Sterling Area

The sterling area (or sterling bloc, legally scheduled territories) was a group of countries that either pegged their currencies to the pound sterling, or actually used the pound as their own currency. The area began to appear informally during the early 1930s, after the pound had left the gold standard in 1931, with the result that a number of currencies of countries that historically had performed a large amount of their trade in sterling were pegged to sterling instead of to gold. A large number of these countries were members of the British Empire and Commonwealth; however, a significant minority were not.

Early in the Second World War, emergency legislation united the sterling bloc countries and territories (except Hong Kong) of the British Empire in a single exchange control area to protect the external value of the pound, among other aims. Canada and Newfoundland were already linked to the US dollar and did not join the sterling block.

The Bank of England in London guided co-ordination of monetary policy in the currency area. Member countries with their own currency held a large portion of their foreign currency reserves as sterling balances in London.

After the Second World War, the Bretton Woods system of fixed exchange rates to the US dollar (convertible to gold) gave the Sterling Area a second lease of life as Commonwealth kinship and trading loyalties were maintained after Britain's withdrawal from Empire by keeping a sterling peg and staying in the Sterling Area, rather than maintaining a direct dollar peg. Despite this, sterling did not regain anything like its place in international commerce that it had had before the war, and a devastated and financially exhausted Britain could not defend the international value of the pound to maintain confidence in the system, resulting in a devaluation of sterling against the dollar in 1967 that was not reflected in other Sterling Area currencies. In the end the US dollar's inability to hold to the Bretton Woods gold standard precipitated the end of the era of fixed exchange rates: with all major currencies including the pound floating against the US dollar, the Sterling Area had lost its final raison d'etre.

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