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Sterling Area
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The sterling area came into existence at the outbreak of the second world war. It was a wartime emergency measure which involved cooperation in exchange control matters between a group of countries, mostly dominions and colonies of the former British Empire (and Commonwealth). These countries either used sterling as their own local currency, or else their own local currency was at a peg to the British pound. And even in the cases where member countries used their own local currency, these countries would still hold large sterling balances in London for the purposes of conducting overseas trade. The purpose of the sterling area was to protect the external value of the pound sterling.
All of the British Empire except for Canada, Newfoundland and Hong Kong joined the sterling area in 1939. Hong Kong originally declined to join due to its position as a centre for open market activities, but after the Second World War, it joined. Southern Rhodesia was expelled from the sterling area in 1965.
The reason why Canada and Newfoundland didn't join the sterling area was because their dollar had effectively been the US dollar until they were forced off the gold standard in 1931 along with Britain. But where countries like Australia, New Zealand and South Africa responded to the end of the gold standard by pegging their pounds to the pound sterling, Canada and Newfoundland responded by pegging their dollars to the US dollar. As such, Canada and Newfoundland would have had no vested interest in joining an exchange control bloc of which the purpose was to protect the external value of sterling. Canada did nevertheless introduce its own exchange controls on the outbreak of war and these lasted until 1953. Canada's exchange controls were 'sterling area friendly' in that they were aimed more at preventing capital flights to the USA rather than at preventing capital flights to the sterling area.
The sterling area in effect came to an end in June 1972 when the British and Irish governments unilaterally applied exchange controls to the other sterling area countries with the exception of the Isle of Man, and the Channel Islands.. It was up to the other sterling area countries to respond in a manner of their own choosing. In fact some of these countries had already taken similar measures throughout the 1950s and 1960s.
Following the British government's decision, some countries immediately copied the British government, and others did so over the next few months. Singapore continued operating sterling area exchange controls till as late as 1978, and Brunei didn't alter its sterling area exchange controls until the year 2001.
It is impossible to state an exact date for when the sterling area ceased to exist. June 1972 is perhaps the best date for that purpose. However from a British perspective, the Republic of Ireland unilaterally imposed exchange controls on the UK in 1978, and in 1979, the British government completely lifted all its exchange controls which had originally been brought in as a wartime emergency measure in 1939. Hence, the year 1979 could be viewed as the year when the sterling area no longer had any practical significance within the UK.
Why was there a zone?Following Britain's departure from the gold standard in 1931, many countries that had pegged their currencies to gold responded by pegging their currencies to the Pound Sterling. This was because the British Pound Sterling was at that time the world's leading reserve currency. This group of countries became known as the sterling bloc. When the second world war broke out, the sterling bloc countries within the British Empire shared a mutual desire to protect the external value of the Pound Sterling. Legislation was therefore passed throughout the empire formalizing the British sterling bloc countries into a single exchange control area.
The ending of the Sterling area On 22 June 1972 Britain imposed exchange controls on the rest of the sterling area except for the Republic of Ireland, the Isle of Man and the Channel Islands. At the same time, Britain floated the Pound Sterling. The reason for this according to the Chancellor of the Exchequer Anthony Barber was to halt a recent increase in capital outflow to other parts of the sterling area. Opponents argued that the real reason was related to Britain's impending entry to the EEC and that France was concerned about Britain's close economic ties to the Commonwealth and the sterling area while at the same time France continued to have favored economic relations with its less successful former colonies in the CFA and CFP franc zones.
This unilateral action by the UK and the Republic of Ireland on 22 June 1972 resulted in many more sterling area countries following suit. To a large degree, the effect of this was that the sterling area no longer existed.
In 1979 due to an improving economic situation and with the second world war now in the past, Britain removed all its exchange controls. At this point in time one could definitely say that as far as Britain and most of the sterling area countries were concerned, the sterling area had ceased to exist.
Former members
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