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Sterling area facts for kids

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1940 Bank of Hyderabad 10 Rupees
The Indian Rupee was one of the currencies of the sterling area.

The sterling area was a group of countries that linked their money to the pound sterling, which is the currency of the United Kingdom. Some countries even used the pound sterling as their own money. Think of it like a club where everyone agrees to use the same main currency or keep their own money's value very close to it.

This group started forming in the early 1930s. Before that, many countries linked their money to gold. But in 1931, Britain stopped linking its pound to gold. So, many countries that traded a lot with Britain decided to link their money to the pound sterling instead. A lot of these countries were part of the British Empire, but some were not.

When World War II began, special laws were made to bring these countries together. They formed one big area where money was controlled to keep the pound sterling strong. Canada and Newfoundland did not join this group because their money was already linked to the US dollar.

The Bank of England in London helped manage the money rules for this group. Countries that were members often kept a lot of their foreign money in pounds sterling in London.

After World War II, a new money system called the Bretton Woods system was created. This system linked most major currencies to the US dollar, which was linked to gold. The sterling area continued because many countries in the Commonwealth of Nations (countries that used to be part of the British Empire) wanted to keep trading with Britain. They kept their money linked to the pound sterling instead of directly to the US dollar.

However, Britain was very tired and had little money after the war. The pound sterling became weaker, and in 1967, its value dropped against the US dollar. Many other sterling area countries did not drop their currency's value at the same time. Eventually, the system of fixed exchange rates ended, and the sterling area lost its main purpose.

In June 1972, the British government changed the rules for money exchange with other sterling area countries. Only Ireland, the Isle of Man, and the Channel Islands were still treated the same. Many people see this as the end of the main sterling area. Over the next few years, the amount of pounds sterling held by other countries went down.

Why the Sterling Area Existed

Before World War I, the British pound sterling was the most important money in the world. London was the biggest financial center. More than 60% of global trade was done using the pound sterling. Most countries kept their extra money in pounds, besides gold.

Many countries, both inside and outside the British Empire, linked their money to the pound. When Britain stopped linking its money to gold in 1931, many countries switched to linking their money to the pound instead. This group became known as the "sterling bloc" or "sterling area."

When World War II started, countries in the British Empire wanted to keep the pound sterling strong. So, they passed laws to create a single area where money was controlled. The sterling area continued after the war. This was partly to help Britain keep its important position in the world during the Cold War between the United States and the Soviet Union.

Canada and Newfoundland's Choice

Canada and Newfoundland did not join the sterling area. Their money, the Canadian dollar, was already linked to the US dollar. This was true even before Britain left the gold standard in 1931.

While countries like Australia and New Zealand linked their money to the pound sterling, Canada and Newfoundland linked theirs to the US dollar. So, joining the sterling area wouldn't have helped them much. It was also good for Britain that Canada and Newfoundland didn't join. It stopped money from leaving the sterling area and going to North America.

Canada did have its own money controls during the war, which lasted until 1953. These controls were friendly to the sterling area. Their main goal was to stop money from going to the US, not to the sterling area.

Hong Kong's Role

Hong Kong first decided not to join the sterling area. This was because it was a big center for open trading. However, Hong Kong did join the sterling area at the end of World War II.

Benefits for Members

After the war in 1945, the sterling area was the biggest group of countries using a linked currency. It allowed members to pay each other in pounds sterling without many money controls. Members also got stable exchange rates. They could always access the financial help of London.

The British government could use all the money reserves from the sterling area members. This helped support the pound sterling when there was a shortage of US dollars.

The End of the Sterling Area

By the late 1950s, the British Empire was shrinking. Many people in Britain started to think that trading with Europe was more important than trading with Commonwealth countries. This led to Britain trying to join the European Communities (also known as the Common Market).

In November 1967, Britain lowered the value of the pound sterling. It went from £1 being worth $2.80 to £1 being worth $2.40. Many sterling area countries were not happy about this. Unlike in 1949, many of them did not lower their own currency's value at the same time. This was the beginning of the end for the sterling area.

On June 22, 1972, Britain put new money controls in place. These controls affected trade between Britain and most other sterling area members. Only Ireland and the Crown Dependencies (the Isle of Man and the Channel Islands) were exceptions. At the same time, Britain let the pound sterling's value float freely, meaning it was no longer fixed. This was done to stop money from flowing out of Britain to other parts of the sterling area.

Some people believed the real reason for these changes was Britain's plan to join the European Economic Community (EEC). France was worried about Britain's strong economic ties with the Commonwealth and the sterling area. Even though France had its own special economic links with its former colonies, they still had concerns. Britain's attempts to join the EEC in 1961 and 1967 were blocked by France. But finally, on January 1, 1973, the United Kingdom became a member of the European Communities.

One big topic during the talks for Britain joining the EEC was "sterling balances." These were large amounts of pounds sterling held in London by other sterling area governments. Many of these were debts Britain owed from the war. France argued that these debts could make the pound unstable, which could affect the whole EEC. So, agreeing to reduce these balances was a key part of Britain joining the EEC. This removed a major reason for the sterling area to continue.

After 1972, the sterling area was very different. But the UK still saw the "overseas sterling area" as a separate group for money control. In 1979, Britain removed all its money controls because its economy was better and trade patterns had changed. At this point, the sterling area had effectively ended.

Britain's efforts to join the EEC, from 1961 until 1973, slowly ended the special trade links between the Commonwealth and the UK. After 1973, Commonwealth nations lost their special access to UK markets. Most members of the sterling area then left the group and linked their money to the US dollar instead.

Former Member Countries

Here are some of the countries that were part of the sterling area:

See also

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