The Modern Colonial Sterling Exchange Standard H. A. Shannon * "A society like the British Empire lends itself very ill to precise definitions." (Hansard, Nov. 9, 1950) HE MONETARY SYSTEMS of the British colonial territories and T their^ unification under the Colonial Sterling Exchange Standard cannot be fully understood except in the light of their long and com- plex history and of British constitutional law and history. Since a sketch of their evolution has been given elsewhere,1 thi^ paper is con- cerned mainly with their present position. Some minor differences of form and of substance which still survive will be ignored, and only major principles and practices will be discussed in full. Local legal and historical details are given, territory by territory, in Appendix I.2 Money and coinage have been immemorial prerogatives of State everywhere—in the British case, a prerogative of the King. In the colo- nial territories, whether originally settled by the British or acquired by war or treaty, the Governor as the King's representative was, and is, the guardian of the royal prerogatives. The colonies, for example, had, and have, no power to set up a mint by themselves. Today, the royal prerogative in money takes the form, in territories having their own legislatures, of "reserved powers"—that is, the Governor, if presented with a bill or other proposed legislation touching on currency, will with- * Mr. Shannon, Acting Chief of the British Commonwealth Division, is a graduate of the University of Belfast and the London School of Economics. He was formerly Senior Lecturer in the University of the Wifrwa^ersrand. and in the University of Bristol and Assistant Secretary, the British Board of Trade. He is the author of articles in various economic journals. ^-H. A. Shannon, "Evolution of the Colonial Sterling Exchange Standard," Staff Papers, Vol. I, pp. 334-54 (April 1951). 2 The Isle of Man and the Channel Islands are neither colonies nor integral parts of the United Kingdom. In the Isle of Man, the Tynwald assimilated the Manx currency to the British in 1839. In Jersey, sterling was made legal tender by local Acts in 1835 and 1876. In Guernsey, sterling was made legal tender concurrently with French money only in 1870. In addition, Jersey and Guernsey today issue their own pound notes and each has its own local copper coinage. English and French currency circulate side by side, and the rate of exchange of the latter with the local currency is the same as that with English currency. The Trucial Sheikhdoms of the Persian Gulf are also not colonial territories; the currency is the Indian rupee. For other details about them, see Board of Trade Journal, May 1951, p. 1120. 318 ©International Monetary Fund. Not for Redistribution MODERN COLONIAL STERLING EXCHANGE STANDARD 319 hold his assent until the King, or rather the King in Council, signifies assent. In other territories, the Governor has direct power over currency by proclamation. Constitutionally, the Colonies are, in currency mat- ters, ultimately under the control of the home Government, more par- ticularly under the Secretary of State for the Colonies.3 The position in the Dominions is quite different. A Dominion has full power of legislation over its own currency by the Act which establishes it as a Dominion, and in a Dominion the King in Council is, in fact, the King acting on the advice of the local independent Cabinet.4 The special case of Southern Rhodesia is examined below. Legislation on currency matters in the colonial territories has taken, and continues to take, many forms. But in one way or another, Cur- rency Boards have been set up in the various territories and, however dissimilar they are in form and in name, they all act substantially in the same way. In Hong Kong, however, a complex of government de- partments and local commercial banks operates as if it were a formal Currency Board. But except in a few minor and anomalous cases,5 there is a local Currency Board or Currency Authority for each colo- nial area. The Boards are usually situated in the area in which the currency is to circulate, and they use the Crown Agents for the Colonies to transact their London business for them.6 The East and West Afri- can Currency Boards are exceptions. They are situated in London and act directly and not through the Crown Agents, although linked with them. 3 Similar arrangements are to be found elsewhere. For example, according to a provision of the U.S. Act of 1934 [48 Stat. I (456) § 2(9)] which granted com- monwealth status to the Philippines, legislation in the Philippines affecting money and coinage required the approval of the President of the United States. After the attainment of independence by the Philippines, an agreement between the Philip- pines and the United States, which granted reciprocal trade preferences between the two countries (the terms of which are set forth in the Philippine Trade Act of 1946), again provided that "The value of the Philippine currency in relation to the U.S. dollar shall not be changed, the convertibility of the peso into dollars shall not be suspended and no restrictions shall be imposed on the transfer of funds from the Philippines to the United States except by agreement with the President of the United States." This agreement expires in July 1974, or after five years' notice by either the United States or the Philippine Republic. 4 The whole question as to when and how Dominion currencies actually become separate currencies can bristle with legal difficulties in a given case, and its solu- tion can be full of legal niceties and subtleties. For an example, see Bonython v. Commonwealth of Australia, 75 C.L.R. (1948). More generally, see "Pounds Sterling," Bankers' Magazine, January 1951, pp. 36-46. 5 Basutoland, Bechuanaland, British Solomon Islands, Gilbert and Ellice Islands, New Hebrides, St. Helena, and Swaziland. 6 Until 1833 each of the then Colonies appointed its own business agent in London to conduct its general financial affairs there. These agencies were then consolidated and evolved into the Crown Agents for the Colonies. Though super- vised by the Secretary of State for the Colonies, the Crown Agents receive their instructions direct from each Colony, and they are financially self-supporting through the commissions and fees they charge for services rendered. ©International Monetary Fund. Not for Redistribution 320 INTERNATIONAL MONETARY FUND STAFF PAPERS In certain areas, however, it has been found convenient to group some territories together for currency purposes. The West African Currency Board was established in 1912 to cover the territories of Gambia, the Gold Coast, Nigeria, and Sierra Leone. The East African Currency Board on its establishment in 1919 covered Kenya, Tan- ganyika, and Uganda; and it was extended in 1936 to cover Zanzibar, and in 1951 to cover Aden and British Somaliland. The Southern Rhodesia Currency Board, established in 1939, also covers the terri- tories of Northern Rhodesia and Nyasaland. In 1951, a Board of Com- missioners of Currency, British Caribbean Territories (Eastern Group), was established to cover Barbados, British Guiana, the Leeward Is- lands, Trinidad and Tobago, and the Windward Islands. Proposals are reported as well-advanced for a Currency Board which will serve all the British territories in South East Asia, probably as an extension of the Board of Commissioners of Currency in Malaya, itself an amal- gamation in 1938 for the Straits Settlements and the Malay States. The new Board is intended to cover the Federation of Malaya, Singa- pore, North Borneo, and Sarawak. The issues of all local Boards are linked with sterling under the Colonial Sterling Exchange Standard, except those of Tonga which are linked with the Australian pound. If historical relics, mostly U.K. silver coins, are ignored, the issues (notes and coin) of the local Cur- rency Boards and of the Hong Kong complex of institutions are the sole legal tender in their own areas. Convertibility of Colonial Currencies The rates of exchange between a colonial currency and sterling, and the right of converting the one into the other, are determined by law in most cases, but there are some exceptions in which, however, various administrative instructions or regulations have the same effect as for- mal law.7 In those West Indian Islands which, like Jamaica in 1839, adopted the currency of the United Kingdom as their own currency, questions of parity and convertibility did not arise. The Acts merely fixed the rates at which old contracts expressed in local units should be discharged in sterling units. In the other Islands, where the old Spanish silver dollar was maintained as the monetary unit, its value in sterling was fixed by proclamation in 1838 as 4s. 2d., and the evolu- tion of that dollar into the modern British West Indian dollar did not affect its valuation in sterling. This valuation has been confirmed 7 Compare the Notifications of the Governor-General in Council which used to regulate the convertibility of sovereigns into rupees in the latter part of the 19th Century (J. M. Keynes, Indian Currency and Finance, London, 1913), pp. 8-10. ©International Monetary Fund. Not for Redistribution MODERN COLONIAL STERLING EXCHANGE STANDARD 321 in the various local legislation which has set up the new unified Cur- rency Board for the Eastern Group of Islands. Local acts or local proclamations in British Honduras, Cyprus, the Falkland Islands, Gibraltar, Malta, Mauritius, Northern Rhodesia, Nyasaland, and Seychelles have similarly determined monetary units, parities, and con- vertibility. In all the foregoing cases, sterling is convertible into local currencies, and vice versa, at the statutory rates, subject only to a small commission which can be varied within narrow statutory limits by means of regulations.