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-term perspective, yet by the time the latter is visible it is too late to take appropriate action. A further element of ambiguity is introduced by the need to convert currencies. The general rule in international trade is the exporter dictates the form in which payment is made - which in the case of a developed nation, like the UK, is mostly in its own currency. A much smaller proportion of UK imports will also be paid for in sterling. All non-sterling payments must therefore be converted into sterling at the ruling exchange rates. However, since these may fluctuate enormously during the course of a financial year, the valuation of imports and exports can be significantly affected by the precise timing of currency conversion.
3. The UK balance of payments in retrospect
A useful historical starting point in examining the UK balance of payments is by way of a characterisation denoted by four main propositions. Firstly, the UK normally has a deficit on visible trade which is more than offset by a surplus on invisibles. Secondly, this implies a surplus on current account. In addition the UK is normally a net exporter (i.e. experiences net outflows) of long-term capital. Thirdly, the role of the UK as an international banking centre, with the focus particularly on London, tends to produce volatile short-term capital flows which have an important influence on the overall balance of payments. Fourthly, these activities are all carried out with an inadequate underpinning of official exchange reserves. The historic position of the UK balance of payments can be analysed with reference to the above set of presumptions within selected periods since the Second World War. The first sub-period covers the 1950s, a time which, in retrospect, appears relatively tranquil. The second sub-period leads up to the devaluation of the pound in 1967. The end of the third sub-period is marked by the floating of sterling in June 1972. The end of the next sub-period coincides with accession to power of the first Conservative government under Mrs. Thatcher in 1979, but more particularly also with the beginning of the major boost to export revenues from North Sea oil. The final sub-period of the 1980s looks at the consequences from declining North Sea oil revenues in revealing the true state of the visible balance and the falling value of the invisibles balance. Prior to 1967 the UK managed to keep the current account in surplus but, with the exception of 1956 and 1958 when the visible balance was positive, the pattern of a negative visible balance more than compensated by a positive invisible balance was already well-established. There was considerable volatility with respect to short-term capital flows during the dying years of the overseas sterling area, but long-term capital flows were mostly outflows, and hence negative in the accounts. In looking at the current situation one might be tempted to believe that nothing much has changed since the 1960s. However, as we shall see, this is not the case because of differences, both in (a) the exchange rate regime in operation, (b) in the UK’s reserve position, and (c) in the contribution of North Sea oil.
The steady deterioration in the UK’s share of world trade in manufactures, exacerbated by an uncompetitive fixed exchange rate combined with a tendency for hot money to pour out of the UK whenever a crisis loomed (thereby draining inadequate reserves) was an unsustainable situation. The balance of payments acc