Summary of Part II

The mid-1960s saw a new chapter in Labour’s relationship with the Common Market open. At the same time, Wilson was poised for a European approach to sterling in the negotiations over ‘the second try’. The backcloth to this scenario was the sterling crisis, which highlighted sterling’s vulnerability as a reserve currency, fuelled by the development of the Eurocurrency markets. While the crisis resulted in the 1967 devaluation, fears of destabilising capital flows called for greater central bank cooperation, which came in the form of the 1968 Basle Agreement. This was greater central bank cooperation based on sterling–dollar diplomacy. However, in discussions on international monetary reform, Britain became aware that while the dollar’s vulnerability helped the United States share with Britain the experience of running a vulnerable reserve currency, the Americans were consumed with ‘contagious mistrust’. The exigencies of the crisis encouraged Britain to pursue the creation of new reserve assets designed as a substitute for the key currencies, while ‘contagious mistrust’ meant the United States distanced itself from the scheme. The conflict between the United States and France over international liquidity culminated in the creation of the SDR. Yet the SDR was far from a comprehensive solution to the problems of reserve currencies. As a sweeping approach to the sterling problem it was plagued with difficulties, and Britain slowly turned to a European approach to sterling.