Published by EH.Net (May 2016)

Kiyoshi Hirowatari, Britain and European Monetary Cooperation, 1964-1979. Basingstoke, UK: Palgrave Macmillan, 2015. xiii + 276 pp. $115 (hardcover), ISBN: 978-1-137-49141-1.

Reviewed for EH.Net by Duncan Needham, Centre for Financial History, University of Cambridge.

In 1982 the Deputy Governor of the Bank of England remarked: “in 1960 sterling still accounted for 38 per cent of the world’s currency reserves.  By 1970 this had fallen to 13 per cent, and by 1980 only 2 per cent” (p. 1).  Kiyoshi Hirowatari explains why in the context of Britain’s changing relationship with the European Economic Communities.  He casts his net wide, incorporating American, French and German concerns about international monetary policy.  There are some complex issues, and Hirowatari explores these with great insight.  I shall focus on two: monetary sovereignty and adjustment to current account imbalances.

First, however, we must define the issue at the heart of the volume — the sterling balances.  These were overseas countries’ official and private holdings of short-term sterling assets.  A legacy of Empire, they grew during World War II as Britain wrote IOUs, particularly to countries that accommodated British forces.  The sterling balances formed part of overseas central banks’ reserves; they were also held privately to facilitate trade with the UK.  Either way, these short-term liabilities far exceeded the Bank of England’s gold and dollar reserves.  Britain may not have been insolvent on her external account (until the 1970s at least), but she was illiquid.  Herein lay the problem.  How to maintain confidence such that the sterling balance holders would not embarrass the Bank of England by demanding their money back all at the same time?  Various schemes were proposed; some were even implemented. But what (former navy Lieutenant) Jim Callaghan called “the shifting cargoes” were an ever-present threat to the buoyancy of the British economy.  Significant withdrawals would necessitate tighter policy, exacerbating the “stop-go” cycle that contemporaries believed to be at the heart of British relative underperformance during the post-war Golden Age (see Dow (1964)).

Hamlet’s father-in-law-to-be advised: “neither a borrower nor a lender be.”  But as Hirowatari reminds us, it is better to be a lender than a borrower — unless you are American (see below).   The alternative is a loss of monetary sovereignty, defined as “supremacy or autonomy over monetary matters” (p. 5)   Just as the Suez Crisis exposed the UK’s lack of Great Power autonomy, so the sterling crises of 1964-66 exposed her lack of monetary autonomy.  The Labour government’s plans for a more productive economy, launched in 1965, foundered in July 1996 with the austerity measures implemented to shore up sterling.  “Labour’s Suez” forced a reluctant Harold Wilson to seek a European solution to the sterling balances with the “second try” at EEC membership.  Conservative leader Ted Heath (chief negotiator during the first application) had already set sail for the Continent, having convinced himself that “pooling sovereignty” did not necessarily entail “surrendering sovereignty” — you gain a bit of everybody else’s, and the sum may add up to more than the parts.

It may now seem remarkable that the British believed that “Europe’s large reserves [could be] married to Britain’s large liabilities via the City of London” to preserve sterling’s reserve currency status (pp. 19 and 40).   Equally remarkable that hard-headed German politicians (such as Helmut Schmidt and Willy Brandt), German and Belgian bankers (Herman Joseph Abs and Louis Camu), and Belgian economists (Robert Triffin) could agree.   Hirowatari explains why.  German fears of inflation militated against the Deutsche mark becoming a reserve currency; the Bundesbank would never cede monetary control in this way.  Why not employ sterling, and the existing financial infrastructure of the City of London instead?  Triffin was enthusiastic, anticipating the emergence of a European financial market with London at its hub performing the role “played by England alone up to the 1914-1918 War” (p. 37).   This might counterbalance the mighty dollar whose “benign neglect” was creating such turbulence for the Europeans.  The problem was the French, concerned that the sterling balances might become a channel for French capital to flow to New York.  Their insistence that the U.S. play by the rules of the game” would come to naught.  When Britain did join the EEC, it was left to the bankers at the BIS to worry about stabilizing the sterling balances.

Samuel Brittan (1970, p. 455) points out that post-war British Chancellors “behaved like simple Pavlovian dogs responding to two main stimuli: one was a ‘run on the reserves’ and the other was ‘500,000 unemployed’.”   Part of the reason Britain was so prone to runs on the reserves was that Keynes had lost the argument in 1944 over a symmetric response to current account imbalances.  Surplus nations could continue accumulating reserves while deficit nations were invariably forced to deflate — apart from the Americans.  As issuers of the world’s major reserve currency, they could continue running “deficits without tears” (Chivis, 2006, p. 708).   And when things got too choppy, they could scupper the whole enterprise, as Nixon did in August 1971.   Not so the British, who had to deflate with every current account squall.  One of Hirowatari’s themes is repeated British attempts to force countries running persistent current account surpluses to inflate (to be “good creditors”).  But as the Dutch central banker Marius Holtrop pointed out, why should the thrifty ant share its resources with the profligate cricket? (The British were still losing this argument in September 1992 when the Germans refused to support sterling within the ERM, see Szász (1999), p. 13.)

Lord Halifax may or may not have remarked to Keynes that “they have the money bags.  But we have all the brains” (p. 202).  But this is really a story about “muddling through,” tacking towards Europe when sterling-dollar diplomacy no longer afforded safe haven, tacking away when it became clear that European reserves would not be lashed to short-term British liabilities.  And Hirowatari tells the story with clarity.  Aside from some minor errors (e.g. William S. “Rylie” should be “Ryrie” (p. 32); “Harold” Pimlott should be “Ben” Pimlott (p. 120); and Britain joined the ERM (just) before Thatcher’s defenestration (p. 185)) — and the awkwardness of placing references at the end of the volume — I had only three issues.   First, the repeated suggestion that the British economy was “in decline.”  “Relative decline” — yes; “absolute decline” — no.  Second, the detailed insights into the academic thinking behind Labour’s currency policy are not matched with similar analysis of Conservative thinking.  Sometimes it feels as if Heath was manning the bridge alone.   Finally, the structure.  Having navigated to the end of the Heath government at the end of Part I, we return to Suez at the beginning of Part II. Hirowatari explains why he did not structure his volume chronologically.  I was not convinced that the thematic approach was the better course.


S. Brittan (1970), Steering the Economy: The Role of Treasury.

C.S. Chivvis (2006),“Charles De Gaulle, Jacques Rueff and French International Monetary Policy under Bretton Woods,” Journal of Contemporary History, vol. 41, no. 4.

J.C.R. Dow (1964), The Management of the British Economy, 1945-1960.

A. Szász (1999), The Road to European Monetary Union.

Duncan Needham is the author of Monetary Policy from Devaluation to Thatcher, 1967-1982 (Palgrave, 2014).

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