An exchange crisis occurred in 1938, partly through a flight of capital, but mainly because demand for imports had been overstimulated by recovery from depression, especially by internal budgetary and monetary expansion out of line with the improvement in external receipts. The real cause was one of timing: the enthusiastic practise of an expansionist policy after 1935 was four years too late to assist recovery without creating undesirable side effects. From £40 million at the end of 1934, net overseas assets of the banking system declined steadily to just over £20 million three years later. Some decline was inevitable – and necessary – but the run down after May 1938 was so rapid that the country was for a time unable to meet all its external commitments. Because service of the external debt had priority, commercial payments had to be restricted and personal payments severely curtailed. At the end of December 1938, when drastic controls were established, overseas assets were under £10 million and it was not until two years later that they again exceeded £20 million.

Paradoxically, the situation was saved, more than by any other reason, by the advent of the Second World War, which led to bulk purchase of our exports at favourable prices by the United Kingdom Government. There were, of course, other related factors, including a physical shortage of many imports. From June 1942 the £40 million level had been restored and from the end of 1944 there was another surge upwards. But not since 1938 has the country been free of exchange or import control for an appreciable period. The exigencies of war were followed by recurring exchange crises during post-war expansion; more recently there has been an undue cyclical manifestation. The management of net overseas assets is now at the centre of Government policy.