finance Minister. 
On July 13 a conference of Commonwealth Finance Ministers 
was convened in London. The purpose of these meetings was 
to hold high-level discussions on Britain's dollar problem 
and to devise short-term corrective measures. On July 14 
Sir Stafford Crlpps announced that the United Kingdom's 
dollar imports would be reduced by 25 percent in 1949-50. 
this the
Following announcement, the final communique on 
76 
Commonwealth conference stated that "the Ministers con­
cerned agreed to recommend to their Governments action 
comparable in its results to that already decided upon 
by the United Kingdom*" The Cripps announcement referred 
to the Government's plans for reducing the United Kingdom's 
million
dollar purchases from 400 million pounds to 300 
at
pounds per annum, i.e., to save dollars a rate of 100 
million pounds per annum. The agreement by the Common­
wealth conference implied a reduction in Commonwealth im­
ports from North America by between $7OO million and $950 59 
million. 
59 
The Statist, July 25, PP-lO5-106. 
These measures, as well as the standstill on dol­
lar purchases announced by Sir Stafford Cripps in his 
speech of July 6, were, however, mere stop-gap devices. 
of the
They contained no permanent solution problem, and 
they could not be expected to have any immediate effect in 
the drain on Britain's dollar resources.
halting Indeed, 
the loss of gold and dollar reserves continued and soon 
reached alarming proportions. Late in August It was esti­
mated that the gold and dollar drain during the third quarter 
would reach the 100 million pounds level. This would 
represent an Increase of 50 percent over the loss recorded 
in the second quarter and would reduce the reserve to a 
60 mere 300 million pounds by the end of September. ' By 
60 
The Statist, August 27, 19*19, p. 251. 
September 18 this estimate was well on the way to proving 
correct. On that date, the gold and dollar reserves were 
61 down to 330 million pounds million). This 
sum 
61 
Cmd. 8065, p. 28. 
was well below the 500 million pounds (about $2,000 million) 
which was the figure generally regarded as the safety level 
for Britain's reserves. 
It was in this atmosphere of growing crisis that 
Sir Stafford Cripps and Foreign Secretary Ernest Bevin 
to
journeyed to Washington early in September begin talks 
with American and Canadian representatives for the purpose of 
in as-
discussing the sterling-dollar problem its broader 
pects and arriving at some permanent solution of Britain's 
dollar difficulties. Much of the groundwork for this meet­
ing had already been laid in the Cripps-Snyder-Abbott talks 
the conference of Commonwealth Finance Ministers held
and 
During the weeks between those deliberations and
in July. 
the opening of the Washington talks, the British Government 
had surveyed the whole dollar problem and reached some 
very Important decisions concerning its solution. It was 
these decisions that the Cripps-Bevin delegation took to 
Washington for discussion. 
Chapter III DEVALUATION OF THE POUND STERLING 
The Washington conference opened on September 7, 
amid much speculation on both sides of the Atlantic 
and indeed throughout the whole world. From the beginning, 
close secrecy was maintained concerning the content of the 
discussions. The attitude of the United States and Cana­
dian governments appeared to be that the crisis was primar­
ily the result of British policy failures, and that re­
sponsibility for finding a solution lay with the British 
Government. The intention of the American and Canadian 
representatives, therefore, was to listen to, to consider, 
and to discuss the proposals of the British delegates, 
rather than to submit any proposals of their own. Further-
the concensus of public opinion in the United States
more, 
was opposed to further monetary aid to the United Kingdom. 
This view, no doubt influenced by the feeling that American 
dollars were being used to subsidize British socialism, 
was shared by official elements. The Congress, partly in 
deference to public opinion and partly on its own account, 
was definitely opposed to any extension of the foreign aid 
The Administration was of the opinion that what
program. 
was needed to meet the crisis was not further dollar aid 
79 
to Britain but an adjustment of British economic policies 
by the British Government itself. The Washington cor­
respondent for The Statist, writing on the eve of the 
conference, observed: 
When the Anglo-American Financial Agreement and the Marshall plan were ih the making there was uncertainty and disagreement over amounts and 
methods of financing, but there was no doubt, 
so far as the U.S. Government was concerned, 
that they would offer, indeed had to offer, a 
large sum of money to cover badly needed exports. 
To-day, the reverse is true; there is a great 
reluctance, partly inspired by Congress, 
to 
suggest any new direct assistance to the United 
Kingdom. more, government

What is this obvious­
ly feels the United Kingdom should be held chief­ly responsible for finding ways to increase her dollar receipts expenditures. l 
or reduce her 
1 
The Statist, August 27, P« 256. 
The Basic Causes of Devaluation 
For some time, informed circles in Britain had also 
shared the opinion that certain fundamental changes in 
British policy rather than stop-gap dollar aid was the 
prime need in dealing with the problem. Thus, it was be­
lieved that the root of the British crisis lay not in the 
drain on gold and dollar reserves but in the new conditions 
of world trade and Britain’s inability to adjust to those 
conditions. 
This new situation in world trade was the result of 
81 
the restoration of European industrial production, particu­
larly production for export, and, consequently, the emer­
gence of the buyers' market. The competitive nature of 
such a market dictated an improvement in the quality, and, 
more Importantly, a reduction in the selling prices, of 
British exports. As more and more war-time technological 
innovations were adopted and as productive facilities and 
techniques were improved during the course of the recon­
version process, a high degree of quality in British ex­
ports was reasonably assured. British export prices, how-
remained high in relation to world market prices.
ever, 
The danger of high prices to Britain's export trade was 
foreseen even before the appearance of the new market con­
ditions. In March Mr. G. D. A. MacDougall, a British 
economist, pointed out that "the quantity of exports we 
/Britain/ can sell will depend greatly on the price at 
which we sell them," and that "unless we can sell at 
competitive prices our exports will sooner or later suffer."2 
2 
MacDougall, G. D. A. "Britain's Foreign Trade 
Problem", Economic Journal, Vol. LVII, March p. 107. 

in the same The Economist advised:
Later year 
means or another the prices at which
one
By 
British goods are quoted in the world market 
have got to be reduced to a level at which, 
quality for quality, they attract and do not 

No one can estimate how large a re-
repel. 
duction in costs and prices will be needed. 

But as guide it be said that
a very rough may cut In present British export prices of 
any 
cent is

less than 30 per hardly worth looking 
at.5 

3 The Economist, September 27, 1947, p. 512. 
A year later The Economist, anticipating a buyers’ market, 
warned that British exports would have to undercut world 
prices in order to overcome the competition: 
It is difficult to reach any conclusion about 
whether British exports are, at present, com-
is, about whether they would be

petitive—that competitive if there were any competition. The evidence is conflicting. But there is no evi­
dence at all that they are undercutting the market. Moreover, buyers' comes,
when the market 
there are other countries that will prove

many 
much nimbler at reducing their prices than 
2* 

Britain. 
4 The Economist, September 25, 1948, p. 483­
By early 1949 the sellers 1 market was definitely at an end, 
and the problem of selling British exports at prevailing 
became real. The Economic Survey for 1949 cited
prices the 
'’difficulties of finding buyers at our present selling 
of the three main limitations on British ex-
as one
prices” 
The Survey continued:
ports. 
Demand is falling off in some markets and for 
some classes of goods where restocking is now 
completed. same increasing compe-

At the time has to be
tition from other exporters faced 
markets.s
in the main hard currency 
5 Cmd. 7647, Economic Survey for 1949 (London: 
His Majesty's Stationery office, March 1949),p. 18. 
In July Sir Hubert Henderson, Professor of Political 
Economy at Oxford, wrote; 
and
....over a large increasing range of trade, 
British goods are far too dear for effective 
competition in buyers' markets. As the costs 
of and of

production the selling prices Indus­trial commodities fall in the 

United States, In Belgium, and elsewhere, this disparity grows 
and becomes more glaring. To correct it is 
imperative; otherwise it will be impossible to 
avert a continuous shrinking in the volume of 

British export trade, at first to dollar or 
semi-dollar markets, but extending gradually 
everywhere. 3 

6 
f,
1"* 
Moral
Henderson, SiHubert, The of the British Cr is is", The Review of Economics and Statistics, Vol. XXXI, November tgr?;‘prss7; 
the between British and world
While disparity prices 
was sufficient cause for concern, the gap between British 
and dollar prices was even more distressing. The Economist 
saw a serious threat to Britain’s dollar exports in the 
latter gap; 
It is becoming clearer every day that there 
is a great and growing divergence between the 
level of costs and prices in the sterling and 

dollar areas. An interesting article in last 
week's Investor '3 Chronicle quoted the results 
of an inquiry by the Trinidad Chamber of Com­
merce into the prices of certain consumer goods 
as landed In that Island 
from the United Kingdom 
as with the similar

compared same or goods from 
the United States or Canada. The list is too 
long to be but

quoted here, in general it shows 
a 
very decided price advantage in favour of the 
North American products. British electrical 
goods, for example—the sort of on which

thing 
so much reliance is placed in the export drive-
are stated to be “on the average 100 per cent 
dearer than the American or Canadian articles.” 
Other similar evidence is from

coming in daily 
all over the world. 

This is a serious situation for a
very 
country whose whole future is staked on its abil­
ity to export. It is clear that with price dis­crepancies of this order-widening as American 
prices fall--it will be difficult to hold British 
sales in the dollar area itself, and that the in­
creases talked of in the 	out
long-term plan are 
of the question. 7 

7 
The Economist, May 7, 1949, p. 825. 

On the eve of devaluation. The Statist pointed out that 
High prices may not constitute the whole of the 
dollar problem, but 	high prices of British ex-
at to

ports are certainly present helping 
restrict dollar sales. 0 

8 The Statist, September 17, P-3^s* 
And Sir Stafford Cripps, in a broadcast to the British people 
announcing the devaluation of sterling on September 18, 1949, 
explained: 
Some of our export prices to dollar markets have 
been too high, and in a number of cases those 

markets did not bring a good enough return to 
encourage our manufacturers and exporters to 

85 
expand their dollar exports. It was pretty 
clear, in the light of the experience of the 
last few months, that without a marked reduc­tion in the dollar price of our exports and 

an increase in our sales we
pressure, were 
running 

a most serious risk that our dollar 
earnings would not be high enough to maintain 
the flow of essential imports so as to keep 
up 
our standard of production and living. 9 

9 of Vol. October
Vital Speeches the Day, XV, 1, 1949, PP. 739-7TOT" 
It was thus the apparent inability of British export 
to adjust to the conditions of a and
prices buyers’ market, 
especially the discrepancy between sterling and dollar 
that informed opinion in Britain took to be the
prices, 
fundamental cause of Britain's external payments problem. 
root
The conviction that high export prices were at the of 
. 
the trouble led to a great deal of speculation on the merits 
of of
of devaluation the pound as a possible means lowering 
British prices in terms of foreign currencies. The Govern­
ment itself shunned devaluation and devoted its efforts to 
reducing production costs and, therefore, prices by en-
in
couraging greater productivity and efficiency industry. 
Despite the improved productivity and efficiency which was 
indeed attained in British industry, the expected reduction 
in costs was not achieved. The greatest obstacle to such 
reduction appears to have been the inability of the Govern
a 
ment to keep wages down. "The biggest item in most firms' 
86 
costs," said The Economist, "is wages, and no serious cut 
In wage rates Is economically conceivable under a regime 
of full employment or politically conceivable under almost 
0 any regime at all."'1Another deterrent to cost reduction
* 
10 
The Economist, July 51, P* 171. See also The Economist, May 7] p. 826. 
was the high prices of certain raw materials used by 
British Industry. ll 
11 
The Statist, September 17, p. s^s* 
The persistency of high prices despite the improved 
efficiency in production intensified the discussion and 
speculation on the desirability of devaluation as a remedy 
to the problem. As early as March Mr. G. D. A. 
MacDougall observed: 
....the fact that our exports are by no means 
unresponsive to changes In the value of sterling points to the need of preserving our right to If this Is likely, at
depreciate sterling any future time, to help restore our International 12
equilibrium. 
12 MacDougall, loc. cit., pp. 107-108. 
Mr. MacDougall pointed out, however, that sterling deprecla 
tlon could not always be relied upon to restore equilibrium 
Our exports are not, of course, the only item 
in our balance of payments affected by a de­
preciation of sterling. The latter will, in 
particular, tend to raise the sterling price 
of our and unless this reduces
imports; pro-the of
portionately quantity our imports—which is unlikely in view of their essential nature-­
the total 
import bill, in terras of sterling, will Increase. This will offset, in part or in whole, 1* 
the higher sterling receipts from our exports. 
15 
MacDougall, loc. cit., p. 108. 
Most of the arguments on the side of devaluation 
centered on the idea that such step would obviouslya 
lower British export prices and thus increase the volume 
of exports. This idea rested on the assumption that 
there was an elastic demand for British exports. Mr. 
Howard 3. Ellis, an American economist, was one of the few 
who recognized and elaborated on that assumption. He 
wrote; 
The favorable case rests.... upon an elastic de­
mand and the expansion of volume of trade, both 
exports and imports, such that values--quantity 
times price per unit—are greater. Those who 
that devaluation is inadvisable now be-
argue cause of the inelastic supply of British export; ""demand
necessarily imply that the is elastic, 
since upon the contrary assumption, England** 
could profitably restrict exports even below 

with this
their present level. I agree impli­cation: England’s diversified industrial prod­ucts, and services of a professional, business, and commercial nature bid fair to enjoy an elastic demand.^ 
14 Ellis, H. 3. "The Dollar Shortage in Theory and 
Fact”, The Canadian Journal of Economics and Political Vol.
Science, 
In May 1949 The Economist noted that "the dollar 
prices at which British goods are quoted could be lowered 
by an alteration in the exchange value of the pound sterling." 
But while thus admitting the usefulness of devaluation in 
reducing British export prices. The Economist warned that 
....it would be rash to draw much comfort
very 
from that prospect, for unless the causes that 

lead to high costs of production in Britain are 
removed, any relief that could be secured by 
devaluation would be purely temporary.ls 

15 
The Economist, May 28, p. 971. 
John K. Williams, Professor of Political Economy at Harvard, 
in an article written on the eve of devaluation, not only 
regarded sterling devaluation as "the most obvtous....man­
ner of attacking the problem directly, but 
16 
Williams, J. H. "The British Crisis: A Problem 
in Economic Statesmanship", Foreign Affairs, Vol. 28, 

October 19^9> P* 12. 
believed that such a step might become necessary: 
....I have been inclining to the view (as an in-
economists seem to
creasing number of English do) 
at will be
that sterling devaluation, some stage, 
a necessary part of the process of adjusting the 
imbalance between the sterling and the dollar 
areas, and, rightly handled, could contribute im-

It would
portantly to all-round trade adjustment. 
probably lead the way to an all-round adjustment 
this at

of exchange rates, and might overcome, 
least the bias in world trade that

temporarily, Itself in the universal dollar shortage.
expresses 
89 
The fact Is that the dollar needs to be 
ap­preciated; and this seems the practicable

most 
way of doing It. ' 

17 
Williams, loc. clt., p. 15. 

Profes-
Such conviction did not, however, completely remove 
sor Williams 1 doubts concerning the effectiveness of devalue 
tion. He admitted that ’'much could be accomplished without 
is much
devaluation, and what it would Itself accomplish 
in terms of
more uncertain than a simple analysts purchasing 
18 
power parities and comparative costs would suggest.” 
18 
Ibid., p. 13* 

It Is apparent that those who regarded devaluation 
obvious method of with
of sterling as a logical and dealing 
the problem of high export prices, almost Invariably quali­
out
fied their opinions by pointing the dangers and uncer­
tainties of devaluation and the temporary character of any 
benefits which it might bring. 
devaluation were legion. One
The arguments against 
these was that devaluation of sterling
of the most common of 

set off a wave of currency depreciations similar to
would 
as The Economist
that of the 1930’5. As early opposed 
devaluation on this 
score: 
....it /devaluation/ cannot be expected to 
make dear British exports cheap. 

A large num­ber of the world's currencies are or

formally Informally tied to sterling and would fall with It. Many others would follow. And when the 
pound depreciated In 1931 it was followed In­side eighteen months by the dollar Itself. De­valuation of sterling would be 

of relatively 
minor Importance to the balance of payments. 
It certainly does not provide an alternative 
to the hard 

way of making British goods at­tractive 

. 
19 The Economist, September 27, 1947, p. 512. 
A year later The Economist again warned that "the pound 
sterling, if it were devalued, would be followed down by 
most of the other currencies of the world," and that in 
the 1930’s "the pound was out-devalued by the dollar itself 
OA 
the
within eighteen months." And Professor Williams, in 
20 
The Economist, September 25, 1948, p. 484. 
article mentioned above, considered one of the dangers
same 
sterling devaluation to be "setting off an external
of 
circle of
spiral in the form of a vicious currency deprecla 
itself.
tions feeding on 
21 
Williams, loc. cit., p. 13. 
This concern over a probable chain reaction In the 
wake of 	devaluation based that
sterling 	was on the fear 
such a reaction would Include the dollar. It Is to be 
remembered that Britain had a surplus on current account 
with most of the 	OEEC countries and the rest 
of 
the sterling 
area. A fall in 	the exchange value of these countries 1 
currencies equal 	to the fall In the value of the pound would. 
It was believed, 	leave British export prices In terms of 
those currencies 	unchanged, Britain's ability to export 
to those countries unimpaired, and the surplus on current 
account unaffected. With the dollar area, however, Britain 
had a persistent 	deficit. A fall In the value of the dol­
lar would nullify any stimulus to Britain’s dollar exports 
resulting from lower British export prices in terms of 
dollars, and the 	dollar deficit would continue undimlnlshed. 
be
Sterling devaluation, it was felt, could effective only 
if the value of the dollar remained unchanged. Professor 
Williams observed; 
The best defense 	against another vicious circle 
would be for the dollar this

of depreciations 
time to stand firm. And the best answer to the 
to make a new sterling rate

question of how 
would be
carry conviction of permanence for the 
United States to help suoport it. Indeed, it 
seems clear that If we /the United States/ ad­
vise devaluation 	we should take definite ob-
a 
to cooperate in making it effective.
ligation 
22 
Williams, loe. cit., p. 15* 
Another major argument against devaluation was 
that It would have an inflationa-ry effect on Britain’s 
internal Sir Hubert Henderson believed that
economy. it 
would aggravate the inflationary situation that already 
existed: 
If a substantial devaluation were to be followed by a fully proportionate rise in the level of wages and sterling costs, clearly
it would do nothing to reduce the price disparity sterling and dollar pricey/. Doubtless this 
would be an extreme result; but any rise in prices and costs would pro tanto defeat the ob­
ject of the devaluation, and in existing circum­stances the rise would almost certainly be sub­
stantial. The British labor market is still a sellers' market, and gives the trade unions a strong bargaining position, they ex-
which have 
ploited only in part. In these circumstances, the would be great that devaluation
danger very  
would lead  to a  vicious  spiral  of  a  rising  cost  
of  living,  rising  wages  and  costs  of  production,  
and further devaluation.  

The definite elimination of the inflationary trend in our economy must, in my opinion, precede devaluation of sterling. Only when this has 
any been done will It be possible to judge the ex­tent of the devaluation that may be appropriate; and only then will it be possible to feel reason­ably confident that the readjustment will be final.23 
23 Henderson, loc. clt., pp. 257-258. 
Similar fears were expressed by Professor Williams: 
was
In 1931 this danger /Inflation/ slight because 
the world generally, was in a state
Britain, like 
93 
of depression, with unemployed resources. This 
fact, combined with the circumstance that she 

a
was large and then unrestricted Import market, 
caused external prices to fall rather than 

British prices to rise as a result of the de­valuation. But now 

both circumstances are 
re­versed. Britain still suffers from over-full 
employment and low real Income, and her Imports 
are so restricted that the

already possibility 
that she can again push the economic burden of 
sterling devaluation onto other countries 

seems 
remote. This means not only that the corrective 
effect of the devaluation on the external balance would have to come, this time, almost purely from the export side, but that much sterner 
measures would have to be taken to prevent the 
devaluation from being dissipated by an Internal 
wage-price spiral. 24 

2k 
Williams, loc. clt., p. 13. 
of devaluation based
Some opponents their opposi­
tion on doubts that by lowering export prices the volume 
of could be increased.
exports Thus, by implication they 
doubted the existence of an elastic demand for British 
goods. "It is exceedingly unlikely," Mr. Thomas Balogh, a 
British economist, pointed out in "that devaluation 
would increase the volume of our exports, as they are now 
determined by 'market forces. ’ &^d later a similar view 
23 Balogh, T. "Britain's P’orelgn Trade Problem: A Comment", Economic Journal, Vol. LVIII, March 1948, footnote 
83.
p. 
94 
wag expressed by Sir Hubert Henderson: 
With the of
disappearance sellers’ markets, a 
reduction of British selling prices would not 

be followed by a larger volume of sales than 
hitherto, essential though It Is in order to 
check a continuous decline. On the most favor­able hypotheses In the prevailing state of 
trade, we must reckon with a considerable drop 
In our export recelpts,.... 

26 
Henderson, loc. cit., p. 257. 
Still another argument against devaluation was that 
the resultant higher of British In of
prices Imports terms 
sterling would not operate to reduce the volume of Imports, 
since these were already restricted to bare essentials. An 
unchanged volume of Imports at higher Import prices would 
obviously offset the larger earnings on the side of exports. 
Said Mr. Balogh; 
Britain Is Importing In the main staple commodi­ties which have world markets. The 
quantity of our Imports is not governed by Internal money demand but by Government decision. A devalua­
tion of Itself cut
sterling would not by imports (and a cut of Imports can be effected without devaluation). Hence devaluation would not 
exert pressure on our import prices In terms of foreign currency, which would, therefore. In terms of sterling increase fully In proportion 
to the rate of the devaluation.-' 
27 Balogh, loc. clt., footnote p. Sj>. Cf. MacDougall, 
108.
loc. clt., p. 
95 
The Statist regarded ,fthe Increase In the cost of Imported 
goods and raw materials leading to a rise In sterling costs 
neutralise
(which would partly the down pressure on export 
prices exerted by devaluation)" as one of the chief dis­
pO advantages of sterling devaluation. 
~~ 
—
i ¦ » ¦ ¦--—¦—» . -^'—¦ -»¦—¦ ——
*r ,m-~ 
28 
The Statist, May 7, 1949, P-498. 

The Statist voiced serious doubts that devaluation 
would Increase the dollar earnings of the stealing area as 
a whole: 
truth is that there is no indication that the reduction in the value of the pound would in­crease the overall return from sterling-area sales 
all the evidence is to the 
The 
to the United States; 
contrary.^9 
29 The Statist, March 19, P* 299* 
the same ad
Shortly thereafter, journal warned that despite 
that might accrue to the United
ditional dollar earnings 
a result of the stimulus to its dollar exports.
Kingdom as 
....the net effect of a devaluation of stealing and an accompanying devaluation in terms of the dollar of its associated currencies would probab­
be to produce an actual contraction in over­
ly 
all dollar yields. 3o 

50 The Statist, May 7, p. 498. 
And on the eve of the Washington conference, it pointed out 
Since the fall in the 
dollar earnings of 
the sterling area has been due to the shrink­age of receipts from the sale of products like 
wool, rubber and cocoa, which sell at world 
prices, rather than to a decline in sales of 

manufactured 
goods caused by over-pricing, 
there is no certainty that devaluation would 
effect a n indeed Mr.

cu e, as Hoffman, the 
Marshall 

warned this week. 
Even if it did achieve some net in 

plan administrator, 
expansion 
dollar earnings a sizeable deficit would per­slst,...3l 

31 
The 

Statist, August 27, p. 251. 
The majority of those who stood against sterling 
devaluation did so not because they opposed devaluation 
as such, but because they doubted its efficacy In dealing 
with the British problem at the time. Most of them never 
out rates
ruled the readjustment of exchange as a possible 
at
and. Indeed, necessary measure some future date. In the 
words of The Economist: "....there is no present at
case 
all for devaluation, and the most that anybody can say is 
that there may be a case for it before very long."^2 Even 
32 
The Economist, May 7 p. 825. 
, 
that leaned to the side of devaluation not
those were so 
sure that the time was propitious for such a step. The 
gist of the argument seemed, therefore, to be not whether 
devaluation per se was the remedy to Britain’s ills, but 
whether the time was 
right for undertaking the readjustment 
of currency values which the new conditions of world trade 
seemed to dictate. Both sides were 
apparently more con­
cerned with the timing of devaluation, should it become 
necessary, than with its effects which everyone considered 
uncertain.
highly 
In the United States, official opinion not only 
favored but in fact urged sterling devaluation early in 
of
1949* In May that year The Statist commented: 
It is becoming increasingly clear that 
Britain is being placed under considerable 

pres­sure by the United States Economic Co-operation 
Administration and by a section of the 
Organiza­tion for European Economic Co-operation both to carry out a devaluation of sterling in terms of the American dollar and to permit unlimited use of sterling in connection with a scheme of 
gen-
currencies.^
eral interconvertibility of European 
33 The Statist, May 21, p. 562. 
The United States Treasury, convinced that a general read­
justment of currencies was inevitable and although well 
of was most
aware the dangers involved, energetic in urging 
sterling This attitude, however, underwent 
34 
The Statist, June 4, 194 pp. 632-633­
a 
sudden change on the eve of the Washington talks. The 
change was apparently brought on by the realization by 
American officials that too much their part
prompting on 
would tend to throw 
responsibility for the success or 
failure of devaluation on the United States. The Washington 
correspondent for The Statist reported; 
It can be predicted fairly surely that the 
United States will not urge devaluation. 

They will suggest this move only by inference, Indicat­that they do not feel that the
ing trade problem can be solved so long as the pound Is valued at 
a rate that Is not more 
generally accepted. 
All this means that the United States Is 
reluctant to stick its neck out In favour of 

any scheme of Its own for fear that It will not 
succeed. Underlying this fear Is still another; 
that It may not be possible politically or Intel­lectually for the United Kingdom to move In the direction of freer trade, freer markets at home and abroad and a cheaoer It Is
currency. this 
doubt that Sir Stafford will have to overcome 
first of all If he Is to succeed. 
In this connection iu is important to 
realise that the United States does not regard 
devaluation as a solution in itself, or even 
the main needed to

as ingredient improve trade. 
The N. A. C. /National Advisory has 

made this clear to the United States
very nego­
tiators. They are not likely, therefore, to put themselves in a spot where they appear to urge 
only devaluation, Sir Stafford appears to bow 
to this one wish, and they then assume responsi­dollar drain that

bility for making good any 
continues after the pound is cheapened. Some 
officials go so far as to predict if the

that 
British delegates should propose devaluation 
they will not be told whether the United States 

until the matter for discussion by the board directors of the International 
approves comes up 
o£ 
Monetary Fund.^s 

55 The Statist, August 27, pp. 256-257. 
For a long time the British Government, as pointed 
this remained firm in
out earlier in chapter, its opposi­
tion to devaluation, even when its efforts to solve the 
problem of high prices through a reduction of production 
costs proved unsuccessful. Early in May Sir Stafford 
Cripps, at a press conference in Rome, reaffirmed the 
Government’s determination to avoid a devaluation of the 
pound. Clearly and emphatically, he declared that what­
ever course other currencies might take, a devaluation of 
“neither would it take c 
sterling was necessary nor place."^
36 The Economist, May 7, P» 825* 
Prior to his departure for Washington, Sir Stafford re­
iterated this stand when, according to reports, he assured 
other Cabinet Ministers that devaluation would serve no 
at that time.' And at a conference
useful purpose press 
37 The Statist, September 10, PP* 311-312. 
during the early stages of the Washington talks, the Chancel 
lor again declared that he had not changed his mind on the 
38 
of devaluation.^

question 
The Statist, September 17, p. 339­
view of this
In apparently unyielding stand, the 
announcement on September 18 that sterling had been de­
valued In 
terms of the dollar came with dramatic suddenness. 
The decision to devalue, however, did not come as suddenly. 
Sir Stafford Crlpps, In his broadcast Informing 
the British 
people of this momentous step, explained that the matter 
had Indeed been carefully studied before his departure for 
Washington and that 
The Government decided—and we told our Amer­ican and Canadian colleagues of the decision the first day of our arrival, before starting on any discussions or reduce the dol­
consultations—l§ 
lar exchange value of sterling.^ 

39 Vital Speeches of the Day, Vol. XV, October 1, 
IW.
p-
Why, then, the Intransigence of the Chancellor up to the 
eve of devaluation? It would seem that the announced
very 
of the Government to a downward revision of the
opposition 
value of the pound was intended to hold In check the specu­
lative transactions In sterling which devaluation rumors 
had set off In the of The Government apparent-
spring 
a
ly believed, and wllh good reason, that premature announce 
hint of the Government’s Intentions would In­
ment or even 
tensify the speculative influences and contribute even more 
to the drain on Britain’s gold and dollar reserves. 
The Immediate Causes of Devaluation 
Whatever the basic of devaluation
causes 
sterling 
may have been, and whatever course public and official 
opinion toward devaluation may have taken, It Is evident 
that the Immediate occasion for this vital step was the 
heavy losses In Britain’s gold and dollar reserves, which 
subject was dealt with In the latter part of the previous 
chapter. 
There were three main factors which contributed 
to the drain on British reserves: (1) the American 
business recession of (2) an acceleration of 
the drain of gold to Belgium and Switzerland; and (3) the 
speculative transactions In sterling. 
The American recession which began late In 
and continued through the first half of vas mild In 
with other American recessions. Yet
comparison It pro­
vides a striking example of the apparent sensitivity of 
and the whole pattern of world trade to
foreign economies 
American business trends. This minor American depression 
from the United Kingdom
reduced not only direct exports 
to the United States but, what was probably more Important, 
from the other countries of
exports of primary products 
to the United States.
the sterling area 
Monthly figures In the Trade and Navigation Ac-
show that the effects of the American recession on
counts 
not felt until the
United Kingdom exports were early par»t 
102 
of 1949* During the last three months of 1948 the value 
of 
United Kingdom exports (including re-exports) to the 
United States 
rose steadily, and by January 1949 it 
reached 6.90 
million pounds. In February it underwent a 
sharp decline to 5*03 million pounds, and by June it had 
fallen to 3*09 million 
While the monthly 
40 
United States Department of Commerce figures show a fall in United States imports from the United Kingdom from $29*68 million in December 1948 to $14.71 million in 
June 1949 (Survey of Current Business, Vol. 29, September 
1949> p. S-22J1 while these figures (when translated into 
pounds sterling) do not correspond with those given in the 
Trade and Navigation Accounts, they indicate the same 
trend that the latter do, i.e., a substantial drop in 
United Kingdom sales to the United States during the first half of 1949* 
for the second half of 1948 amounted to 6.13 mil-
average 
lion pounds, it dropped to 4.63 million pounds for the first 
half of and while the for the first
1949, monthly average 
quarter of 1949 amounted to 5*83 million pounds. It fell 
to 3.43 million pounds for the second quarter of 1949* 
June are shown In
Monthly values from July 1948 to 1949 
Table 1. 
of
The proportion total United Kingdom exports 
also the
taken by the United States fell sharply during 
same period. In the fourth quarter of 1948 the value of 
United Kingdom exports (including re-exports) to the United 
percent of the total value of
States represented 4.25 
103  
Table 1* Value of United Kingdom Exports (includingre-exports) to the United States and Canada, July 1948-June 1949 (in millions of pounds sterling)  
Month  United States  Canada  
1948  July  6.43  8.16  
August September  5.39 5-93  5.23 6.23  
October  6.13  6.39  
November  6.44  7.40  
December  6.58  5.75  
1949  January February March  6.90 5.03 5.55  5.79 5.76 8.09  
April May June  3.^5 3.7^ 3.09  6.16 7.66 6.06  
United Kingdom exports. In the first quarter of 1949 It represented J.6Q percent of the total, and in the second 41 quarter it fell to 2.29 percent. Source; Accounts Relating to Trade and Navigation of the United Kingdom, London, His Majesty's Stationery Office (various Issues).  
41 The  Board of Trade  Journal,  August  27, 1949,  p.  385.  

While United Kingdom exports to the United States 
were thus declining sharply in the first half of 1949, the 
same was not true of exports to Canada, the other major 
dollar country. The Trade and Navigation Accounts show 
that 1949
in January United Kingdom exports (including re-exports) to Canada were valued at 5*79 million pounds, 
while in June they amounted to 6.06 million pounds. This, 
however, does not indicate a rising trend, for since 
October 1948 exports to Canada had risen and fallen in 
alternate months, reaching a figure of as much as 8.09 million pounds in March 1949* Month-to-month figures from 
July 1948 to June 1949 are shown in Table 1. 
The proportion of United Kingdom exports (includ­
ing re-exports) going to Canada fell from 4.6? percent of 
the total value In the fourth quarter of 1948 to 4.25 per-
of There
cent In the first quarter 1949. was, however, 
42 
of 1 
Increase to 4.4? percent In the second quarter 1949­
an 
42 
The Board of Trade Journal, August 27, 1949, 
385*
p. 
indicate a definite fall in
The foregoing figures 
United States purchases of United Kingdom goods during 

of the business recession in the United
the latter part 
While it is evident that sales to Canada were at
States. 
105 
least maintained, if not slightly increased, during the 
same period, the dollar earnings accruing to the United 
Kingdom from these sales were not sufficient to offset the 
substantial losses sustained in the United States market. 
Aside from the dollar losses suffered by the United 
Kingdom, there was an even more marked decline in the dol­
lar earnings of some of the other members of the sterling 
area as a result of a drop in United States purchases of 
lack of does not allow for
primary The space 
43 
The Board of Trade Journal, July 16, 19^9, P« 100. 
a presentation of precise figures of total or primary ex­
ports of each of the sterling countries to the United States 
the period of the recession. Suffice it to point
during 
out that while the dollar losses of the United Kingdom as 
a result of the American recession gave enough cause for 
the added losses of the rest of the sterling area,
concern, 
and they were considerable, gave cause for alarm, since it 
members the
is the dollar earnings of all the of sterling 
that to make Britain’s reserves. 
area go up 
A second factor contributing to the loss of 
reserves was the accelerated drain of
Britain's monetary 
June and of 
to Belgium and Switzerland during July
gold 
In June gold and dollar losses to these two countries
1949. 
totalled 8,409,000 pounds, of which 6,790,000 pounds went 
to Belgium and 1,619,000 pounds to Switzerland. In July 
total gold 
and dollar losses to both countries declined 
but remained high at 7,299,000 pounds, 4,495,000 pounds 
going to Belgium and 2,804,000 pounds to Switzerland. 
Thus, during those two months the United Kingdom was los­
ing gold and dollars to Belgium and Switzerland at an 
annual rate of 94 This rate
million pounds. high of gold 
losses to both countries be
may explained by temporary 
factors, 
of
....notably the amount sterling their central banks have derived from the Inflow of British tourists and from the tendency for business 
con­
cerns and others who normally hold sterling In 
these countries to run down their balances In 
order to safeguard themselves against possible 

devaluation of sterling.^ 
44 The Statist, August 13, 1949, p. 191. 
The third factor which contributed to the decline 
of the gold and dollar reserves was the speculation In 
sterling which was set in motion by the talk of devaluation 
during the spring and summer of 1949* Many traders and 
had become convinced that devaluation
outright speculators 
of the pound was Inevitable. As a result, foreign Importers 
of British goods, anticipating a decline In sterling, de­
new and held up payment of sterling Invoices
layed purchases 
107 
This reduced the demand for sterling. At the same time, 
British importers, expecting a rise in the sterling price 
of dollars, speeded up purchases and accelerated payment 
of dollar invoices. This increased the supply of sterling. 
Thus, the British importers by accelerating dollar payments, 
as well as the 
foreign importers by postponing sterling 
payments, were speculating on a decline in sterling. Out­
right speculators, also anticipating a fall in the dollar 
value of sterling, converted their pounds into dollars. 
They purchased dollars at the rate of $4.03 for each pound, 
dollars
hoping to reconvert these into pounds after devalua­
tion (when each dollar would buy more pounds) at a hand­
some profit. Although the Government maintained exchange 
controls, they contained enough loopholes to allow these 
speculative activities. As a result of such speculation, 
the demand for dollars remained at a high level and large 
4c, 
incurred.
dollar losses were 
45 
Ellsworth, P. T. The International Economy (New 
York: The MacMillan Company, 1 P-~~f4~27 andHarrIs, 
"Devaluation of the Pound Sterling", Harvard Business

S. E. 
Review, Vol. XXVII, November 1949, pp. TBl-?82. 

Readjustment of Foreign Currencies 
1949 the British Government
On September 16, submitted 
to the 
International Monetary Fund a proposed change In the 
to a 
value of the pound sterling from $4.03 $2.80, reduction 
of 30*5 percent, in terms of the dollar. With the Fund's 
approval, this change went into effect on Sunday, September 
18, immediately following Sir Stafford Crlpps 1 announcement 
over the air. Simultaneously, or soon after, a number of 
countries devalued their currencies to a similar lesser
or 
degree. With the exception of Pakistan, the members of 
the sterling area also devalued their currencies by 30.5 
percent in terms of the dollar. The local currencies of 
British dependencies, except British Honduras, were de­
valued by 30.5 percent. The Scandinavian countries, Holland, 
Finland, Argentina, and a few others devalued by 30.5 per­
cent or a slightly smaller proportion. Greece alone de­
preciated her by a greater proportion (33.3 per-
currency 
cent) than sterling. France, Italy, 
Portugal, Western Germany, Canada, Thailand, and Uruguay, 
value of their currencies to a lesser extent than
reduced the 
of
the pound. Unaffected by this widespread readjustment 
values were the currencies of the countries
foreign exchange 
and of most of the countries in 
46 
Latin-America 

in the Communist area, 
and the Near East. 
46 "Readjustment of Foreign Currency Values 
, 
Federal Reserve Bulletin, Vol. 35, October 1949, PP. 1170­"Devaluation

Il7l; "a’nd"*Leffingwell, R. C. and European 
Foreign Affairs, 28, January 1950, p. 203.

Vol.
Recovery", 
of In
The rapid realignment currency values 
of the 
dollar reflected the unbalanced state of trade that 
existed between the United States and the rest of the world 
This condition had manifested itself in a world-wide "dol­
lar shortage" or "dollar deficit", which simply meant the 
inability of most countries to earn enough dollars from 
their exports to the United States to pay for their neces­
sary dollar purchases. In most of the Western European 
countries the devaluations expressed a combination of 
factors quite similar to those which brought about the de­
valuation of sterling. One of the major long-term factors 
contributing to European devaluation was the distortion 
between European and United States export prices. The 
Organization for> European Economic Cooperation in its 
Interim Report for 1948 noted that "the export prices of 
many OEEC countries are by no means competitive with those 
out the for
of the United States," and pointed necessity 
reducing the prices of European exports. The Economic 
Commission for Europe in its report for 1948 stressed the 
fact that European export prices had increased more than 
for the same of goods, and noted
United States prices type 
much
that it might become necessary "to bring about a 
closer realignment between European and American prices 
The Commission's report further
for manufactured goods." 
noted that 
currencies in general are overvalued in
European relation to the dollar, or rather, since the United 
States has a 
large export surplus with the rest 
of the world and not 
only with Europe, ...the 
dollar Is 

considerably undervalued In relation 
to all other currencles.*7 

These excerpts are quoted In "Readjustment of Foreign Currency Values", clt., p. 1178.
loc. 
Some calculations of comparative export prices as of mld­
suggested that European currencies were overvalued by 
15 to 40 percent In terms of the dollar, with most of them 
between 25 and 30 percent.^ 
48 
"Readjustment of Foreign Currency Values", loc. cit., p. 1173* 
As in the case of Britain, of the short-term
one 
factors of Europe's dollar problems was the Impact of the 
American recession of 1948-1949 upon Europe's export trade. 
As a result of the recession and falling prices In the 
United States, there was a sharp reduction of United States 
In the of
Imports from Europe. fourth quarter 1948 Im­
ports from EPP countries amounted to $275 million. By the 
second quarter of 1949 they had fallen to $l9O million. 
These Imports represented 14.7 percent of total United 
States Imports in the fourth quarter of 1948. In the 
second quarter of 1949 they fell to 11.9 percent. 
Ibid. 
The conviction that the 
high prices of European 
exports, relative to American prices, were the chief 
obstacle to expanding trade led to widespread arguments 
on behalf of 
a general readjustment of European currencies 
terms of the dollar.
in In the United States, the Ad­
ministration and other sectors of Informed 
opinion exerted 
continuing pressure for European devaluation. The United 
States 
National Advisory Council on International Monetary 
and Financial 
Policies reported in July 1949 that "in some 
cases the revaluation of currencies constitute
may an im­
portant means of bringing about the desired expansion of 
exports to the dollar area....” Early in September both 
the International Monetary Fund and the International Bank 
came out in favor of a revision of European Currencies. 
The IMP in its report for 1948-49 noted that "where a price 
reduction...is necessary to expand exports, it would 
in 
many cases seem possible only through an adjustment of the 
exchange And Mr. Eugene Black, the president of 
50 
in

Excerpts quoted "Readjustment of Foreign Cur­rency Values", loc. cit., p. 1178. 
the International Bank, in a speech to the governors of the 
stated that if the European countries hoped to solve
Bank 
their dollar problem 
there must be established a system of exchange 
will assist the dollar deficit

rates which 
countries to 
in world 
markets, incentive to ex-

compete effectively 
will furnish an 
porters increase their sales in the dollar

to 
area and will sl 

encourage importers to buy. 
Quoted in The Statist, September 17, 1949, p. 559 
With the United States Government and such influ­
ential international bodies as the Fund and the Bank 
urging 
a 
realignment of exchange rates, a general devaluation be­
came virtually inevitable and only a matter of time. Most 
of 
the Western European countries, being in the same pre­
dicament as Britain, were only waiting for the latter "to 
take the lead and to give a touch of respectability to 
devaluation. When the pound fell, the other currencies 
32 
Lefflngwell, loc. cit., p. 204. 
went tumbling after. 
Chapter IV 
THE IMMEDIATE EFFECTS OF 

DEVALUATION 
The decision of the British Government to devalue 
the pound was obviously based on the belief that lower 
dollar prices for British goods would increase volumethe 
to
of exports dollar countries in a large enough proportion to produce greater dollar returns. Furthermore, it was be­
lieved that with the value of the United States dollar re-
could undersell
maining unchanged, British goods many 
United States goods in third markets and thus the volume 
and value (in terms of dollars) of total British exports 
would also be increased. Britain's competitive position 
was also expected to improve, but to a lesser degree, 
vis-a-vis countries devaluing their currencies by a smaller 
percentage than sterling. In other words, the Government 
of an overall elastic demand for
assumed the presence 
British exports. The devaluation of sterling reflected the failure 
drive and the severe import re-
of the vigorous export strictions as the best possible means of balancing Britain's 
current transactions with the dollar area, the chief sore 
spot in the general balance of payments. Moreover, it re-
more on price and profit incentives
to
flected a desire rely 
113 
to British manufacturers and exporters in order to achieve 
the needed export increase. Although aware of the tempor­
ary nature of any benefits stemming from devaluation, 
British officials apparently were confident that exports, 
especially dollar exports, could be expanded sufficiently 
to balance Britain's external payments, especially dollar 
payments, before sterling prices would rise. 
When carefully analyzed, however, the actual pros­
pects for expansion of British exports were not so bright. 
It would not be enough for the volume of dollar exports 
merely to rise. It would have to rise by a much greater 
proportion than the percentage drop in the dollar value of 
sterling. For example, if the sterling prices of British remained unchanged and their dollar prices fell
exports hy 30.5 percent (the full extent of devaluation), the 
volume of dollar exports would have to increase by about 
43 percent in order just to obtain the pre-devaluation 
dollar receipts. If dollar earnings were to increase 
the
above the pre-devaluation level, volume of dollar ex-
would have to increase by more than 43 percent. If,
ports 
however, sterling prices should rise, the additional 

volume of exports required would be smaller, depending on 
the magnitude of the price rise; but a smaller volume at 
more
higher sterling prices would be that much difficult 
to sell than the larger volume at unchanged sterling 
1 prices. Assuming an elastic demand for British goods. 
1 
Harris, S. E. flDevaluation of the Pound Sterling", Harvard Business Review, Vol. XXVII, November 1949, p. 783 ; and Ellsworth, P. T. The International Economy (New York: 
The MacMillan Company 7 1950), p. ?43. 
the larger volume seemed easier to attain, and the chief 
problem would be to delay the rise in sterling prices. 
United Kingdom Merchandise Trade in the First Year After Devaluation 
There are no official figures indicating changes 
in the volume of United Kingdom trade with individual 
countries. It is, therefore, difficult to determine con­
clusively whether the volume of United Kingdom trade with 
the United States, Canada, or any other country in the 
dollar area moved in the required direction and in the 
re­
quired proportion to produce greater dollar yields follow­
ing the devaluation of sterling. But, changes in the 
volume of trade with the dollar countries are not as im­
as value of such
portant changes in the trade, figures for 
which are readily available. The latter changes will 
determine whether dollar receipts increased following de­
valuation, and to the extent that they Increased, it may 
be assumed that the volume of dollar trade must have 
changed in the required direction and proportion to produce 
the increase. 
in
Monthly figures the Trade and Navigation Accounts 
of the United Kingdom indicate a definite increase in the 
value of United Kingdom exports to the United States (in 
terms of in the first
sterling) year after devaluation 
(see Chart l). In September 1949 such exports amounted to 
4.47 million pounds. By September 1950 they had risen to 
12.88 million pounds, an increase of 188 percent. During 
the same period the wholesale price index of the United 
= 
rose from 212 to
Kingdom steadily 250 percent (1937100), 
an increase of 18 percent. This was an encouraging sign, 
since exports might be expected to continue to rise until 
prices increased by about 45 percent. 
In the case of United Kingdom imports from the 
United States, the trend was not as encouraging. Chart 1 
to such
shows that from September July 1950 Imports 
underwent a considerable decline (in terms of sterling). 
from the United States
In September imports were 
valued at 16.29 million pounds. By July 1950 they had fal­
10.65 million pounds, a drop of 35 percent. In the
len to 
latter month, the United Kingdom actually had an export 
surplus in its trade with the United States. As shown by 
the Chart, however, imports from the United States increased 
sharply after July and reached 18.30 million pounds in 
117 
from 
Imports 

and 
to 
Exports 
Kingdom 
United 

of 
Value 
1. 
Chart 
Price 
'i
1950 
Wholesale 
i 
the and 
i 
Sterling July 
Pounds 
in 
States 
United 

the 
Kingdom, 

i 
United 

i 
the 
of 
i
Index 
118 
September 1950. Thus, from September to September, Imports 
actually Increased by 12 percent. Calculated on a quarter­
ly basis, imports decreased from a monthly average of 17.19 
million pounds in the third quarter of to 
a monthly 
average of 14.61 million pounds in the third quarter of 1950, 
a fall of only 15 percent. p 
2 
Calculated from figures in Accounts Relating to Trade and Navigation of the United Kingdom^tvarious Issues 
The foregoing figures may be taken as an indication 
of
that by September 1950 the value United Kingdom exports 
to the United States, in terms of sterling, was definitely 
increasing and apparently fulfilling expectations. The 
trend in the value of imports from the United States, also 
in terms of sterling, however, is difficult to analyze. 
the value of to have
By one calculation, imports appears 
risen, but only by a very slight percentage. By another 
calculation, it appears to have fallen, but also by a very 
slight percentage. At any rate, imports, in terms of ster­
seem to have contributed little to correct the United
ling, 
Kingdom's trade balance with the United States. This is 
that
no surprise. It was expected an adjustment should be 
made mainly on the side of exports. With imports already 
119 
cut to foodstuffs and materials essential to the post-war 
reconversion it was believed that the higher
program, sterling prices British dollar imports resulting from
of 
devaluation would fail to discourage such imports enough 
to reduce their volume to an appreciable extent. What is 
volume of at
more important, a virtually unchanged imports 
higher prices would be expected to result in a considerably 
increased import bill, in terms of sterling. The import 
figures quoted above would thus seem to surpass pre-devalua 
tion expectations concerning imports from the United States 
In terms of dollars the picture is somewhat dif­
ferent. Figures in the Survey of Current Business also 
indicate a rising trend in the value of United Kingdom ex-
to the United States (in terms of dollars) in the
ports first year following devaluation (see Chart 2), In Septem­
to States amounted
ber 1949 exports the United to $20,62 
million. By September 1959 they had risen to $51.46 mil­
lion, an Increase of 52 percent. This increase was consid­
erably under the percentage rise in the sterling value of 
smaller increase in the dollar value was to
exports, but a 
as a result of the new relative values of
be expected the 
two currencies. A further increase in the dollar value of 
exports to the United States might be expected as long as 
wholesale prices in the United Kingdom did not rise by 45 
percent. 
120 
1950
Imports 
Wholesale 

to ­
and 1949-September
Exports the 
and 
Kingdom Dollars July 
Kingdom,

United in of States 
United 
Value United the 
of
11l 
2. the 
IndexChart from 
United Kingdom imports from the United States during 
the same period show no clear trend (see Chart 2). As in the 
case of the dollar value of such
sterling value, imports fell 
to
from $52.37 million in September 1949 $24.05 million in 
July 1950, a drop of 54 percent. In June and July the 
United Kingdom had an export surplus with the United States 
in terras of dollars. There was, however, a sharp increase 
in imports from the United States after July, and by Septem­
ber 1950 they had risen to $59*54 million, an increase of 
147 percent from July to September of 195° and an increase 
of 14 percent from September 1949 to September 1950. 
Figured on a quarterly basis, however, imports from the 
United States fell from a monthly average of $51.96 million 
in the third quarter of 1949 to a monthly average of $41.72 
million in the third quarter of 1950> a drop of 20 percent.^ 
3 Calculated from figures In Survey of Current Business (various issues). 
Thus, in terms of dollars as in terms of sterling. United 
Kingdom imports from the United States tended to decrease, 
at least until July 1950* It should, however, be noted 
that in terms of dollars imports declined by a slightly 
larger percentage than in terms of sterling. As in the case 
of exports, this was to be expected because of the changed 
values of the two currencies.
relative 
122 
Aside from the new exchange rate, other factors may 
have contributed to the discrepancy between the dollar and 
values and
sterling of exports imports. The two sets of 
are taken from two different one
figures sources, British, 
the other American. It is quite possible that the 
figures 
in one source are based on f.o.b. values, while those in 
the other source are based on C.i.f. values. The question 
of timing is also important. The merchandise exported or 
imported by the United Kingdom in one month not be the
may 
same merchandise imported or exported by the United States 
in that month. 
The dollar figures are, of course, the important ones 
in determining whether Britain’s dollar earnings Increased 
following devaluation. With the exception of June and 
July of 1950, the dollar figures give little indication of 
a definite narrowing of the trade gap between the United 
Kingdom and the United States in the year following deval­
uation. In September the United Kingdom's trade deficit 
with the United States amounted to $31.75 million. In 
September 1950 it amounted to $28.08 million, a reduction 
of only 11.6 percent. 
United Kingdom trade with Canada appears to have 
been more favorably affected than trade with the United 
States. The Trade and Navigation Accounts show a definite 
rise in the value of United Kingdom exports to Canada (in 
123 
terms of sterling) during the year after devaluation (see 
Chart 3)* From 5*50 million pounds In September 1949 such 
to
exports rose 10.31 million pounds In September 1950, 
an Increase of 87 percent. Since during the same period 
wholesale prices in the United Kingdom had risen by only 
18 percent, a further Increase In exports to Canada might 
be expected. 
Imports from Canada underwent a slight downward 
trend (in terms of sterling) In the first twelve months 
after devaluation. They fell from 16.28 million pounds In 
September 1949 to 11.77 million pounds In September 1950, 
a drop of 27.7 percent. The downward trend, as shown In 
Chert 3, actually began In July 1949* In which month Im­
ports from Canada were valued at 22.36 million pounds. 
Thus, from July 1949 to September 1950 these Imports de­
creased by 47.4 percent. 
Of more Importance are the dollar figures for United 
Kingdom trade with Canada. Data taken from the Canadian 
Statistical Review Indicate, as would be expected, a smal­
to
ler Increase in United Kingdom exports Canada In terms 
than In of Chart From
of dollars terms sterling (see 4). 
million In September 1949 such exports rose to
$21.94 
Increase of
$36.21 million In September 1950, an 65 per­
cent, as compared with 87 percent In terms of sterling. 
124 
I
Imports Price 1950 
i 
to ­
and Wholesale 
the
Exports 
i
and July
Kingdom 
SterlingKingdom, 

i
United 
of Pounds 
United 

.
Value in the 
of
Canada 

3* 
i
Index
from
Chart 
Canada 

Kingdom,

from 
Imports 

and 
to 
Exports 
Kingdom 
United 

of 
Value 
4. 
Chart 
United 

the 
of 
Index 
Price 

Wholesale 

the and 
Dollars 

In 
1 
1 
1 
1 
1
1950 
1 
1
9-September 

1 
194 
1
July 
1 
1 
1 
1 
Additional data, however, Indicate, as would also be ex­
pected, a greater fall in United Kingdom imports from 
Canada in terms of dollars than in terms of sterling. In 
such amounted to million.
September 1949 imports $56.95 By September 1950 they had fallen to $50.44 million, a drop of 
in terms of



46.6 percent, as compared with 27*7 percent 
sterling. The downward trend in imports, according to 
In which month
Chart 4, had really begun in July 1949, 
they amounted to $70.55 million. Thus, from July 1949 to 
from Canada
September 1950, imports fell by 56.9 percent, as 
compared with 47.4 percent in terms of sterling. In terms 
of dollars the United Kingdom achieved an export surplus 
with Canada in March, April, and September of 1950 (see Chart 4). In terms of sterling it failed to achieve an ex­
port surplus in any of the twelve months following devaluation 
(see Chart 5). In terms of both dollars and sterling, but 
more so in terms of dollars, it Is clear that the United 
Kingdom 1 s trade deficit with Canada was reduced considerably 
in the first after devaluation. Whereas there was an
year 
import surplus of $55*01 million with Canada in September 

achieved
1949, an export surplus of $5*77 million was in 
September 1950. 
The foregoing figures for United Kingdom trade with 

Canada indicate that in terms of dollars exports to Canada 
increased by a greater percentage than exports to the United 
States and that Imports 	from Canada declined by a greater 
percentage than Imports 	from the United States. These 
trends did not follow pre-devaluation expectations. Since 
Canada had devalued her 	dollar by 9»1 percent while the 
United States dollar remained stable, the latter had ap­
preciated In value, vls-a-vls sterling, by a greater per­
centage than the former. It had, therefore, been expected 
that United Kingdom exports to the United States should in­
crease In greater proportion than exports to Canada and 
that United Kingdom Imports from the United States should 
fall in greater proportion than Imports from Canada. It 
is not pertinent to this study to determine why United 
trade with the United States and Canada should
Kingdom have followed a pattern opposite to the one expected. The 
various factors responsible for such an outcome would re-
and the
quire lengthy analysis and discussion, answer might 
still be uncertain. The chief purpose here Is to determine 
the 	of the In-
whether dollar earnings United Kingdom 
to what extent.
creased following devaluation, and. If so, 
The dollar value of United Kingdom exports to both 
totalled $42.56 million
the United States and Canada 	In 
1949. In the same month, the dollar value of
September United Kingdom imports from these two countries totalled 
$109.52 million, making 	for a trade deficit of $66.76 mil-
dollar countries.

lion with the two major 	In September 
128 
1950 exports to the United States and Canada had risen to 
$67.67 million, while imports from them had declined to 
$89.98 million, making for a trade deficit of $22.31 million. 
These figures represent a reduction of 66.6 percent in the 
United Kingdom's trade deficit with the United States and 
Canada and a net gain of $44.45 million in its dollar earn­
ings from these two countries during the first year after 
devaluation. Calculated on a quarterly basis. United King­
dom exports to both countries amounted to a monthly average 
of $43.11 million in the third quarter of 1949* In the same 
quarter, imports amounted to a monthly average of $115.42 mil 
lion, resulting in a trade deficit of $72.31 million with 
dollar countries. In the of
both major third quarter 1950 
exports to the United States and Canada rose to a monthly 
of $65.81 million, while Imports from them fell to
average 
a monthly average of $77*77 million, resulting in a trade 
deficit of only $11.96 million. These figures represent a 
reduction of 85.5 percent in the United Kingdom's trade 
deficit with the two chief countries of the dollar area and a 
of million in its from them
net gain $60.35 dollar earnings 
from the third quarter of 1949 (immediately prior to deval­
uation) to the third quarter of 1950 (a year after devalu­
ation) 
Calculated from figures in Survey of Current Business and Canadian Statistical Review, 
Vol. 
December 1950# p. 106. 

(various issues) XXV, 
To summarize the trends In United Kingdom trade 
with the United States and Canada In the year after devalua­
tion; It Is evident from the above figures that the United 
Kingdom's dollar earnings Increased considerably as a re­
sult of Its merchandise trade with these two countries, and 
a
although deficit remained. It had been substantially re­
duced by September 1950. Furthermore, it must be remem­
bered that during the same time wholesale prices in the 
United Kingdom Increased by only 18 percent. This Indicated 
that, assuming the applicability of a purchasing power par­
ity analysis to the situation, the same favorable trends In 
trade with the two major dollar countries should continue, 
although at a decreasing rate, as long as prices did not 
rise by 43 percent. trade with the whole dollar area also
United Kingdom 
Improved following devaluation. No summarized figures are 
available for such trade on a monthly basts. However, half-
summaries show a substantial reduction. In terms of 
year 
dollars, in the United Kingdom’s trade deficit with the 

whole dollar In the second half of 1949
area during 1930* 
United Kingdom exports and re-exports (f.0.b.) to the dollar 
amounted to $313 million, while Imports (f.0.b.) from the dollar area amounted to $772 million, making for a trade 
area 
deficit of $459 million. J In the second half of 1950 exports 
3 
Cmd. 8065, United Kingdom Balance of Payments to 
1950 (London: His Majesty 1 s Stationery office, October 
TSSGT,' P-25. 
and re-exports (f.0.b.) to the dollar area rose to $512 mil­
lion, while imports (f.0.b.) from the dollar area declined 
in a trade
to $633 million, resulting deficit of $l2l million/" a reduction
These of
figures represent 73*6 
6 
Britain f s Balance of Payments Position, ID 1093 
(British Information Services, october 1931)> p. ?• 

percent in the United Kingdom f s trade deficit with the whole 
dollar area and a net gain of $358 million in its total dol­
merchandise in
lar earnings (from trade) one year. 
At this point it would be worthwhile, or at least 
interesting, to note the trend in United Kingdom trade 
with two non-dollar countries during the first year after 
devaluation. Chart 5 shows that, except for small fluctu­
ations from month to month. United Kingdom exports to and 
imports from India, in terms of sterling, remained virtually 
unchanged from September 1949 to September 1950. This is 
as it should have been, for with India devaluing her currency 
as in terms
in the same proportion sterling (30.5 percent) 
r 
in 
lndia Kingdom, 
¦ 
r 
United 
1 
the
Imports 
1 
of 
and 
1950 
to 
Index 1 
1 
Exports Price 
1 
Kingdom Wholesale 
July
the
United 
and 
of 
Value 
Sterling 
5­
Pounds
Chart 
of the dollar, its value had remained stable vls-a-vls 
and
sterling, the United Kingdom’s competitive position as 
had
against India’s remained unchanged. Nobody had ex­
pected the pattern of United Kingdom trade with India to be 
affected substantially as a result of the devaluation. 
Trade with Pakistan, however, underwent some changes, 
but not in the It must be remembered that
way expected. Pakistan was the only member of the sterling area that 
maintained the value of its when the pound fell.
currency It had, therefore, appreciated, vis-a-vis sterling, in the same proportion as the United States dollar. Thus, it would 
seem that United Kingdom exports to and Imports from Pakistan, 
should have moved in the same direction
in terms of sterling, 
and proportion as exports to and imports from the United 
States, in terms of sterling. Exports to Pakistan, as 
shown in Chart 6, increased in the first year after devalua­
tion. From 1.69 million pounds in September 1949 they rose 
to 3,26 million pounds in September 1950, an increase of 95 
percent. This was considerably below the increase of 188 
to the United States the same
percent in exports during 
from Pakistan increased from 0.8l

period. Imports million pounds in September 1949 to 1.?3 million pounds in September 
1950, a rise of 120 percent. In the same period. United 
Kingdom Imports from the United States rose by only 12 
o 
Pakistan Kingdom, 
from United Imports the 
of 
1950
and Index 
. 
to 
r 
Price
Exports 
Kingdom Wholesale 

July
the
United and 
of Sterling
Value 
6. 
Pounds 
Chart in 
rs.. 
percent. When calculated on a the rise
quarterly basis, 
in imports from Pakistan was not as great. Prom a monthly 
average of 0.91 million pounds in the third quarter of 
of
they rose to a monthly average 1.47 million pounds 
in the third quarter of 195°* a rise of 61 percent.’ The 
7 
Calculated from figures In Accounts Relating to and of the
Trade Navigation United KTngdoirP(Various issues) 
quarterly calculations for imports from the United States, 
however, revealed that In the same period such Imports fell 
the from
by 15 percent. Since figures for Imports Pakistan 
are in pounds sterling, they Indicate an Inelastic demand 
for Pakistan goods. Analyzing the reasons for the failure 
of United Kingdom trade with Pakistan to follow trends 
of its trade with the United States is
similar to those 
also beyond the scope of this study. The foregoing figures 
merely point out how unreliable expectations concerning the 
effects of devaluation can be. 
With respect to the trend of total United Kingdom 
exports and Imports following devaluation, the monthly 
figures in the Trade and Navigation Accounts reveal that 
in terms moved somewhat
total exports, of sterling, ac-
to i.e., they increased. Chart 7
cording expectations, 
a slight increase in the sterling value of total
indicates 
in 
Imports 

and 
Exports Kingdom United Total 
of 
Value 
7* 
Chart 
135 
Kingdom, 
United 

the 
of 1950 
Index 
Price 

'Wholesale 

July 
the and 
Stealing 
Pounds 

136 
exports daring the year after devaluation. From 145.56 
million pounds in September 1949 exports rose to 180.53 mil­
lion pounds in September 1930, an increase of 24 percent. 
Assuming unchanging sterling prices, it was necessary that 
the sterling value of exports increase by more than 43 
percent in order for their dollar value to increase above 
the pre-devaluation level. As will be shown below, the 
dollar value decreased instead of Increasing in the year 
after devaluation. The sterling value of total Imports 
increased as expected. Prom 181.65 million pounds in 
September 1949 they increased to 193-92 million pounds in 
September 1950> a rise of 7 percent. 
A rise of 24 percent in the sterling value of total 
for the mentioned above, but
reason
exports was discouraging 
wholesale prices did not rise by 43 a
as long as percent, 
further increase in exports might be expected. Gn the 
side of imports the only encouraging aspect, for its pos­
sible effect on the balance of payments, was the fact that 
to
after July 1950 total imports began decline sharply. 
of did not the
The sterling value imports fall below Septem­
ber 1949 value of the twelve months following devalua­
in any 
to
tion. But this was only according expectations. Imports, 
to
in terms of sterling, were not expected help in correcting 
the balance-of-payments disequilibrium. Their essential 
nature Indicated that at best they could only be held to 
a minimum Increase. 
When viewed In terms of sterling, the total trade 
position of the United Kingdom shows no definite Improve­
ment following devaluation. A glimpse at Chart 7 will 
reveal that, except In September 1950, the gap between 
total exports and imports failed to narrow appreciably dur­
ing the first year after devaluation. In September 1949 
the United Kingdom had an Import surplus of 56.09 million 
pounds. In September 1950 the Import surplus amounted to 
15*59 million pounds. 
In terms of dollars the situation was even more 
distressing. There are no monthly figures on the dollar 
value of total United Kingdom exports and Imports; however, 
the February 1951 Issue of International Financial Statis­
tics figures on the dollar value of United Kingdom
gives 
and for one whole after devaluation
exports Imports year 
for whole year
compared with figures one preceding devalua-
For the twelve months prior to devaluation (October
tion. 
1948-September 1949) United Kingdom exports (f.0.b.) 
the months
totalled $7,285 million. For twelve following 
devaluation (October 1949-September 1950) they totalled 
$5,915 million, a decline of 17*4 percent. United Kingdom 
Imports (c.1.f.) In the twelve months before devaluation 
amounted to $8,926 million, while In the twelve months after 
138 
devaluation they fell to $7,036 million, a drop of 21.2 
Q 
percent. Thus, In terms of dollars and calculated on 
8 
International Financial Statistics, Vol. IV, Febru­ary 1951> PP* 
xx-xxi. 
whole-year basis, the total exports of the United Kingdom 
In
failed to increase, as expected, following devaluation. 
fact, they decreased noticeably. Total imports also de­
creased, but only moderately. As a result, the Import sur­
plus of the United Kingdom was not appreciably reduced. For 
the twelve months preceding devaluation the import surplus 
amounted to $1,64l million. For the twelve months follow­
ing devaluation it amounted to $1,121 million, a reduction 
of 51.7 Speaking in terms of dollars, devaluation. 
9 
Calculated from figures In Ibid. 
to have been unsuccessful in achieving
therefore, appears 
its primary objective; a substantial expansion of United 
Kingdom exports. The limited reduction in the import sur­
was possible only because imports declined by a greaterplus than exports.
percentage 
Some idea of the sacrifice involved in attaining 
in the
this limited Improvement trade balance can be got 
139 
from a look at the trend followed by the United Kingdom 
terms of trade during the year after devaluation. Chart 8 
shows that export prices, as expected, rose slightly following 
devaluation. From 113 percent (1947=100) in September 1949 
the export price index rose to 121 percent in September 1950* 
an increase of 7 percent. Import prices, as expected, 
also increased noticeably. From 110 percent (1947=100) in 
September 1949 the import price index climbed to 137 per­
cent in September 1950, an increase of 24 percent. With 
import prices rising in greater proportion than export prices, 
the result was a deterioration of the terms of trade 
against the United Kingdom. From 102.8 percent (1947=100) 
in September 1949 the terms of trade index fell steadily 
(see Chart 8) to 88.3 percent in September 1950, a drop of 
14.1 percent. This is a relatively small decline and does 
not represent a serious deterioration of the terms of trade. 
The United Kingdom appears to have had very limited success 
in its merchandise trade during the twelve months follow-
devaluation. But the sacrifice incurred also appears
ing 
to have been limited. 
in the Balance of
Improvement Payments 
Despite the inability of the United Kingdom to make 
reduction in its visible trade deficit, it
a 
significant 
1949-September 

July 
Kingdom, 
United 

the 
of 
Trade 
of 
Terms 
8. 
Chart 
141 
succeeded 
In attaining a considerable overall surplus in 
its balance of payments in 1950* This was made possible 
by the substantial improvement in the invisible trade 
balance during that year. 
Although the United Kingdom had an overall surplus 
of 16 million pounds in the first half of 1949, it sus-1 
tained an overall deficit of 54 million pounds in the 
second half of that year. This reversal was brought about 
by an increase in the visible trade deficit from 43 to 104 
million pounds and a decrease in the invisible trade sur­
plus from 59 to 5° million pounds over the same period. 
Thus, for the whole of 1949 there was an overall balance-
of-payments deficit of 38 million pounds, made up of a 
visible trade deficit of 147 million pounds and an invisible 
lo 
trade surplus of 109 million pounds.' ' In the first half 

10 
Cmd. 8063, p. 7« The latest balance-of-payments 
figures for* give an overall surplus of 20 million 
made of a visible trade deficit of 152 million

pounds, up 
pounds and an invisible trade surplus of 172 million 
pounds (British Record (British Information Services), 
November 15, 1951> P« l)• 

of
of 1950 the United Kingdom achieved an overall surplus 
42 million pounds and in the second half of that year one 
overall
of 179 million pounds, resulting in an surplus of 
whole This
221 million pounds for the year. substantial 
142 
surplus was facilitated by an Increase in the invisible 
trade surplus to 380 million pounds end achieved despite an 
increase in the visible trade deficit to 159 million pounds 
in 1950. The most important items in the increased in­
11 
Balance of Payments Position, ID 1093, 
p. 5. 
visible earnings were shipping and income from interest, 
and dividends. net
profits, In 1949 shipping receipts 
amounted to 88 million pounds and net earnings fr*om inter-
and amounted to 62
est, profits, dividends million pounds.^ 
12 
Cmd. 8065, p. 7. 
In 1950 shipping receipts netted 115 million pounds, and 
earnings from Interest, profits, and dividends netted 123 13 
J 
million pounds. 
13  
Britain! s  Balance  of Payments  Position,  ID  1093,  
P*  5.  

the United Kingdom attained an overall sur-
Although 
plus in its general balance of payments in 1950, a deficit 
in Its current transactions with the dollar ares remained. 
143 
However, this deficit, like the dollar trade deficit, was 
substantially reduced during 1950* In the second half of 
1949 the deficit in current transactions with the dollar 
area amounted to 160 million pounds ($538 million), which, 
together with the deficit of 142 million pounds ($571 mil­
-14 
lion) sustained in the first half of the 

same year, re­
14 
The dollar figure with the

larger smaller sterling figure is due to the fact that the dollar equivalent of the sterling figure for the first half of 1949 is calculated at the old exchange rate of $4.03=1 pound; whereas, the dol­lar equivalent of the sterling figure for the second half of 1949 is calculated partly (up to the time of devaluation in September) at the old rate of $4.03=1 pound and partly (after devaluation) at the new rate of $2,80=1 pound. 
suited in a dollar deficit of 302 million pounds ($1,109 
million) for the whole of 1949. This dollar deficit was made 
up of a visible trade deficit of 251 million pounds ($903 
million) and an invisible tr*ade deficit of 51 million pounds 
($206 million). 15 In 1950 the United Kingdom's deficit 
15 
Cmd. 8065, p. 25* 

with the dollar area was reduced to 107 million pounds ($299 
million), consisting of a visible trade deficit of 113 mil­
lion pounds ($314 million) and an invisible trade surplus 
144 
of 6 million pounds ($l5 million). J Thus, a reduction of 
16 Britain's Balance of Payments Position, ID 1095, pp. 6-7. 
64.6 percent in terms of sterling and of 7? percent in terms 
of dollars was made in the United Kingdom's dollar deficit 
during 1950. 
The total net gold and dollar deficit of the whole 
sterling area, which had persisted since the war, was, un­
like the United Kingdom's own dollar deficit, turned into 
a substantial surplus in 1950-In the second half of 
the sterling area deficit amounted to $570 million, which, 
added to the deficit of $962 million in the first half of 
resulted in a net and dollar deficit of
that year, gold 
million for the whole of The
$1,351 greater part of 
this deficit, $1,196 million, was financed by E. R. P. 
funds. Of the remainder, $l6B million was financed by 
credits and $167 million by drawings on the gold and dollar 
17 reserves of the sterling area. In 1950 a net gold and 
17 
Cmd. 8065, p. 27. 

dollar surplus of SBOS million was achieved by the sterling 
area. This surplus, together with Marshall Aid amounting 
to $762 million and credits amounting to $45 million, 
brought about an addition of $1,612 million to the gold 
and dollar reserves In 1950. As a result of this favor­
able turn, the reserves, which amounted to $1,688 million 
at the end of rose substantially to $3,300 million 





1950.^
the end of
by 
18 
Britain 1 s Balance of Payments Position, ID 1093, 
8.

p. 


This sharp Increase in the sterling area's gold and 
dollar reserves represents the most Important post-devalua­
tion development. It must be remembered that the heavy losses 
of reserves In the spring and summer of 1949 was the chief 
immediate cause of sterling devaluation, and that on the 
day of devaluation the reserves were down to $1,340 million. 
Thus, by the end of 1950 the sterling area's gold and dol­
lar holdings had Increased by 95 percent over the holdings 
at the end of 1949 and by 146 percent over the holdings on 
the day when devaluation went Into effect. Furthermore, the 
figure of $3,300 million at the end of 1950 was the highest 
since the war. Such a marked improvement in the reserve 
position In little more than a year after devaluation must 
146 
be regarded as a highly creditable and gratifying achieve­
ment 
. 
Evaluation 
It may be well to summarize the trends followed by 
United Kingdom merchandise trade In the year after devalua­
tion. United Kingdom exports to the United States and 
Canada (in terms of dollars) appear to have moved accord­
ing to pre-devaluation expectations, 1.e., they Increased 
substantially. United Kingdom imports from these two 
countries decreased slightly. The trends were more favor­
able with respect to Canada than with respect to the United 
States, 1.e., exports to Canada Increased In greater pro­portion than exports to the United States and Imports from 
Canada decreased in greater proportion than Imports from 
the United States. A.S a result of these trends the United 
Kingdom's trade deficit with Canada was considerably reduced and a surplus achieved in September 1950, while the trade 
with the United States failed to close appreciably.
gap 
The United Kingdom's trade deficit with the two major dol­
lar countries taken together, while not eliminated, was sub­
stantially reduced In the first year following devaluation. 
The trade deficit with the whole dollar area was also 
considerably reduced but not abolished. One encouraging 
aspect in the situation was the fact that during the same 
in the
period wholesale prices United Kingdom rose by only 
18 percent. As long as such prices would not rise by 43 
percent, a continuation of the favorable trends in the 
United Kingdom's dollar trade, especially the rise in ex­
ports, might be expected. The total merchandise trade of 
the United Kingdom (in terms of dollars) apparently failed 
to improve in the following devaluation. Total United
year 
Kingdom exports, instead of rising as expected, underwent a 
noticeable decline, while total Imports decreased somewhat 
and in greater proportion than total exports. As a result, 
the total trade deficit of the United Kingdom was not ap­
preciably reduced. The terms of trade, as expected, moved 
in the
against the United Kingdom year after devaluation, 
but to a small extent.
very 
Despite the inability of the United Kingdom notably 
to reduce its visible trade deficit following devaluation, 
it was able to increase its invisible trade surplus sub­
stantially and, as a result, to obtain an overall balance-
of-payments surplus of 221 million pounds in 1950. But 
for the considerable increase in invisible earnings, this 
surplus would not, of course, have been possible. The 
United Kingdom's deficit in current transactions with the 
dollar area continued, although it was substantially re-
and
duced during 1950. But the net gold dollar deficit of 
148 
of the whole sterling area became a surplus of SBOS million 
In 1950. As a result, the gold and dollar reserves of the 
sterling area rose to their post-war peak of $3,300 million. 
Thus, the most notable post-devaluation improve­
ments to
in Britain’s balance-of-payments position appear 
have been the large surplus attained in the invisible 
balance of the United Kingdom and the substantial Increase 
in the gold and dollar holdings of the whole sterling area. 
The latter development was perhaps the more important one. 
It demonstrated that devaluation, however little it may 
have accomplished toward a permanent solution of the British 
problem, was at least successful as a short-term corrective 
measure. It appears to have solved the immediate problem 
of the sterling area’s diminishing reserves. 
It would be a serious mistake to assume that the 
in the United Kingdom's merchandise
limited improvements 
trade with the dollar countries and the notable improve-
in Britain's balance-of-payments position were made
ments 
solely because of sterling devaluation. Certainly, the 
devaluation played a large part in bringing about these 
but its effectiveness would be overestimated
improvements, 
if it were given sole credit for the favorable changes. 

be too soon to assess all the factors af-
Although it may 
fecting British trade and Britain's balance of payments 
149 
following devaluation and to determine precisely the degree 
of their Influence, it Is clear that certain factors other 
than devaluation were Important In Britain’s Improved posi­
tion. 
One of the chief reasons for the Increase In United 
Kingdom exports to the United States appears to have been 
the change in business conditions in the latter country. 
Following the end of the recession about the middle of 
1949* United States imports Increased as business condi­
tions Improved in the second half of 1949 and the first 
half of 1950* The relative importance of this factor in 
the expansion of United Kingdom dollar exports would be 
difficult if not Impossible to gauge. Mr. J. J. Polak of 
the International Monetary Fund in a recent 
-
pr* e 
19 
Polak, J. J. ’’Contribution of the-September Devaluations to the Solution of Europe's Dollar Problem”, Staff Papers (international Monetary Fund), Vol. 11, 
8-11.
September 1951* PP« 1-32. See pp. 
sents some useful data showing the effect of improved 
business conditions in the United States on European exports 
to He
(including United Kingdom exports) that country. 
finds that the value of United States imports from European 
countries rose parallel with a sharp rise in United States 
the
industrial production from third quarter of 1949 to the 
second quarter of 1950. The same parallelism is implied 
with respect to United States imports from the United 
Kingdom. 
Another factor contributing to the rise in United 
Kingdom dollar exports following devaluation appears to 
have been the export drive on dollar markets promoted by 
the British Government. It Is possible that this drive, 
started long before devaluation, may not have begun to 
bear fruit until 1950. The importance of this factor is 20 
also difficult to assess. 
20 
Polak, loc. clt., p. 12. 
The increase in business activity in the United 
States in the latter part of also appears to have 
affected favorably the exports of the whole sterling area 
to the United States. This expansion of exports to dollar 
markets, coupled with a fall in the dollar imports of the 
sterling contributed greatly to the reduction of the
area, 
area’s net gold and dollar deficit in the second half of 
21 
One factor which had an immediate (i.e. short­
21 
The Economist, January 7, 1950, p. 35* 
151 
term) effect on the sterling area's dollar balance was the 
reversal of the speculative operations which had taken place 
in anticipation of sterling devaluation. In the few months 
prior to devaluation these speculative influences had 
acted to increase the dollar deficit of the sterling area 
and, consequently, to accelerate the drain on the gold and 
dollar reserves. Conversely, their reversal in the first 
few months after devaluation acted to reduce the dollar 
deficit and, thus, to replenish the reserves.^ 
22 
The Economist, January 7, 1950, p. 35* 
One other factor which appears to have contributed 
heavily to the improvement of Britain’s balance-of-payments 
position in 1950 must be mentioned. The outbreak of the 
Korean war in June 1950 was followed, in the second half 
of 1950, by a sharp rise in United States imports from all 
countries. This import upsurge was related primarily to the 
rearmament program and the stockpiling of strategic materials.^3 
25 
Polak, Idc> clt., p. 12. 
Included in this general import rise were substantial in­
creases in United States imports from the United Kingdom 
152 
and the rest of the sterling area. The monthly average of 
United States Imports from the United Kingdom rose from 
$21.1 million in the first half of 1950 to $35*2 million in 
the second half of that year (This, however, was more than 
the rise
offset by sharp in United Kingdom imports from the 
United States beginning in July 1950). United States im­
ports from the rest of the sterling area rose from a month­
ly average of $93-5 million in the first half of 1950 to a 
monthly of $117*7 million in the second half of
average 
that The increase in imports from the
year. greatest 
sterling area was in rubber and rubber articles. The month 
ly average of such imports more than doubled from the first 
24 
to the second half of 1950. Largely as a result of this 

24 
Sterling Area Facts and Figures, ID 1122 (British 
Information"Services7-January-1’555)’, p." 11. 
increase in United States purchases of sterling area goods, 
the sterling area's dollar balance rose from a surplus of 
million in the first half of 1950 to a surplus of $585
$220 
25 
million in the second half of that year, which of course 

25 
Britain's Balance of Payments Position, ID 1095, 
7•
p. 
contributed in no small measure to the substantial Increase 
in the gold and dollar reserves in 1950. 
Chapter V 
THE 1951 CRISIS 
In 1951 Britain’s balance-of-payments position 
deteriorated once more. The favorable effects of the de­
valuation were at an end, and Britain's balance on cur­
rent account was again in deficit. The limited improve­
ment which was made in Britain's merchandise trade balance 
following devaluation began to disappear toward the end of 
1950, and by the third quarter of 1951 the trade deficit 
had increased by tremendous proportions. 
The steady rise In the value of total United King­
dom exports (in terms of sterling), which characterized the 
first after devaluation, was continued in the fourth
year 
quarter of 1950 and over into 1951; however, during the 
same period the value of total United Kingdom imports (in 
terms of sterling) also increased steadily, hut at a much 
faster rate than the value of total exports. The result, 
of course, was a steady widening of the trade gap. The 
latest monthly figures show that by the third quarter of 
1951 United Kingdom exports and re-exports (f.0.b.) had 
risen to a monthly average of 250 million pounds. This 
represents an increase of 27 percent over September 1950. 
During the same period United Kingdom imports (c.i.f.) 
154 
rose to a monthly average of 555 million pounds, represent­
ing an Increase of 85 percent over September 1950. As a 
result, the apparent trade increased to a monthly 
1 deficit is greater than the real
The apparent deficit, because It Ts based on c.i.f. import figures which include freight and insurance costs. 
of 125 million pounds in the third quarter of 1951­
average 
This indicates an increase of 853 percent over September 
1950 and of 551 percent over the monthly average of 29 mil­
-2 
lion pounds for the year 1950-It is obvious that the 

2 British Record (British Information Services), November 257 P • "4". 
for this unfavorable turn in the trade balance was
reason 
not a failure to expand exports (they continued to rise), 
but the more rapid increase in imports. 
The most recent trade figures show that for the 
whole 1951 the apparent trade deficit of the United
year 
Kingdom amounted to 1,210 million pounds. The worsening 
of Britain's trade position in 1951 can be more readily ap­
preciated if one notes that for the whole of 1950 the 
apparent trade deficit was only 352 million pounds. The 
156 
peal trade deficit (based on an f.o.b. valuation of imports) 
3 would, of course, be less but still very large. The real 
3 
British Record, January 22, 1952, p. 4. 
trade deficit figure for the whole year 1951 is not yet 
available. For the first half of that year, however, the 
4 real deficit amounted to 338 million pounds. At 
o 
that rate. 
4 
British Record, October 31, 1931# p. 1* 
the whole-year figure would amount to 676 million pounds. 
This contrasts sharply with the trade deficit of 159 mil­
lion pounds in 1950­
There are no figures for the United Kingdom’s in­
visible trade for the whole year 1951* But, in the first 
half of that there was an invisible trade surplus of
year 
216 million at which rate the whole-year surplus 
5 
Ibid. 

should be 432 million pounds. This would be an increase of 
52 million pounds over the invisible trade surplus for 1950. 
Thus, for the first half of 1951 the overall balance 
157 
g 
1
of-payments deficit amounted to 122 million pounds, or
6 
British Record, October 31, 1951, P« 1* 
an annual rate of 244 million pounds. This represents a 
tremendous deterioration in Britain! s overall balance-of 
payments position over 1950# when the United Kingdom en­
joyed an overall surplus of 221 million pounds. 
In the first half of 1951 the United Kingdom's cur­
rent account with the dollar area was in deficit to the 
amount of 109 million pounds ($305 million), making for an 
7 Britain's Balance of Payments Position, ID 1093 (British Informatfon£ervlces', 6ctoberTssl), PP. 6-7. 
annual rate of 218 million pounds ($6lO million). This 
would mean a doubling of the 1950 dollar deficit of 107 
million pounds ($299 million). 
The sterling area's gold and dollar accounts showed 
a favorable trend in the first half of 1951 but deteriorated 
sharply in the second half. In the first half a gold and 
dollar surplus of $414 million was attained. As a result, 
the gold and dollar reserves of the sterling area rose to 
the
a high of $5#867 million by the end of half-year. In 
half of
the second 1951 there was a sharp reversal in the 
gold and dollar position of the sterling area, and a 
deficit of $1,578 was sustained. As a result, the deficit 
for the whole year amounted to $1,164 million, and at the 
o 
end of the year the reserves were down to $2,535 million. 
8 
1122
Sterling Area Facts and Figures, ID (British 
Information "Services/ January 1952)7 P* 9* 
It is too early to analyse in a precise manner the 
various factors contributing to the deterioration of 
Britain's balance-of-payments and reserve position in 1951* 
Some of them, however, are obvious and should be noted. 
The foremost cause of Britain's new difficulty appears to 
have been the steady increase in British import prices, 
especially in raw material prices, which began soon after 
the outbreak of the Korean war in June 1950. By June 1951 
and
Import prices had risen by 43 percent raw material 
the the
prices by 76 percent over 1950 average. At same 
time, export prices rose by only 20 percent over the 1950 
average. This failure of export prices to rise in propor­
tion with import prices caused a considerable worsening of 
the United Kingdom's terms of trade. By May 1951 the terms 
of trade were 20 percent worse than the 1950 average. The 
result was, of course, a substantial increase in import ex­
penditures, not offset by an equivalent increase in export 
earnings. Some of the increase in import expenditures was 
due to a higher volume of imports (partly for stockpiling 
and to replenish commercial stocks), but the greater part 
was due to the rise in import prices. After June 1951 there 
was a slight fall in British import prices, and raw material 
prices, while export prices continued to rise. By October 
1951 import prices were 33 percent and raw material prices 
46 percent higher than the 1950 average. In the same month 
export prices were 25 percent higher. As a result, the 
terms of trade improved considerably but were still 6 
per-
Q 
cent worse than the 1950 
average. 
9 
Britain’s Balance of Payments Position, ID 1093, 
p. 2; and La'bor and Industry in Britain (British Information Services), Vol. IX, December 1951, P* 15^* 
Another important cause of the 1951 crisis was the 
was
rearmament program which prompted by the critical world 
situation. The greater imports of raw materials needed by 
Britain to out its own rearmament effort, as well as
carry 
the world-wide pressure on raw material supplies arising 
out of the world rearmament drive, sent the prices of 
lo 
Britain’s imports shooting upward. Furthermore, to meet 

10  
Britain’s Balance  of  Payments  Position,  ID  1093,  
p.  2.  

160 
the demands of rearmament, substantial resources had to be 
shifted from civilian and export production to military 
production. The main impact of this development appeals 
to have fallen on those industries which produce substantial­
11 ly for export, such as coal and steel. Despite this strain 
11 Labor and Industry in Britain, Vol. IX, December 1951, p. 15^ 
on Britain’s export Industries, the volume of exports in­
creased by about 3 percent during 1951* The volume of im­
-12 ports, however, increased by about 15 percent. 
12 British Record, January 22, 1952, p. 4. 
Another factor which appears to have contributed 
to the 1951 crisis was the loss of Iranian oil. Although 
there no specific figures at this time to indicate
are 
the magnitude of this loss, there is no doubt that the 
nationalization of the Iranian oil industry has cut deeply 
into the invisible earnings of the United Kingdom. 
Two other factors contributed to the deterioration 
of the sterling area’s position in 1951-First, there was 
considerable increase in the dollar imports of both the
a 
161 
and the rest of the sterling area. In the
United Kingdom 
first half of 1951 United Kingdom dollar imports rose to 
an annual rate of $1,680 million, as compared with $1,200 
million in 1950. The dollar imports of the rest, of the 
sterling area rose to an annual rate of $1,090 million in 
the first half of 1951, as compared with $715 million in 
1950. Secondly, the prices of sterling area raw materials 
had begun to fall in the first half of 1951* This price 
fall, coupled with decreased purchases by dollar countries, 
very probably led to a sharp fall In dollar earnings by 
countries In the second half of
overseas sterling 1951 (no 
available
specific figures are ).^ 
13  
Britain’s Balance  of  Payments  Position,  ID  1093,  
p.  4.  

Still another cause of Britain's trouble in 1951 was 
the loss of gold to the European Payments Union. Until 
April 1951 Britain had a substantial surplus (partly on her 
own and partly on other sterling countries' accounts) with 
the E. P. U. In May this surplus turned into a deficit which 
continued throughout the rest of the year. As a result, 
Britain had to repay $ll9 million in gold which she re­
ceived when she was in surplus, and, since October, to make 
162 
additional gold payments amounting to $9B million. The 
effect of these losses of to weaken Britain's
was, course, 14 
gold and dollar position. 
14 British Record, October 31, 1951, P» 4, and Janu­ary 8, 1955/Ip 
There were, perhaps, other factors in Britain's 
balance-of-payments crisis of 1951* Those noted above 
the most important, or least the most obvious, ones. The 
relative importance of each is, at Lhis time, impossible 
to assess. 
The 1951 crisis is more disturbing than the 1949 crisis 
for two reasons. First, there was a substantial reduction 
in the United Kingdom's balance-of-payments surplus with 
the rest of the sterling area in the first half of 1951* 
This was due to the fact that for the first time the United 
other members 	of the
Kingdom had a 	trade deficit with the IS 
It must be remembered that in the first
area.
sterling 
15 
British Record, October 31, 1951# p. 3« 
half of 1949, 	while the United Kingdom had a large balance-
of..payments deficit with the dollar area, it maintained a 
substantial surplus with the rest of the sterling area. 
Partly because of that surplus, the United Kingdom was able 
to maintain a small overall balance-of-payments surplus in 
the first half of 
the other sterling countries was considerably smaller. 
Partly because of this reduced surplus, the United Kingdom 
sustained a substantial overall balance-of-payments deficit 
in the first half of 1951* Secondly, the new crisis is 
not, as in mainly a problem of trade between the 
it is not crisis charac­
sterling and dollar areas, i.e., a 
the
terized chiefly by a large deficit in sterling area’s 
transactions with the dollar area. To be sure, the dollar 
deficit remains large, but the current crisis is primarily 
"a crisis." In addition to
general balance of payments 
the United Kingdom,"other members of the Sterling Area are 
in overall deficit." As a matter of fact. 
....the whole Sterling Area is in deficit all 
round the world... It follows that there is 
not at the time as sharp a distinction

present 
as there was in recent years between so-called 

hard currencies and so-called soft ies. 
16 Labor and Industry In Britain, Vol. IX, December 
1951, P« 157. Quoted from the speech or Mr. H. A. Bucler, the new Chancellor of the Exchequer, to the House of Com­
mons on November 7* 1951> In which he outlined Britain's economic position and announced measures to deal with the critical situation. 
164 
There are Indications that the situation may be­
come worse. It has been estimated that on present trends, 
Britain would have a balance-of-payments deficit of between 
500 and 600 million pounds in 1952, and "the gold and dol­
lar deficit of the Sterling Area would be still larger. 
17 
Labor and Industry in Britain, Vol. IX, December 
1951, P-15^ 
Such deficits would set Britain back to the position she 
held In 194?, when her overall balance-of-payments deficit 
amounted to million pounds and the sterling area ! s 
gold and dollar deficit amounted to 1,024 million pounds 
($4,151 million). 
Chapter VI 
BRITAIN'S DILEMMA 
The usefulness of devaluation a
currency as means 
of correcting a fundamental balance-of-payments disequi­
librium has frequently been questioned. As a short-term 
measure it may have certain merits, but as a device to 
achieve it
a permanent solution, may not necessarily be 
successful. Britain's new balance-of-payments crisis em­
phasizes this view in a convincing manner. The devalua­
tion of 1949 brought temporary relief to the British situa-
It dealt with the immediate cause of the
tion. 1949 crisis 
and enabled Britain to make a substantial improvement in 
international payments in 1950* But once the favorable ef­
fects of the devaluation had worn off, Britain's funda­
mental problem came to the fore once again, aggravated by 
the Korean war. 
Britain's current crisis cannot, however, be at­
tributed entirely to the failure of sterling devaluation 
as a long-term solution. As pointed out in Chapter V, there 
were other factors which contributed to the deterioration 
of Britain's position. They might have produced a crisis 
regardless of the effects of devaluation. But it must be 
most
remembered that one of the important of these factors 
was a substantial deterioration of Britain's terms of trade 
165 
in 1951. The devaluation of sterling, as might have been 
expected, contributed heavily to this adversity in the 
terms of trade. Again, there were factors other than de­
valuation that had an adverse effect on Britain’s terms 
of trade, e.g., the rearmament drive which caused raw 
material prices to soar. But the terms of trade had been 
deteriorating since devaluation and would have continued 
to deteriorate regardless of the external pressure on raw 
material prices. 
Since devaluation has proven unsuccessful in deal-
what
ing with Britain’s long-term problem, alternatives re­
main? What new policies and measures are dictated by the 
ineffectiveness of devaluation and the of the cur-
urgency 

rent crisis? The British Government has adopted certain 
short-term measures designed to deal with the present dif­
ficulty, as well as long-range policies which, it is hoped, 
will ultimately solve Britain’s basic problem. 
Immediate efforts will be concentrated on attain-
increase It is
ing a substantial in exports. felt that, 
the current exchange rate and current prices,
given Britain’s external accounts will balance only if the volume 
of her exports is increased enough to earn the means of pay-
she of the
ing for the imports needs. The problem expanding 
volume of exports seems to be closely related to the problem of production. The Increase in the value of United Kingdom 
exports which was attained in 1950 and maintained in 1951* 
was chiefly the result of rather than
higher export prices 
an increase in the volume of exports. The volume of United 
Kingdom exports has increased very little since devaluation 
In 1951 it was about 13 to 20 percent above the volume 
This small increase in large due to the fact
was, measure, 
that British industrial production increased by an even 
smaller the
percentage during same period. In 1951 indus­
trial production in the United Kingdom was only about 12 
level.^
percent above the 
1 Rough estimates from figures International
in Financial Statistics, Vol. V, January 1952, pp. 112-115. 
Thus, if Britain is to seek the remedy for her 
balance-of-payments difficulty by stressing an increase in 
the volume of exports, she must increase her industrial 
production substantially. Special attention must be given 
to steel. Britain will need more steel to produce "more 
ships, cars, machinery, and engineering products" for 
2 
export. The British Government apparently feels that the 

2 British Record (British Information Services), 
P. ~t>7~
January 87 
key to the whole problem must be found in increased pro­
duction and is determined to do everything in its power 
to achieve that increase. "The only ultimate solution,” 
said Chancellor Butler in his speech to the Commons on 
November 7, 1951* Mmust be one of expansion. We are de­
termined to get output and the to
up encourage country 
more...."^
produce 
3 Quoted in Labor and Industry in Britain (British Information Services), Vol. , £>ecember 15517 P • 157» 
How is Britain to achieve this increase in her in­
dustrial production? An immediate increase in the number 
of industrial workers is unlikely. Since the the
war, 
British economy has been operating at or near full employ­
ment, and labor reserves are negligible. Greater production 
must come by means other than a larger working force. The 
logical alternative is an increase in industrial efficiency. 
A large portion of British Industry is in dire need of new 
The introduction of
plant and equipment. more modern equip­
ment and techniques would, very likely, increase the pro-
worker.
ductivity of the British industrial But the re-
equipment of industry would require machinery and other 
capital goods that are urgently needed for export. Further-
a substantial share of British production will go
more, 
Into the rearmament program. What is more distressing is 
the fact that the steel 
shortage will make it extremely difficult to increase industrial production enough to pro­
vide for 
industrial re-equipment, rearmament, and a sub­stantially larger volume of exports in the immediate future 
An attack on the balance-of-payments problem from 
the side of imports faces even greater obstacles than the 
approach from the side of exports. Further import cuts 
are impossible if essential foodstuffs and raw materials 
are to be imported in sufficient quantities to maintain a 
tolerable standard of living and a level of production 
which satisfies rearmament and other consumption needs. The Government has already announced import cuts designed 
to save 500 million pounds ($1,400 million) a year. Since 
they consist largely of cuts in imports of food and con­
sumer goods, the burden will fall mainly on the British 4 
consumer. 
4 
British Record, January J>l, 1952, p. 2. 
New cuts in raw material Imports would seriously 
the rearmament and export programs. Britain must
endanger materials to keep industrial production at a high
raw
have 
Efforts will, therefore, have to be concentrated
level. 
170 
on lowering raw material prices. In this respect, Britain 
will have to rely primarily on external forces over which she 
has no direct control. The pressure on world supplies of 
raw materials must be eased If prices to decline.
are 
Whether this can be done depends on whether the world re­
armament drive can be slowed down, which In turn depends on 
political and military considerations arising out of future 
world events. As its contribution to relieving the pressure 
on raw materials, the British Government plans to slow down 
its own stockpiling program. The rate of this slow-down 
will, of course, be limited by the needs of industry to 
meet rearmament and export requirements. Lower raw mate­
rial prices would help considerably to reduce import expendi­
tures. with the new cuts In of food and
Together imports 
to-
consumer goods mentioned above, they would go a long way 
ward closing the trade gap. 
One very important aspect of the Import problem 
should be considered. This is the possibility of reducing 
Britain’s import expenditures by increased home production 
the efforts have been
of foodstuffs. Since war, vigorous 
to increase food production in
made, with notable success, 
Britain is still the world’s
the United Kingdom. Although 
largest importer of foodstuffs (she imports about 60 percent 
of
of what she eats), she is now producing about 40 percent 
her food (in terms of calories), "as compared with about 
50 per cent before World War II.H The post-war increase in 
Britain's domestic food production has been the result of 
"carefully worked out policies supported, where necessary, 
by Government aid." 
In 1947 a policy was put Into effect, under the 
Agriculture Act of that year, designed to increase output 
to 50 percent above the 1938 level by 1952-53-Much of 
the  success  is,  of  course,  due  to  increased  mechanization  
5  
and  increased use  of  fertilizers.  Whether  home  production  

5 
Vol. December
Labor and Industry In Britain, IX, 
164-Ibb.
1951> pp. 
can be raised enough to cut down substantially on future 
food imports is a moot question. Certainly, the Government 
policy of encouraging greater production of foodstuffs in 
the United Kingdom should be continued. Greater mechaniza­
tion, use of the latest and most efficient methods of cultl 
vatlon and livestock breeding, and utilization of more un­
to
used land could possibly increase food production enough 
allow a substantial reduction in Britain's food Imports and 
still assure a high level of consumption. The immediate 
problem in achieving this goal is, of course, whether the 
will be spared by the rearmament and export in-
resources 
dustries for the production of more agricultural equipment 
172 
and industrial fertilizers. 
The future for Britain's invisible trade is un­
certain, and the prospects for substantial aid from this 
source in solving the balance-of-payments problem are dim. 
To be invisible 
earnings have been steadily increas­
ing since the war, and the improvement in Britain's posi­
tion in 1950 was largely due to a substantial increase in 
invisible earnings. However, it is doubtful whether 
further substantial increases can be made in shipping re-
the two
ceipts and in income from overseas investments, 
most important items in Britain's invisible trade. Greater 
commercial shipping space depends on increased ship 
construction, which in turn will be limited by the shortage 
of steel and the priority claims of the rearmament and ex­
port programs on available manpower. And the large losses of 
Investments sustained during the war have not been
overseas 
replaced by new investment in a large enough proportion to 
a volume of income equal to or greater than the
yield pre­war level in the near future. The unsettled international 
situation and Britain's diminishing empire have, of course, 
limited the opportunities for new Investment. A
severely net invisible of
reduction in Britain's income would, course, 
aggravate the balance-of-payments problem. But even if in-
were maintained at its present level, it might be of 
come 
small help 
in solving the problem. To offset a possible 
increase in the visible trade deficit, a substantial in­
crease in net invisible earnings would be necessary. Such 
an 
Increase is unlikely in the near future. 
Even If Britain were able to implement all the 
measures and make all the adjustments necessary to expand 
reduce and
her exports, her Imports, increase her net in­
visible even if all the external factors
earnings, affect­
ing her balance of payments were favorable, she would still 
fail to solve her problem unless steps were taken to stabi­
lize her internal economy and increase internal production. 
However drastic, any action designed to deal with the ex­
ternal aspects of the problem, and this includes devalua­
tion, will be unsuccessful unless it is supported by ade­
internal measures.
quate 
more resources of men and materials diverted
As are 
to meet the needs of the rearmament and export programs, 
less will be available for production of consumer goods to 
at home. There be
satisfy civilian needs will, however, 
no corresponding reduction of purchasing power. Unless 
are taken to hold back the increased demand on this
steps 
limited supply of consumer goods, inflation will be un­
avoidable. The effect of internal inflationary pressures 
Britain's external trade should be obvious. As sterling
on 
174 
prices rise at home, British goods will seem less attractive 
and
to foreign buyers the proposed export Increases will be 
much more difficult to attain. To export more, Britain 
must Devaluation or
hold down sterling prices. any other 
measure to
designed improve Britain’s competitive posi­
tion on the world market will futile If the
prove prices 
of British goods continue to rise. Unless internal demand 
can be checked, such a price rise will be forthcoming. 
But Inflation will also have an adverse effect on Imports, 
for higher sterling prices at home would encourage more 
Imports of cheaper foreign goods to satisfy consumer de­
mand . 
Strict Inflationary controls by the Government must 
Intensified.
be continued and. If necessary. Taxation, 
however painful, will undoubtedly continue to be the 
Government’s chief anti-inflatlonary weapon. The burden 
of heavy taxes has been a severe strain on the British 
people since the war, but if purchasing power Is to be 
substantially curtailed, taxes will have to be kept high. 
not
Government bonds, redeemable for, say, 20 years, 
would also be an effective check on consumer demand. Wage 
even further will be virtual-
reductions to restrict demand 
ly Impossible, because no British Government, whether 
to commit
Laborlte or Conservative, would wish political 
cuts for British workers. The
suicide by supporting wage 
175 
Government may even find 1g Impossible to prevent wage In­
creases. A further rise in the cost of living will bring 
demands for higher wages from British trade unions. In 
the export Industries holding wages down Is a prime neces­
sity If production costs, and hence export prices, are to 
be kept down. This, however, would limit the 
voluntary 
migration of labor to the export Industries, and would 
necessitate to channel the
government controls necessary 
manpower Into these Industries. Price controls also face 
serious difficulties. If the general price level is kept 
high in o~der to restrict purchasing power, the Inflation­
ary pressure on export prices may prevent the desired ex­
pansion In exports* If general prices are reduced in order 
to keep export prices down, purchasing power will be en­
hanced. The logical solution to this problem may be 
to 
allow prices of consume'1 goods to remain high, while Im­
posing strict controls on the prices of exports and 
materials used in the production of exports. This, however, 
would reduce the profit Incentive In the export and related 
Industries, and would necessitate further controls to 
channel capital Into these essential Industries. 
Certain large public expenditures undertaken by 
the Labor Government and which, for the most part, must 
now be continued by the Conservatives, have a definite 
on
inflationary effect the economy. Yet, substantial 
re­
ductions in government expenditures are highly improbable 
in the near future. Britain’s international committments, 
especially her role in the North Atlantic alliance, re­
quire the maintenance of large armed forces and heavy mili­
tary expenditures. Unless there is a sudden improvement in 
the international situation, than
an increase, rather a 
reduction, may be forthcoming in government military spend-
The social
ing. services, likewise, face little or no 
reduction. Like the problem of wage reductions, this is a 
touchy political issue, and the Conservative Government 
will want to avoid tampering with it. As a matter of fact, 
the Government has announced that the structure of the 
social services is to remain Intact; however, new charges, 
expected to yield some 40 million pounds, will be intro­
duced for some parts of the National Health Service.^ 
r 
o 
British Record, January 31, 1952, pp. 3-4. 
Other* measures designed to maintain internal 
financial stability were announced by Chancellor of the 
Butler in his November 1951 speech to the Com-
Exchequer 
mons. These include proposed cuts in building and capital 
investment designed to save materials, especially steel, 
and labor which are more urgently needed to carry out the 
177 
rearmament and export new restraints 
on
programs; personal 
incomes and spending through "a very cautious policy of 
. 
dividend distribution" and an excess profits tax to be 
introduced on January 1, 1952; and a rise in the rate of 
Interest as well as other credit controls designed to 
restrict bank credit to essential purposes.^ 
7 
Labor and Industry in Britain, Vol. IX, December 
1951, pp.~TSB-1.59. 

To a very large extent, many of Britain's troubles 
are due to external forces over which she alone has no 
control. Her rearmament program and her large military 
expenditures overseas stem, of course, from the current 
world tension. A substantial lessening of this tension 
would permit a substantial reduction In Britain's military 
production and expenditure. Whether such an Improvement 
in the world situation is possible In the near future Is 
primarily a political question, and one which Britain alone 
Influence. Certainly, she should do all in her power
cannot 
a but this will have to be done
to bring about settlement, 
in the context of international negotiations.
primarily 
The unsettled international conditions that have prevailed 
in the post-war period are, of course, also responsible 
for the instability that afflicts the world economy. In 
such unstable conditions, world trade in general and 
British foreign trade in particular cannot thrive. It 
may be said that, in the final analysis, the solution to 
Britain’s problem depends upon the restoration of world 
economic stability and the creation of a more favorable 
international trade setting. Whether this can be done 
in the immediate future also which
depends upon forces 
Britain alone cannot control. 
In this respect, the United States can play a very 
important role. As a matter of fact, the success of 
Britain’s new economic policies will depend 
largely upon 
the stability of the American economy. This is not an 
idle statement. It must be remembered that the small de­
pression that took place in the United States in the lat­
ter half of and the first half of caused a re­
duction in United States imports of British goods. This 
reduction contributed heavily to the gold and dollar losses 
the British crisis of and led to the
that precipitated 
devaluation of sterling. If Britain is to find a market 
for her exports in the United States, the American economy 
must be maintained at a high level of employment and in­
come. Furthermore, tariff restrictions on British goods 
entering the United States will have to be substantially 
179 
reduced and In some cases (provided no undue hardship 
is Imposed on the Industries affected) abolished. 
Many Americans complain about United States aid 
to Britain. They maintain that Britain’s troubles are not 
our fault and that we should not be asked for them.
to pay 
Yet, they fail to realize that unless we are willing to 
buy more British goods, Britain will face a continuing 
deficit in her balance of payments which will make her 
increasingly dependent on foreign aid to finance her pur­
chases of food and raw materials. The only logical source 
of such aid is, of course, the United States. 
For the British people, the road ahead looks ex­
tremely difficult. The implementation of the policies 
outlined in the foregoing pages does not guarantee a 
solution of Britain’s balance-of-payments problem. It 
may be noued that their practical application would, in 
raise new and more difficult problems which
many cases, 
would require new and more stringent measures. The steel 
and the priority claims of rearmament and exports
shortage 
seem to be the chief stumbling blocks upon which most of 
the proposals for dealing with the British problem disinte-
This is not to that these
grate into new problems. say 
policies would be totally ineffective and that their 
adoption is a futile gesture. Even if they do not achieve a 
180 
permanent solution, they are necessary to meet the cur­
rent and will
crisis; if applied with sufficient vigor, they 
put Britain well on the 
road toward external solvency. For 
the individual Britisher, the immediate future holds 
greater 
sacrifices than he has heretofore experienced. The 
austerity he has learned to bear so patiently will be in­
tensified, and the improved standard of living which he 
has so long expected will have to be postponed indefinitely. 
He will be taxed more. He will find less consumer goods 
available and will have to pay higher prices for those he 
for the most
buys. His food consumption will, part, re­
main at present levels, but he will have to face actual 
cuts in some items. 
Emphasis on increased British production is well 
Greater industrial production and domestic
placed. pro­
duction of foodstuffs has a favorable effect on the 
balance of payments and will, in the long run. Improve 
the standard of living. On the other hand, the rearmament 
has an adverse effect on the balance of payments,
program 
directly, by limiting the resources that can be allocated 
the
for export production, and indirectly, by intensifying 
inflationary pressures which worsen the terms of trade. 
has an adverse effect on the standard of
Rearmament also 
living by limiting the supply of consumer goods. Britain, 
thus, finds Itself on the horns of a dilemma. In this 
situation, sterling devaluation, far from being a cure 
(a few Individuals have suggested a further devaluation 
of the pound), will only make the terms of trade worse and 
the
aggravate malady. 
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Articles 
Balogh, 	T. "Britain's Foreign Trade Problem; A Comment", 
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Ellis, H. S. “The Dollar Shortage in Theory and Fact", The Canadian Journal of Economics and Political Science ;"VoT 7 'T47~August' 
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on
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r
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The vita has been removed from the digitized version of this document.