Paper Prepared by the British Embassy1

top secret

Sterling Balances and South East Asia

note by the united kingdom

This paper sets out for consideration an outline of policy for dealing with the two closely related problems of the sterling balances and development in South and South East Asia.
Both these problems are urgent. While Sterling balances of the present size remain outstanding throughout the world they represent a continuous threat to sterling and their repayment is a Weighty burden on our economy which intensifies the inflationary pressure. Meanwhile, in South and South East Asia the Communist threat is growing apace. This threat is of vital importance, both politically and economically, and can be countered only by a constructive policy which will offer hope of economic advance for the peoples of this region. Furthermore, supplies from South and South East Asia are of cardinal importance to the economy of the whole world and in particular the area is of importance in the balance of payments and trading position of Western Europe.
The two problems are linked together for the following reason. Of; the total sterling balances of £3,267 million, £1,185 million are held by India, Australia, Pakistan, Ceylon and New Zealand. The sterling balances represent not only the external reserves of these countries but also the funds upon which they rely for carrying out their programmes of development. If their drawings upon their sterling balances are reduced to a level which we can afford, India, Pakistan and Ceylon in particular will be unable to maintain, far less increase, their present rate of development; India has already had to cut back her development programme very sharply. There is, therefore, no prospect of a satisfactory settlement of the sterling balance problem consistent with a continuous economic development in South and South East Asia unless new money can be found for development (or for settlement of the sterling balances) from outside the Sterling Area. On any realistic assessment this can only mean dollars.

At the same time the two problems cannot be treated as identical. The sterling balance problem extends far beyond the boundaries of South and South East Asia; thus the sterling holdings of certain other countries (e.g. Egypt) affect the position of sterling. Moreover, in considering any development programme for South and South East Asia, Indonesia, Burma, Indo-China and Siam (who possess only modest amounts of sterling) are also of great importance, and indeed are nearer the front line in the Communist attack than the Commonwealth countries. The two problems cannot therefore be treated as one; but a self-consistent solution has to be found for both.

I—Sterling Balances

We have to deal with two major dangers to sterling and to our economy:
The existence of large sterling balances, available for spending outside our control, is an ever-present threat to sterling. The balances played a large part in the events of 1949 in that their existence contributed heavily—and still contributes—to the difficulty of restoring [Page 1634] full confidence in sterling. While our affairs are going well, this is not directly damaging, but as soon as we suffer a setback, our weakness is at once intensified. Our vulnerability to fluctuations in the world economy—resulting from our wholly inadequate reserves—is our worst weakness, and the sterling balances greatly intensify it.
The existence of large sterling balances represents a potential direct drain upon our economic resources—so-called “unrequited exports”. If, e.g., India is able to run a deficit on her balance of payments by drawing down her sterling balances, this is a charge on our economy, and contributes to our present inflationary difficulties. In 1948–49, the rest of the sterling area ran an overall deficit of £320 million, and in 1949–50 the deficit will be well over £200 million. The receipt of aid from the United States and Canada has, of course, been a considerable factor in our ability to support such a strain.
The “sterling balances” are a wide range of overseas holdings of sterling and sterling securities—bank balances in London held by Central Banks, balances held by overseas commercial banks and private individuals, sundry wartime loans to His Majesty’s Government, the funds of Colonial Currency Boards and Colonial Governments, etc. Much of them—probably well over one-half—represent the monetary reserves of countries which base their currencies on sterling and the normal world-wide working balances held in sterling which are a natural part of the sterling trading and financial system. The composition of balances differs from country to country; the present arrangements, by which some of the balances are more or less “blocked”, vary widely; some positions are more dangerous than others, and for different reasons. The “sterling balances” cannot be treated uniformly; but each holder attaches great importance to what happens to others.
The distribution of Sterling Balances is shown in Annex A.2 Among Commonwelth countries, we should consider it desirable to take early action with India, Australia, Pakistan, Ceylon; we do not propose to take action in respect of the Colonies partly because their sterling funds are already under close control, and partly because we are already giving large financial assistance to the Colonies, and it would not make sense to reduce their available sterling resources and at the same time to provide them with new funds. (A fuller note on the Colonies is at Annex B.2) New Zealand’s balances do not create difficulty. South Africa’s balances present certain special characteristics. Outside the Commonwealth, the biggest problem is presented by Egypt. The European balances involve special features, and their future depends on the outcome of present discussions concerning a European Payments Union. In any case, it will be advisable to deal first with the Commonwealth.
Any new arrangements with holders of sterling balances would be a combination of any or all of the following elements:
Cancellation of some balances outright (if possible).
Funding of some (i.e. an arrangement by which part of the balances are paid off in equal annual instalments, over a specified number of years).
Release or partial blocking of the rest (i.e. agreeing how much of the rest the holder should be allowed to use freely now, and under what circumstances it should be allowed to ask for the release of any of the remainder).

These matters would have to be the subject of discussions with holders of sterling balances. As already stated, we think it advisable to hold discussions with the Commonwealth first, and then work outwards to other holders.

(A question may shortly arise of dealing with Egypt separately at an early date.)

Voluntary cancellation by the holders of any part of the balances is thought to be most unlikely unless it is a consequence of the injection of external assistance. Some surrender of balances might be accepted in exchange for dollar aid. This would, of course, only be feasible if such assistance were made available on a grant and not on a loan basis.
The extent of funding to which the holding countries may be willing to agree may also be influenced by whether or not dollar assistance is available but we believe that some funding arrangement may be possible even without its being associated with dollar aid. Our object as regards funding would be to ascertain what is the minimum amount of its sterling holdings which each country needs to maintain as monetary reserves and working balances and to seek agreement for the funding of the rest. In the ideal the amounts left free under such an arrangement would represent working balances and minimum reserves only so that except in circumstances of extreme difficulty which justify a call upon reserves the current demand upon our own resources would be limited to the annual instalment of repayment of the funded debt. The proportion of existing balances required to be held as working balances and reserves would of course vary quite widely from country to country and would need to be discussed with each country in the light of its expected future policies. If we get the sort of arrangement we should like we should not expect the “free” proportion of existing balances to be less than 50% overall, but the very nature of these “free” balances should mean that no appreciable proportion of them would normally be free to be spent. Quite clearly, the willingness of the holders of balances to fund on the maximum scale desirable on these lines will be greatly affected [Page 1636] by the prospects they see of receiving assistance towards their necessary current expenditures from outside the sterling area.
That would mean that a balance-holding country, in addition to current earnings, would have available to spend—(a) the dollar aid; (b) the annual installments of the funded portion of the balances; and (c) such part of the balances as might be left completely free under paragraph 8(iii), and did not need to be retained as monetary reserves and working balances.
It is clear, therefore, that great importance is to be attached to the availability of dollar assistance. Nevertheless, we shall do whatever can be done in advance of the availability of such assistance.
We are, therefore, considering tackling the problem in two stages:
By funding as quickly as possible as much sterling as can be funded independently of external assistance.

If external assistance becomes available, for development or otherwise, linking it so that a recipient of external aid would have to cancel part of the previously funded debt and/or fund a larger proportion of its balances.

II—South and South East Asia Development


Except in the Colonial territories, we cannot afford to play any significant part in the financing of accelerated development in South and South East Asia. The assistance which we have given to India, Pakistan, and Ceylon by permitting them to use their sterling balances has contributed greatly to their economies since they became independent, but at a greater cost to ourselves than we can afford to continue to pay, in view of the declining scale of Marshall Aid. Thus, far from being able to do more to assist development in this region, we cannot do as much as we have done in the past.

The other Commonwealth countries in the region are likewise unable to contribute substantial help. If Australia (or any other Sterling Area country) offered a sterling contribution to development this would almost certainly come out of her balances and would, therefore, merely impose an additional burden on the United Kingdom. In turns of the economic burden involved, Australia can only turn her sterling into goods and services at our expense. (For instance, if Australia gives or lends £1,000,000 to Indonesia to buy U.K. plant for electrical generating stations, the supply of that plant involves demands for labour and material in the U.K. in precisely the same way as if e.g., India [Indonesia?] were buying it and paying for it, not by exports to us, but by drawing down her sterling balances.)

The course of economic development in this region therefore depends upon external dollar assistance. Without this, the pace of [Page 1637] economic development in Commonwealth and non-Commonwealth countries alike will be far less than is needed in present circumstances. Both from the political point of view and from the economic point of view, it is highly necessary—and indeed urgent—that economic development throughout this region should proceed as fast as possible. There is no other way to provide hope for these peoples. The condition of success must be dollar assistance, for the scale of the problem is so great that economic aid given piecemeal in the sort of quantities which we can offer does not scratch the surface of the task of raising the productivity—and thus the standard of living—of 500 million people. This is obviously a long term problem.
In the middle of May, the Consultative Committee which was set up at Colombo will meet at Sydney. We hope that the Committee will concentrate upon the production of a realistic development programme, showing the immediate and more distant objectives of the projects included in the programme, the resources available from within the area and from other parts of the Commonwealth to carry it out and the additional external (i.e. dollar) assistance which may be needed to give full effect to it. In addition to the long-term development, it is necessary also to consider the money and supplies which are needed to maintain political and economic stability, but we consider that the latter should be included in a very wide concept of “development”, in order to avoid the grave dangers of maintenance being sacrificed to the creation of new capital and of the idea of development being associated exclusively with spectacular projects. This approach may well make it difficult to cover under the programme the immediate quasi-military needs of territories such as Indo-China where governments at present exercise no effective control over their territories. Their development needs would be covered by the programme, if and when their governments regained control of their economies. Meanwhile, their immediate needs are in any case so urgent that the only way of meeting them in time would be by some emergency aid such as was rendered by the U.S. to Greece, Turkey and France before the E.R.P. programme was launched.
We therefore contemplate a general policy on the problems of South and South East Asia development along the following lines:
That, at Sydney (following the Colombo resolution) we should seek to begin the preparation of a development programme for the Commonwealth countries in the region, to prepare the way for—
Further consultation with the United States and Canadian Governments as to the assistance they can give in carrying out this programme, and
That, at Sydney, a decision should be sought to invite other countries in the region, i.e. Burma, Indo-China, Indonesia and Siam [Page 1638] to co-operate with the Commonwealth in preparing similar development programmes.
That any scheme agreed at Sydney should be co-ordinated with the Technical Assistance Programme being prepared by the United Nations Organisation and its specialised agencies;

That we should go ahead with the work on the Commonwealth programme irrespective of whether the other countries join in.

III—The Time Table

We can thus proceed to a discussion of the acceptability of funding with holders of sterling balances independently of the intentions of the United States and Canada. The problem of timing of wider action on sterling balances and on development is, however, a delicate one. If discussions with Commonwealth nations are to be based on certain assumptions as to the acceptability of a given course of action to the United States (and Canada), we must know whether that course of action will in fact meet with the approval of the United States and Canada and have some idea of what sort of action they themselves would contemplate. On the other hand, the Indians (and others) are inclined to look with disfavour upon discussions with the United States and Canada of questions which they consider ought to have been first discussed in the wider Commonwealth forum. We believe, however, that the right course is to begin by a general discussion of our ideas within the tripartite forum, but in the sense of seeking to elucidate the views of our colleagues rather than asking their attitude to a special plan. We are not seeking agreement on a special plan either with regard to the sterling balances or development, but we do feel it necessary to know how our colleagues are thinking. We therefore hope that this paper will serve to set on foot exploratory conversations which can be completed before the Sydney Conference opens on May 15th.
The time table of discussions might then take the following form:
2nd half of May. Meeting of Consultative Committee in Sydney.
May–September. Detailed preparation of programmes in the capitals and approaches to South East Asia countries not in the Commonwealth.
September. Further meeting of Commonwealth Governments to co-ordinate detailed development programmes and to assess need for external assistance.
October. Final co-ordination of these programmes with the programmes of the non-Commonwealth countries.
2nd half of October. Commonwealth meeting to approve the general programme and the terms of an approach for external assistance.

November. Presentation of report in Tripartite talks.

[Page 1639]

Sometime during this period, discussions with certain members of the Commonwealth and certain countries outside the Commonwealth on Sterling Balances.


Our proposals are therefore:
We seek a two-stage settlement of the sterling balances problem, the first, independent of external aid, by a limited measure of funding, and the second involving some surrender of balances in exchange for external assistance for development.
We seek a South and South East Asia development programme on the policy indicated in paragraph 18.
Exploratory discussions with the Americans and Canadians be started as soon as possible on the lines of paragraph 19.
The programme in paragraph 20 be accepted for the time being as a general basis of planning.3
  1. Attached to the source text were a memorandum of transmission from Battle to Secretary Acheson and two notes from Ambassador Franks, dated April 17, none printed (841.10/4–1750). In the first note Franks indicated that this paper was the one he had promised and that he had also sent a copy to Ambassador Wrong. In the second he stated that the views expressed in the paper were not definitive.
  2. Not printed.
  3. Not printed.
  4. On April 18, Secretary Acheson sent copies of this paper as enclosures to letters to Paul Hoffman, Administrator of the Economic Cooperation Administration, and to John W. Snyder, Secretary of the Treasury. Copies of these identical letters, neither printed, are in file 841.13/4–1850.