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  • Print publication year: 2010
  • Online publication date: May 2010

7 - Multilateral negotiations: sterling and the reform of the international monetary system


A vital feature of the management of the retreat of sterling was the continuing effort to engage the rest of the world's economic leaders in resolving the problems that the reserve currency role of sterling appeared to pose for domestic economic policy. Indeed, as the 1960s progressed, waiting for a global solution to weaknesses in the international monetary system emerged as a cornerstone of British sterling strategy, allowing ministers to postpone unpalatable decisions about achieving this on their own. Certainly, there was a legitimate a priori case for viewing sterling's problems as part of the wider weaknesses in the Bretton Woods system as it functioned in the 1960s. Much ink and effort was spent on analysing the n–1 problem of using national currencies as reserve currencies in the context of the US dollar, famously identified by Robert Triffin. Increased demand for reserves that arose from growth in world trade could be met only if the issuing countries ran persistent balance of payments deficits. This was the diagnosis of part of the United States's economic problems in the 1960s, but it was not as easy to apply in the case of the United Kingdom, since official sterling balances did not increase overall, although the geographical distribution did shift – as we have seen. Nevertheless, sterling remained a primary reserve asset for a broad range of developing countries.

Figure 7.1 shows IMF estimates of the currency distribution of foreign exchange reserves, which reveal that sterling accounted for a remarkably stable 30 per cent of global foreign exchange reserves from 1964 to 1969 despite the devaluation of 1967 and the upheavals in the international monetary system during this period.