convertible currency reserves, acted as such a signal.
71
In most years the
balance of payments was in surplus, but there were deficits in 1955,
1960–1, 1964–5 and 1967, and there would have been a deficit in 1966
had deflationary action not been taken by the government. The
Treasury urged that economic policy should aim at a substantial surplus
in the balance of payments on current account to strengthen the
reserves, but a booming domestic economy tended to suck in imports
and consume products that might otherwise have been exported. The
surplus reached the annual target of £300 million set by the Treasury in
1956 only once between then and devaluation in 1967, and the figure of
£450 million that the Treasury believed in 1959 would be a desirable
annual average was not achieved until 1969.
72
The sterling area was, none the less, seen in Whitehall as a source of
strength. Ministers were told in June 1956 by an interdepartmental
working group of officials, headed by Sir Norman Brook, that sterling
was an important Commonwealth link. All the dominions, except
Canada, used sterling as a reserve currency, as did the colonies. The
Treasury believed that devaluation, followin g on so closely that of 1949,
would break up the sterling area; members would turn to more
dependable currencies for their reserves and the effect on the political
cohesion of the Commonwealth would be disastrous. Sterling was also
used for about 40 to 50 per cent of all world trade, and it was believed
that instability in exchange rates would cause confusion. From this
perspective, preserving the international value of sterling was, according
to Brook’s working group, ‘the greatest single contribution’ Britain
could make to the maintenance of her position in world affairs.
73
When
the Eden government was making military plans in August and Sep-
tember to respond to Colonel Nasser’s nationalisation of the Suez Canal
Company, Treasury officials warned the Chancellor, Macmillan, that
foreign confidence in sterling was weak and that it was vital that Britain
should not act in Egypt without the ‘maximum United States’ sup-
port’.
74
However, Macmillan apparently failed to convey to his Cabinet
colleagues the full significance of sterling’s weakness. He believed,
mistakenly, that the Americans were as keen as the British to bring
Nasser down and would do nothing to endanger sterling. Nasser
71
(Radcliffe) Committee on the Working of the Currency System, Report (Cmnd 827),
Aug. 1959, PP 1958–59, xvii. p. 389, paras. 613–28, 634–43.
72
‘The future of the United Kingdom in world affairs’, PR (56) 3, 1 June 1956, para. 17,
CAB 134/1315, TNA; Cmnd 827, para. 734; London and Cambridge Economic
Service, The British Economy: Key Statistics 1900–1970 (1971), p. 17.
73
PR (56) 3, 1 June 1956, CAB 134/1315, TNA.
74
Bridges to Macmillan, 8 Aug. and 7 Sep. 1956, and T. L. Rowan to Macmillan, 25 Sep.
1956, T 236/4188, TNA.
The hydrogen bomb, the economy and decolonisation 303