Financial Resource

where the beneficial owner of the securities is not resident in the UK”. This was the combined view of the Treasury and the Inland Revenue as a “means of removing an impediment to foreign currency borrowing by UK authorities in the Eurobond market” . The reason for this was that, “it was in the public interest for nationalised industries and large local authorities to borrow on the Euro-dollar market” .

Controls in the UK had been designed to protect the reserves by restricting access to the market by UK residents and restricting of “switching” out of sterling by banks in the UK. UK residents who were able to show a need were allowed to maintain foreign currency deposits (which earned Euro-dollar rates) with UK banks. These deposits soon accrued dramatically. Also control was permitting UK residents (especially the local authorities) to borrow foreign currencies in this market, or overseas where this allowed beneficial transactions to take place without recourse to the reserves (e.g. for foreign investment). Banks in the UK were allowed to maintain an excess of foreign currency claims over liabilities (i.e. to switch out of sterling) only to the extent necessary for them to maintain working balances.

This would accommodate a significant and useful benefit to the UK balance of payments. The idea was considered to be of such importance that large steps were taken to encourage UK borrowers to “tap” into the foreign currency sources of finance. The UK government passed powerful legislation through parliament, which involved serious sensitive issues such as tax measures encouraging foreign currency borrowing (i.e. tax allowances, tax evasion, and payment of gross interest), and double taxation agreements.

However, certain issues arose which showed the sensitivity of the situation of whether the UK government were favouring business interests, when pursuing its policies, and whether HM government would relieve these industries of the loss should-ever there be a change in the exchange rates (in a form of a Government Exchange Guarantee). The argument being that the government could not allow a nationalised industry to default and by encouraging the nationalised industries to borrow for the sole purpose of easing the balance of payments, the interest rates would be more than counter-balanced by the increased production that would be made possible. Given successful management of demand, such production would either find its way into exports or into the satisfaction of needs, which would otherwise be placed into imports. This meant that external sources of capital financed a large part of the UK’s portfolio and direct investment abroad, and UK borrowers were allowed under exchange control to raise foreign currency loans to finance domestic investment. This was implemented by providing an “off-shore” regulation-free environment devised to trade financial assets denominated in foreign currencies.

One situation concerned the Ford Motor Company in the USA. The company had entered into a contract to purchase for dollars, the sterling required to enable the company to undertake their offer to buy 45% shareholdings in the Ford Motor Company of the UK, which they did not already own. The UK Government on the 13th December 1960, received 0 million for value for this offer . Secondly, it was a market that even interested the IBRD. On 18th August 1960 Mr Miller of the IBRD’s Paris Office wrote to the UK Treasury, to discuss with the Bank of England, the question of whether the International bank could follow the example that was apparent, with many other institutions investing dollars in the UK at short term, and to place these into what was identified as the “Euro-Dollar Market”. At the end, the IBRD eventually dropped the idea of placing certain liquid dollar assets in London, because of the unfavourable attitude of the US Treasury. Although the IBRD decided not to process this further, it nevertheless resembled the importance and relevance of the Euro-dollar market, and of the City of London itself .

In 1968, the progress in reducing the UK balance of payments deficit was much slower than the UK Government had either anticipated or desired. As, the third quarter figures of 1968 experienced an unprecedented net inflow of nearly £200m on long-term capital account and a further reduction in the current account deficit. On the combined current and long-term capital accounts there was an identified surplus of around £105m: the best quarterly result since the fourth quarter of 1966, and following deficits of about £310m and £170m in the first and second quarters. Official long-term capital transactions benefited in the third quarter. There was a very large net inward movement of private long-term capital amounting to around £175m . However in 1969, there was a considerable turnaround between the first and second halves of the year, when the current and long-term capital deficit fell from £427m to £31m. Apart from the substantial progress in cutting the trade deficit, a significant part of the improvement resulted from changes on the capital account. The outflow on official capital (in the capital account) inevitably rose. Bond issues overseas by UK public corporations provided a counterbalance to the increase. Tighter credit in the UK tended to check outward movements and encouraged inward movements of long and short-term capital. As investment of this kind involved no call on the UK reserves, in the standard form of the balance of payments, the investment was recorded as a debit, but the Euro-dollars which financed it were recorded not as a credit, but as a monetary inflow. In general, it seemed that there had been an encouraging start towards the UK achieving its immediate objective for 1969-70, and that the outlook for achieving a larger continuing surplus thereafter was good .

However even though it is easy to view these events by their own logic, in order to understand their real significance, they must be set in the context of the negotiations which took place between Britain and Europe in the mid-1950s. In the summer and autumn of 1955, Britain was invited to discussions on closer European economic integration by the six nations, which eventually signed the Treaties of Rome in March 1957. After a flurry of activity in Whitehall, the Cabinet Office circulated the Trend Report, which pointed out to four decisive considerations against membership . Firstly, the Cabinet Office and the Treasury had concluded that membership would weaken the UK’s economic and consequently its political relationship with the Commonwealth and the colonies. Secondly, it was judged that the UK’s economic and political interests were worldwide and that a European common market would be contrary to the approach of freer trade and payments. Thirdly, it was thought that participation would gradually lead to political federation, which was unacceptable to Britain. Finally, the Cabinet Office concluded that membership would be detrimental to the British economy since it would involve the removal of protection for British industry against European competition. When placed alongside the earlier considerations relating to sterling, the Trend Report convinced the Eden government that Britain should withdraw from the Messina Talks. Instead of negotiating with the Six, Thornecroft at the Board of Trade convinced the Cabinet to launch an alternative non-discriminatory scheme aiming to “disunite” the Six away from the idea of the common market. This scheme, labelled Plan G, later developed into Britain’s free trade proposals, which became the basis of the European Free Trade Area (EFTA) established after the Stockholm Conference in 1959 . Whilst, Plan G proposed a free trade area designed to eliminate industrial tariffs, it carried no further implications regarding wider economic integration. Within a free trade area, Britain could retain its traditional trading structure, and as Board of Trade concluded, this would be entirely different from a European discriminatory bloc in which Britain came under domination of Germany.

The successful conclusion of the Treaty of Rome in March 1957, came as a major surprise to the British state. It was fundamental to British thinking that the Six would not go ahead without the participation of the UK. In a frank memorandum titled “What went wrong?”, the Treasury surveyed the scene in July 1959, and concluded that the government had made a number of serious errors . Britain had misunderstood the US position, not realising that the US State department would always back the Community given its political and defence implications. It had made a number of tactical errors, in trying to divide the Six, in believing that the UK would be allowed to join at any stage once the Community was formed and in failing to establish a “negotiating machinery” to match that of the French. Finally the British government had continued to pursue the half-hearted 17 nation EFTA strategy when it was clear that neither the French nor the Germans were attracted to the idea, which in any case the Treasury concluded “does not bear examination for five minutes”. The next 14 years would be spent struggling with the legacy of the British state’s failed attempt to prevent the creation of the Community.

A further examination must make reference to the form of Britain’s postwar integration into international trade and money markets. Although a number of events began to weaken Britain’s position in the global political economy (Suez and the relentless process of decolonisation), access to privileged markets had enabled the economy to reconstruct and prosper in the early 1950s. Moreover, the British governments could utilise the international prestige of

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