A “blank cheque”? portuguese world war ii sterling balances, 1940-1973

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A “blank cheque”? Portuguese World War II sterling balances, 1940-1973

Marcelo de Paiva Abreu

The perception that the loss of traditional markets had led to a weakening of the bargaining power of most neutrals led to a British move in 1939-1940 to negotiate payments agreements. Besides killing off the free market in sterling centralized payments of British purchases in such marketscoupled with British export controls would assure that Great Britain would be financed by neutrals at least for the duration. With the U.S. Lend Lease it was of vital importance to finance the British war effort. The total sterling balances of £ 3,355 million do not compare too unfavourably with the £ 5,504 million that corresponded to transfers under Lend-Lease net of Reciprocal Aid.

Inlate 1940 an agreement was signed between the Bank of England and the Bank of Portugal on payments between the Sterling Area and the Portuguese Empire in line with other payments agreements signed by the British with neutrals in Europe and elsewhere. All sterling payments due to Portugal were to made into a special account of the Bank of Portugal in the Bank of England. There were reciprocaldispositions regulating escudo deposits in the Bank of Portugal but these had no practical importance.

The agreement was part of the British overall successful effort to kill the market for free sterling but “it was not by original design that [Portugal] became the holder of a substantial sterling balance.” The combined result of this agreement with the dwindling supply of British exports toPortugal and the surge in British expenditures in Portugal related to the war effort – with a crucial role played by wolfram pre-emptive purchases -- was the accumulation of large sterling balances by the Bank of Portugal. By August 1945 they had reached £ 76 million.

While the Portuguese balances corresponded to only about 2.3% of total sterling balances, both as a proportion of GDP or ofPortuguese exports Portugal was in the same group of those economies that were directly affected by war operations such as Egypt and the Sudan, the Palestine, and especially India, which held almost a third of the total balances. While from the point of view of Britain the Portuguese agreement had some importance – which increased until 1944 especially because of strategic imports -- from the point ofview of Portugal the sterling balance issue was crucial.

The case of Portugal is of interest also because, in contrast with other economies holding sterling balances -- such as those in South America -- there were no British assets in Portugal whose disposal could contribute to reduce or cancel the outstanding sterling balances in the negotiations after the war. Other solutions had to bedevised and negotiated and they would have significant long-term consequences. To some extent the disposal of Portuguese sterling balances had some similarities with the case of India as even after transfers related to military stores, pension annuities (and previous redemption of sterling-denominated debt) Indian sterling balances remained extremely significant well into the 1950s.

1. Towardsa payments agreement

After the outbreak of the war there were many frictions between the Allies and Portugal concerning economic blockade and foreign exchange matters. Most of the difficulties concerning the economic blockade were related to the limitation by the British authorities of exports to certain neutrals to their 1934-1938 average level as well as restrictions on re-exports usingimported inputs. Portugal resisted these British proposals for a war-trade agreement until the fall of France.

With the German occupation of France and the entry of Italy in the war blockade issues became even more crucial. It affected the position of Portugal as it became possible to export to Germany by land. Portugal became an adjacent neutral as opposed to overseas neutrals which were...
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