Memorandum from the Department of Finance on Irish Sterling holdings given by Frank Aiken to Éamon de Valera (Dublin)

In the United Kingdom, the volume of currency in circulation and bank deposits, which was expanded by £3,450 million during the war period, has been further increased since August, 1945, to the extent of about £840 million. During the two years to the end of July last, the deposits of the London Clearing Banks increased by £826 million. In these two years the creation of credit by the banking system in favour of the British Government, as indicated by the increase in Government security holdings of the Bank of England and in short loans to the money market, Bills, Treasury Deposit Receipts and investments held by the London Clearing Banks, totalled £610 million. The Banks' advances to the public increased by £371 million. The rise in British Government debt in the same two years' period was £2,204 million. The effects of the inflationary financial policy continuously pursued in Britain since 1939 are evident in the rise in prices and wages. Wage rates have risen by an average of over 65% and wholesale prices by over 85%. Agricultural prices are between 2 and 2½ times the pre-war level; export prices have more than doubled (index 225, base 1938). The cost of living index is pinned down by subsidies, costing annually about £400 million, to 135&percent; of the 1938 figure.

Over the seven years 1940 to 1946, the sterling holdings of Ireland, resulting from unrequited exports of goods and services to Britain, increased by £163 million, as follows:-

As a result of the inflation in Britain referred to above, in particular the rise in British export prices, the potential purchasing power of the sterling assets already held by Ireland before the war (usually taken to be about £300 million) has been more than halved and the sterling acquired since 1939 has been continuously diminishing in value. In contrast with countries like Argentina and Portugal, Ireland's sterling accumulation since 1939 is not protected by a gold guarantee against depreciation of sterling in relation to the US dollar.

The sterling acquired since 1939 is a measure of the deprivation of supplies which Ireland has had to endure despite the fact that the means of payment had been earned by the rendering of services and the supply of goods at rates which were held down below the ordinary commercial levels by the British Government policy of bulk purchase and price discrimination. Even during the first half of 1947, when other holders of sterling drew upon their accumulated balances to the total extent of £68 million, Ireland's purchases abroad were no more than she could afford from current earnings.

The great bulk of Ireland's income from abroad is in sterling and the convertibility of sterling is vital to our economy. Even in 1938, when supplies were freely available from the sterling area, we imported 40% of our requirements from outside the sterling area.

The prolonged shortage of supplies has affected not only consumption standards but the maintenance and increase of national capital. In the White Paper on National Income and Expenditure, 1938-1944, it was estimated that a capital deficiency of the order of £100 m. had developed during those years. As the White Paper comments 'these figures set in a new perspective the value of the forced savings of the State during the war. It is doubtful if these savings will suffice to make good the capital deficiency which has piled up during the war years, let alone provide for more intensive capitalisation' (pp. 29/30).

In the light of these facts, Britain must recognise that we would be exceedingly unwilling to accumulate further sterling. Our holdings now amount to some £450 million and there is no firm prospect that Britain will ever be able to convert into goods even the small fraction of this sterling we are likely to want to repatriate.

It would be unrealistic not to regard the further accumulation of sterling less as a loan than as an outright gift of resources to Britain. We would be in the position of a creditor who makes a further unsecured advance to a borrower in the hope, which present indications do little to justify, that it will restore his general solvency. Such additional aid to Britain will, however, be forced upon us by the curtailment of convertibility of current sterling earnings and the extent of this forced aid will be the greater in so far as our sterling earnings are augmented by increased expenditure here by British tourists. All the time the continuance of inflation in Britain, which is extremely probable, will progressively reduce the real value of our sterling holdings.

The British Chancellor of the Exchequer addressing Brazilian representatives on 6th May last said that 'a sign of Great Britain's strength must be a refusal to take on fantastic commitments beyond all limits of good sense and fair play'. The context of these remarks was a denunciation of the vast sterling debt incurred by Britain during the war as an 'unreal, unjust and insupportable burden' but they also apply to the deliberate assumption by Britain of further sterling debts now.

The scaling down of sterling balances, if super-imposed on the wasting effect of British inflation, would cut still further the hoped-for eventual return in goods and services for services for the net resources supplied to Britain since 1939. The intimations from the British Treasury show that Britain intends to pursue this topic, despite our reasoned contention that the circumstances in which we acquired sterling balances entirely exclude any possible justification for scaling down. It is worthy of note that none of the formal agreements so far negotiated with countries which accumulated sterling since 1939 provides for a scaling down of sterling holdings.