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Indian Economy

Notes The United Kingdom endured large reserve losses in 1947 but drew on the “Anglo-American
loan”. As recognition for the losses Britain endured prosecuting the war effort and the late
entry of the North American nations into that conflict, Keynes had negotiated the
Anglo-American loan whereby the US and Canadian governments provided a low cost
loan to Britain (from 1946), which allowed the British government to maintain its financial
commitments to the sterling-area nations (principally the Commonwealth countries)
without having to cut back infrastructure renewal in Britain.
The loan arrangement also required the British government to provide sterling
convertibility into dollars and many nations that held sterling as reserves sought to
exchange them for US dollars thereby worsening the loss of reserves arising from the
external deficits. Britain also received aid under the Marshall Plan which helped offset the
assistance that Britain was providing to the Commonwealth nations and had the effect of
allowing these nations to increase government spending on infrastructure development
“beyond what would otherwise have been possible” (BIS, 1950, page 29). Convertibility
under the Anglo-American loan was abandoned in 1947 as the reserve crisis increased.
Britain responded by introducing contractionary domestic policy.
The crisis came to a head in early 1949 as a result of a US recession, which significantly
reduced the demand for US imports from Europe (particularly food and raw materials). As
a result of the deteriorating trade balance (less exports), British gold and dollar reserves
fell to $570 million between April and June 1949.To avoid a complete loss of reserves, the
pound was devalued on September 18, 1949 by 30.5 per cent, which led to similar
devaluations in the non-dollar currencies in Europe and the sterling-area. The 1949
devaluation was in response to the shortage of reserves and to some extent reflected the
teething problems – that is, getting the parties right – in the newly created Bretton Woods
system. Soon after the US recession ended and British reserves recovered somewhat due to
the dual impacts of increased competitiveness arising from the devaluation and the
short-lived nature of the US economic downturn. Throughout this period, Britain was
running large sterling surpluses within the sterling-area but large dollar deficits overall.
It funded the deficits in several ways: drawing on its gold and dollar reserves; drawing on
the Anglo-American loan; drawing on the Canadian loan, and in 1947, 1948 and 1949 the
sterling-area countries borrowed from the IMF. A once-off gold loan from South Africa
and the ERP aid also helped. The drawings mentioned actually allowed Britain to increase
its gold and dollar holdings in 1947, 1948 and 1949. At this stage, the IMF had not yet
introduced conditionality into the drawing arrangements. By the mid-1950s, conditionality
was increasingly used to steer nations who were relying on IMF funding support to
pursue domestic economic policy that the IMF felt would reduce the nation’s reliance on
future support from the Fund. The principal emphasis was on so-called Domestic Credit
Expansion (DCE) targets. The imposition of conditionality was extended in the 1960s to
most advanced nations who sought stand-by arrangements with the IMF.
The British economy grew relatively strongly in the early 1950s and produced external
surpluses on the back of robust export growth. The growth in tax revenue also pushed the
budget into surplus. However, import growth was trending upwards and the Bank of
England tightened monetary policy in 1955 in order to moderate domestic demand. The
Suez Crisis in 1956, whereby British and French troops intervened militarily in a tripartite
agreement with Israel, after Egypt sought to nationalise the Suez Canal, provided some
challenges for Britain, beyond the military considerations. While it did not interrupt trade
as much as might have been expected given the strategic importance of the canal – Britain’s
current account surplus continued in 1956 and 1957, the crisis created a lack of confidence
in the value of sterling and a speculative outflow of sterling. The growing lack of confidence
in the sterling (with rising domestic inflation) depleted Britain’s US dollar reserves and
Contd...

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