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

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 markets coupled 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.

In late 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 reciprocal dispositions 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 to Portugal 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 of