Within the members of the sterling area, a series of agreements were signed with the aim of encouraging trade. These initiatives led to the system known as “imperial preference” and to several trade agreements with more limited objectives. Only the countries belonging to the Commonwealth, which included Canada, signed the Ottawa Agreements. These countries granted one another customs advantages through reductions, and sometimes even the elimination, of tariffs.
The other countries belonging to the sterling area were therefore discriminated against, since they did not benefit from the advantages of imperial preference. The British government, aware of the risks created by this situation, established a number of bilateral agreements with these states. Between 1932 and 1933, agreements were signed with Norway, Sweden, Denmark, and Argentina.
In the Danish case, quotas were established. Denmark was required to supply 62 percent of British imports of ham and bacon, whereas before 1932 it had supplied around 67 percent. Quotas were also established for eggs and butter. In exchange, Denmark committed itself to importing coal, coke, iron, and steel from Great Britain without customs duties. In addition, the Danish government agreed to reduce tariffs on certain products and promised not to raise tariffs on others.
The agreement with Argentina was also highly significant. The Argentine government, which had introduced exchange controls, committed itself to allowing the transfer of dividends payable in pounds up to the amount of its exports to the United Kingdom. These bilateral agreements provoked protests from some of the Dominions, which argued that the Ottawa Agreements had been violated.
The policy of conditional loans
The policy of foreign lending reinforced this commercial system. The British authorities assumed strict control over the issuance of foreign securities on the London financial market. Securities issued by the Dominions were not considered foreign and therefore escaped this control. However, as in the case of imperial preference, the countries of the sterling area that were not members of the Commonwealth found themselves in a disadvantageous position.
For that reason, the British Treasury readily granted loan authorizations requested by these countries. This was done all the more easily because such loans were generally conditional and helped support British exports. On April 19, 1933, the Chancellor of the Exchequer authorized a loan of one million pounds to the Danish government for the construction of a bridge. The steel required for the project had to be purchased in Great Britain. This authorization was granted five days before the signing of the Anglo-Danish trade agreement described earlier.
Loans granted by London after 1931 generally had two objectives: to support British industry and to help borrowing countries maintain a stable exchange rate with the pound, thereby preventing them from leaving the sterling area. The consequences of this policy can be observed clearly in the case of Canada.
Although the Canadian currency was never formally linked to the pound, it appears that after 1931 Canada moved closer to London because of the considerable advantages it could obtain from imperial preference and from British loans. Before 1931 Ottawa borrowed mainly in New York, but from 1932 onward there was a complete reversal of this trend in favor of London. In 1933 Canada obtained in London its first public loan in nineteen years.
At that time the United Kingdom absorbed more than 40 percent of Canadian exports. For Canada it was therefore preferable to borrow funds from the country to which it could most easily sell its goods during the economic depression.
Among all Commonwealth countries, Canada benefited particularly from this situation. Canadian exports to the United Kingdom increased by 60 percent, while imports from Britain increased by only 25 percent. In contrast, Canadian imports from the United States declined by 13 percent and its exports to that country fell by 5 percent.
Canadian exports to other Commonwealth countries rose by 50 percent between 1931 and 1937, while imports from these countries increased by only 8 percent. British industrialists even protested against this unexpected competition. Nevertheless, this situation, which ultimately resulted from London’s initiatives, demonstrated that Canada had moved somewhat away from the dollar and closer to the pound.
Finally, the British government encouraged the creation of central banks in the Dominions, including India, Australia, and South Africa. The Bank of England provided advice and experts in each case, effectively becoming the “super central bank” for these new institutions. Through this policy, Britain strengthened the monetary cohesion of the Commonwealth countries, which formed the most solid core of the sterling area.
Outside this privileged zone of cooperation and economic activity, most other countries, eager to escape the effects of the Great Depression, resorted to devaluation or exchange controls, and sometimes to both simultaneously.