Evolution of the Colonial Sterling Exchange Standard H. A. Shannon * HE EVOLUTION of the monetary and exchange system that has Tcome to be known as the sterling area dates back to a time when almost all the territories outside Great Britain and Ireland in which this system operates were British colonial dependencies.1 For later stages of its history, as the concept of Dominion status crystallized and the number of territories to which it was applied increased, the distinc- tion can be made, for convenience, between the Dominions, which now have complete control of their national currency and exchange policies, and other parts of the British Commonwealth which have not yet attained that status—leaving aside altogether members of the sterling area which are outside the British Commonwealth. The process of growth has been continuous throughout; it is, moreover, not yet com- plete. A sketch of the earlier stages of its history will contribute to a proper understanding of the sterling area as it operates today and, in particular, of the position in the sterling area of the territories which operate under the Colonial Sterling Exchange Standard. The sterling currency area originated in a Treasury Minute of 1825 concerned with the payment of British troops in the Colonies. Their pay was fixed in sterling, and the Treasury sought to tidy up its administration and its conversion into local currencies. At the same time, the Minute was in part a sequel to the reform of the English monetary system itself after the Napoleonic Wars, particularly the full adoption of gold as the standard and of silver as token money. Until 1825 Britain had never supplied any of its own currency to its colonies. They had been left to fend for themselves and to pick up and use what other money they could find. The coins used make up a * Mr. Shannon, Assistant 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 Witwatersrand and in the University of Bristol and Assistant Secretary, the British Board of Trade. He is the author of articles in various economic journals. 1 For further details, see James Pennington, Currency of the British Colonies (London, 1848); Robert (Lord) Chalmers, History oj Currency in the British Colonies (London, 1893); Sir Gerard Clauson, "British Colonial Currency System," Economic Journal (1944); "Monetary Systems of the Colonies," Banker (1948- 49); Statutory Rules and Orders (Revised, 1904 and 1950), s.v. "Coin" and "Coin, Colonies"; Colonial Office List and Annual Reports on the various Colonial Territories (H.M.S.O.). 334 ©International Monetary Fund. Not for Redistribution COLONIAL STERLING EXCHANGE STANDARD 335 long and picturesque list, ranging through the alphabet from "anchor money" and "black dogs" to 'Venetians" and "zequeens." In origin they were mainly Spanish, Spanish-American, Portuguese, French, Dutch, Danish, Sicilian, Barbary, Knights of St. John, Indian, and Eastern. Their condition was frequently as diverse as their origin: full weight, light weight, cut, clipped, plugged, holed, of true fineness or alloyed, legal or counterfeit, gold or silver, and baser. In the older colonies this heterogeneous collection had been given independent legal ratings by the various colonies themselves in their own £ s. d. "cur- rencies"—£ s. d. units of account which were neither the same as £ s. d. sterling nor the same between different colonies. Far back, in 1704-07, the home government, like a primitive International Monetary Fund, had sought to establish a schedule of par values expressed in terms of English silver as a common denominator of the weight and fineness in effect under the Elizabethan mint indenture of 1601. But it had failed. In the newer colonies, mostly acquired during the Napoleonic Wars, there were added difficulties arising from their linking with the British system or from the change-over from their own currency systems to it—difficulties increased by the existence then in Britain of a wartime paper standard. Moreover, in some of the ex-Dutch colonies, irredeem- able paper currency was frequent. Perhaps the most relevant general- ized statement on colonial currencies just before 1825 is that most of the West Indies were individually on a kind of gold standard with very poor subsidiary coinage, and that elsewhere the ancient Spanish or Spanish-American silver dollar in one form or other was supreme among their coinages, except in the Dutch paper-using colonies. Even today the colonial currencies cannot be understood except in the light of their complex history. By the end of the Napoleonic Wars both the home and the colonial currencies were in great need of a systematic overhaul. The im- memorial, full-weight, English silver standard had in the course of the 18th century given way, partly by accident and mostly de facto, to the new gold standard based on the guinea, a coin of 21s. not agreeing with the pound sterling unit of account—and the silver coins were in a lamentable state. Gold itself gave way to paper during the Wars and disappeared from circulation. The first reform, therefore, took place in Britain itself under the influence of Lord Liverpool's earlier Letter to the King (1805) on the coin of the realm. The gold sovereign of 20s. was established by the Coinage Act of 1816 as the standard coin and, partly by accident, silver was reduced to a token and limited use in a properly articulated system of coinage. The full principles were not immediately or com- pletely understood. Liverpool considered that token silver would be ©International Monetary Fund. Not for Redistribution 336 IMF STAFF PAPERS kept in a properly subordinated place merely by limiting its legal tender, and the Act of 1816 authorized the opening of the Mint to silver by proclamation. But it so happened that the market price of silver was then below the mint price, and as a consequence the procla- mation was not, and never has been, issued. In fact, the subordinate role of silver is derived from restriction of its quantity rather than by limitation of legal tender. The Treasury had not fully grasped the position when it attempted its colonial reforms in 1825. And by its failure it laid up a store of trouble for itself and the Colonies in the revolution of the bimetallic ratios fifty years later, and some difficulties even today. In immediate relevance here, however, the new token silver shilling was a great and demonstrated success at home. The Eef orms of 1825 and 1838-44 Meanwhile, by the 1820's, successful rebellions had broken out in Latin America, and the various Latin American countries had achieved their independence. Supplies of silver and of Spanish-American silver dollars were dwindling. In fact, Spain was passing out of the ranks of great empires, and the long hegemony of the Spanish dollar, dating back three centuries, was passing away. With the expansion of the British Empire overseas and the rising world economic predominance of Britain, the pound sterling—with its representative, the sovereign, and its vehicle, the bill on London—was to take the place of the dollar for the nineteenth century and beyond. The Treasury turned to its nonmetropolitan task in 1825. In an elaborate minute of many pages, it surveyed the untidy colonial scene in 1825 2 and decided that the time had come to clear it up.3 It sought to introduce the new and successful home shilling into general circula- tion as a standard coin of the Empire, concurrent with the numerous other coins already in use, the sovereign of course being of too high a 2 The full text is given in Pennington, op. cit., pp. 182-99, and in Chalmers, op. cit., pp. 417-24. Extracts from the minute are given in the Appendix below. The next official survey is Goschen's brief account to the International Monetary Conference of 1878, printed as U.S. Senate Document 58, 45th Congress, 3rd Session. 3 Chalmers, op. cit., would have us believe that the Treasury was actuated by imperialistic motives unconsciously (p. 24) or consciously (p. 23: "The shilling was to circulate wherever the British drum was heard"). But this seems read- ing history backward. The Colonies were not so esteemed in the days of Huskisson as in the time of Joseph Chamberlain. They were a drain on the Mother Country and their military defense and its expense were resented and under constant criticism. It seems clear that the Treasury was here concerned with justice to the troops and with tidiness of administration. Cf. its plaintive statement: "[Some military dollar] rates are of long standing and many of them founded upon authorities of the origin of which there are no distinct records in this office." ©International Monetary Fund. Not for Redistribution COLONIAL STERLING EXCHANGE STANDARD 337 value for general circulation. And, more important, it sought to estab- lish fixed rates of exchange throughout the very diversified colonial systems. This it attempted to do by offering bills on London against the local delivery of shillings as needed for payment of the troops and for other local imperial expenditure. In effect, its proposals amounted to the establishment of an official sterling exchange standard. At that date the Treasury would, in many respects, have been the largest ex- change dealer in colonial markets, especially outside the wealthier islands in the West Indies. Its rate of exchange would have tended to dominate the exchanges. The idea was simple. The shilling was legally to be given concurrent circulation with the heterogeneous collection of foreign coins already circulating in the Colonies. The Treasury was to ship out an initial stock, the troops were to spend it, the local merchants were to gather it in and turn it over to the local Army Command against bills on London, the Command was to pay the troops with it by re-issue, and so on indefinitely.