British Imperialism and the Making of Colonial Currency Systems

It might be surprising that anything substantially new can be written about the monetary and financial impact of British imperialism. Yet the standard authoritative works on the British Empire, such as Lawrence James’ (1994) (The rise and fall of the British Empire), Niall Ferguson’s (2002) (Empire: the rise and demise of the British world order and the lessons for global power), Robert Johnson’s (2003) (British Imperialism) and Philippa Levine’s (2007) (The British Empire: sunrise to sunset) do not have a single reference to currency or money in their indexes. The one exception is British Empire, edited by P. J. Marshall (1996) which not only has six references to ‘currencies’ in its index, but a chapter by D.K. Fieldhouse (1996:111) has a box titled ‘Money — an imperial tool?’ This book is effectively an expansion of that one question, tracing the historical evolution of colonial currency systems throughout the British Empire, over a period of some 300 years to the end of the 1950s.

This chapter outlines the long term key historical developments in Britain’s own sterling currency system, namely adoption of the gold standard and rejection of silver and bimetallism, and frequent inability to maintain rigorous reserves policies for sterling, as the proper context to examine the imperial colonial currency policies.

Two historical themes or sets of explanations have continued to current times. First, Chalmers (1893: pp. 29–30) observed that ‘faulty as the legislation of 1825 might have been in important details, it was … sound in its essential idea, viz., that sterling was the best system of currency for all British colonies, irrespective of their geographical position and trade relations’. Nelson (1987:50) thought that the purpose of the 1825 policy was to ‘encourage the use of sterling throughout the British Empire’. Shannon (1951: pp. 334–37), Hopkins (1970: 104) and Nelson (1987: 53) all held that that the authorities believed in the principle of currency areas which allowed non-sterling currency, if dominant, to circulate alongside British silver. This chapter challenges both these sets of explanations.

Given the economic importance of India in Britain’s empire, it is surprising that few writers ¹ have connected developments in India’s currency system before 1912 to the currency board system imposed on West Africa and other colonies. Chandavarkar (1984:774) was intrigued that India ‘altogether escaped from the thrall of the all-pervading British colonial currency board standard with its 100 percent currency reserves’. This chapter establishes that on the contrary, key elements of the currency board system were based on the imperial usefulness of similar elements that Britain developed in India.

Imperial policies in the Straits Settlements is useful to analyse as a mid-way point between policies in India and in West Africa, where the currency board was formally established. The Straits consisted of four separate British settlements on the Malayan peninsula: Singapore, Malacca, Dinding and Penang. ¹ Originally ruled by the British East India Company, it became a subdivision of the Presidency of Bengal in India in 1830. In 1867 it became a British colony proper, ruled directly from the Colonial Office.

Chapter 3 indicated that, the during the latter half of the nineteenth century, the imperial authorities eliminated most international currencies and gold coins circulating in British West Africa, by undervaluation or demonetization, and, despite colonial opposition, replaced them with British silver tokens. Through an arrangement between the authorities and the Bank of British West Africa, the British silver tokens were landed at face value in the colonies, giving London the benefit of the seigniorage profits. The profits increased rapidly when silver depreciated following the 1871 metropolitan demonetization of silver, becoming more than a half of the face value of the coins, by the beginning of the twentieth century. A request from Lagos, that the seigniorage profits be used for colonial development, was rejected in 1897, although the Treasury suggested that they could have access to the seigniorage profits if they took complete responsibility for their own currency. ¹

Chapters 4 to 6 have shown that even when the currency boards were being created between 1890 and 1914, there were considerable disagreements between London and the colonies and among the London authorities themselves, as to the supposed benefits and costs. Similar disagreements again emerged during the 1920s, ’30s and ’40s, when imperial authorities manipulated colonial reserves in London in the interests of the City and sterling, and to provide easy and cheap finance for the British Government. The manipulation of colonial reserves continued for more than a decade after the war was over. The internal debates went a long way to undermining the supposed founding principles of the currency boards, while also establishing that whatever their statutory obligations to safeguard the interests of colonies, the Colonial Office gave in to the pressures from the British Treasury and Bank of England, fully aware that they were safeguarding imperial interest, even if their decisions resulted in financial disadvantage to the colonies. The Colonial Office deliberately deceived colonies to achieve their ends.

This chapter gives a detailed reassessment of the 1950s and 1960s debate over the economics of the currency board system for several reasons. First it sets the record straight for students of colonial currency systems who will inevitably come across many accounts of currency and monetary policies in different colonies, most of which are inaccurate or completely wrong. Second, this book emphasizes to students of economics the critical importance of grounding economic analysis solidly in accurate history, if they are not to be led astray by seemingly rational explanations which history has a habit of disproving. Third, many still have relevance for general discussions about the use of monetary and fiscal policies for fostering economic growth and development. Fourth, many of the arguments discussed here about colonial monetary issues in relation to sterling, may also apply to similar relations between other world reserve currencies such as the dollar, euro and renminbi, their respective reserve centers in the United States, the European Union and China, and their monetary relations with the international holders of the respective reserves held in these centers. The broader economic implications of significant changes in the large holdings of US dollar reserves and US Government debt by the Arab countries, Japan and China have been of great interest to monetary economists. The previous chapter has similarly outlined the changing attitude of Britain to the enormous holding of sterling reserves by colonies.¹

Discussions of colonial currency policies seldom include the experiences of much earlier white settler colonies in North America, Australia, New Zealand, and South Africa¹, even though they had quite similar currency problems invariably generating similar conflicts with the imperial decision-makers. Indeed, discussions of colonialism rarely look at England’s early colonization of Scotland, Wales and Ireland, with the rare exception of Philippa Levine (2007). Yet the contrasting imperial reactions to the currency policies in these white settler colonies, later to be granted self-government status and eventually called ‘Dominions’ ² which became ‘developed’ economies, highlights the negative consequences of imperial policies in colonies proper, which were adamantly refused self-government and treated quite differently in currency and monetary matters, as well as broader economic policies. ³ The central issue is why the white settler colonies were given the leeway that the colonies proper were not. The differential treatment of white settlers in ‘mixed’ white settler colonies, such as South Africa and Rhodesia, where non-whites were in the majority and given inferior treatment by the state, illustrates also the factor of racism underlying monetary imperialism, a factor considered important also by Accominotti et al (2005) below.

D.K. Fieldhouse (1996: 111) has a box questioning ‘Money — an imperial tool?’¹ This book has effectively been one answer to that question, providing a systematic historical monetary perspective largely missing from most studies of British imperialism.