- 2 -
 
which have the effect of reducing the demand for 
free sterling and of increasing the proportion of
our exports which can be used to pay for imports. 
The effect of lowering the rate is natural and was 
expected; what we have done is to strengthen our 
exchange control, and it would be a travesty to 
say that by so doing we are deliberately depreciating 
our currency. On the contrary, weakness in sterling 
due to the erratic market abroad is the natural corollary 
of an efficient control over exchange transactions, and 
it must be expected that despite the effects upon the 
rate for free sterling we shall continue to strengthen 
and extend our control in this and other ways.
 
       Criticism which asserts that the fall in 
the rate is damaging to our prestige is due to the
failure to appreciate that the market and the rate 
are dominated by the official transactions, and that 
the free markets deal only with a small overflow 
which we are concerned to diminish but not to manage. 
The relative unimportance of the movements in the 
free sterling rate is demonstrated by the advance of 
the quotation from the low point of 3.44 to 3.60 
while this telegram was being drafted. The thinner 
the market the larger the fluctuations are likely to 
be.
 
 
                    30th March 1940.