No. 455 NAI DT S14111A
Memorandum by Frederick H. Boland
'Foreign Exchange Restrictions'
Dublin, 4 December 1947
- Exchange control in our case could have two possible objectives. The first would be the protection of our own balance of payments. The second would be the safeguarding - so far as this country is concerned - of the international position of the pound sterling.
- It would be difficult, if not absurd, to attempt to justify the control of our payments to non-sterling countries on the ground of the necessity of protecting our own balance of payments. Everyone knows that the really vital movements in our balance of payments take place within the sterling area. How then could we defend the cost and inconvenience of a system of exchange control which had no application to the accounts across which the vast bulk of our external payments move? How could we defend restrictions on travel to France, or on purchases of French Renaults, perfumes and strawberries, on the ground of the necessity for safeguarding our external payments position, if people here were free to take luxury cruises on British ships and buy Bentleys, fur coats, and pineapples from Britain and other countries of the sterling area? And the argument would become more and more untenable according as sterling area exportable surpluses increased.
- It is far better that, from the outset, we should place our control of payments with non-sterling countries fairly and squarely on the ground of the importance, from the point of view of this country, of securing the recovery of the £ sterling as a medium of international exchange. But, once we decide to join with the other sterling countries in an endeavour to secure this, it becomes essential, at the outset, to get quite clear the principles upon which the joint endeavour is to proceed. It would be wrong to assume that the present problems of sterling exchange are temporary and that sterling convertibility is likely to be restored at any time in the near future. It is a far safer and sounder assumption to regard sterling convertibility as being still a very long way off. Although exchange restrictions can, no doubt, be progressively relaxed in severity according as balances of payments come nearer to equilibrium, the principles upon which we agree to act now will probably continue to affect, not only our non-sterling payments, but the character and extent of our trade with non-sterling countries, for many years to come.
- Assuming that we frankly accept the position that we must continue to control our non-sterling payments as our contribution towards sterling recovery, the next step is to get clear in our own minds the principles in accordance with which the restriction of our foreign payments should be determined and administered. The parallel action of the sterling countries in this matter has been hitherto characterised by a marked degree of fluidity. It is obviously in our interest that that should continue. There are one or two general principles, however, which, it seems to me, desirable from our point of view to endeavour to get established as soon as possible, viz:-
- it seems to me better from our point of view that, when it comes to cooperation in applying restrictions, either to non-sterling currencies generally, or to a particular non-sterling currency, or group of currencies, the obligation to restrict should, in the case of each member of the sterling area, be, so far as possible, quantitative, and to the smallest degree possible, qualitative or specific. It should, as far as possible, take the form of an agreement to reduce payments in the currency or currencies concerned, say, by an agreed percentage of the similar payments effected in a previous given period, or something of that kind, rather than of an agreement to refuse foreign exchange in respect of particular classes of goods or services. Control of foreign payments is so vital an element in national economic policy that any Government which agreed to accept an automatic uniformity of action in the application of exchange restrictions or the disposal of its foreign exchange resources would run the risk of compromising its sovereignty and being drawn into something tantamount to an economic union. As a matter of policy, therefore, it seems to me to be a matter of considerable importance that, whereas we might readily agree to reduce or limit our payments in a specific currency, or group of currencies, either by a specified absolute amount or by a specified percentage as compared with a prior given period, we should fight as hard as we can for the principle that, within the limits of such reductions as may be generally agreed upon, each member of the sterling area should be entirely free to use the resources at its disposal in what it considers the best interests of its own economy.
- The second matter, which seems to me of some importance, is this. Payments arrangements between the sterling area and other countries are at present determined by monetary agreements made between Britain - acting, in effect if not in name, for the sterling area as a whole - and the countries concerned. In making these agreements, Britain acts with little or no consultation with the other sterling countries, and the terms of the arrangements themselves seem to be reached primarily with an eye to British import programmes from the country concerned. Although it seems to be generally admitted that these arrangements are made without any special examination of the currency position between the foreign countries concerned and the sterling area as a whole, the agreements operate to determine the character of the foreign currency concerned for all the countries of the sterling area, the foreign currency concerned becoming 'hard' or 'soft' according as the 'cushions' fixed in the agreement are exceeded or not. It is a somewhat undesirable feature of the sterling area that Britain alone is able by treaty to determine the foreign currency relationships of other countries of the sterling area in this way without their having a say in the matter, and the moral seems to me to be that, if there is to be joint endeavour to protect the international position of sterling, a necessary corollary is that there should be full consultation between Britain and the other countries of the sterling group before payments agreements of this kind are made.
- Apart from these two operative principles, which, it seems to me, it is in our interest to establish so far as we can, there are some general considerations in connection with this whole matter which it is as well, perhaps, to have in mind. A number of Continental countries, including France, Portugal, Italy, Switzerland, etc., are vitally dependent on luxury and semi-luxury exports, as well as on the tourist trade, for their national wellbeing and prosperity. All these countries had active balances of payments with Great Britain before the war arising largely from this type of export. Having lost much of her overseas income as a result of the war, Britain can hardly be expected to afford these countries markets on the same scale as before. On the other hand, these essential European exports to Britain, being to a large extent traditional and of very long standing, are relatively inelastic. They cannot be readily abandoned or diverted. The result is that an unduly severe restriction of sterling payments in respect of them must inevitably, by accentuating balance of payments difficulties, force the European countries concerned into policies of autarky1 and foreign trade restriction inimical to that expansion of world trade in which no country is so vitally concerned as Britain herself, it being only by the achievement of a steadily rising volume of world trade that Britain can expect to achieve and maintain the volume of exports required to balance her own international payments. On this ground, there is a strong argument for the exercise of the greatest care and liberality in applying exchange restrictions to the staple exports, visible and invisible, of European countries; and this is all the more so because the United States Government, which, on present indications, is about to undertake heavy sacrifices in an effort to restore stable monetary and economic conditions in France, Italy and other continental countries, is certain to take an extremely unfavourable view of any action on Britain's part tending to exclude the essential exports of those countries from their traditional market.
- I have seen indications that British official opinion on this whole matter is by no means unanimous. Some British officials regard the automatic balance of Britain's trade exchanges with European countries as an inevitable consequence of the loss of British overseas investments, while others, remembering that the international position of the £ sterling rested partly on the balances maintained in London by Continental countries with favourable balances of trade with Britain, feel that, to adopt too narrow and restrictive a policy as regards European trade would be to say goodbye to any hope of restoring the £ to its previous position as a medium of international exchange. In any case, it seems to me that, in any sterling area discussions on this matter, our influence should be exerted in favour of the exercise of the utmost liberality possible in the application of foreign exchange restrictions to traditional European exports to Britain, visible and invisible. We would certainly have with us most American official opinion, and at least some official opinion in Britain, if, in keeping with this attitude, we choose to go slow in such matters as restricting travel to European countries whose tourist trades are an important element in their balance of payments.
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