This paper examines how the British state mobilises off-balance-sheet fiscal agencies to address extreme financial pressures inflicted by systemic shocks. It looks at the case of the UK’s Exchange Equalisation Account (EEA), a World War Two (WWII) Treasury-controlled fund operated via the Bank of England, initially established to smooth out exchange rate fluctuations through secret foreign exchange and gold transactions after the pound was taken off the Gold Standard and allowed to float. This experience gained in exchange rate management gave the British authorities a powerful macroeconomic tool, severely lacking in the early interwar period. With the onset of WWII, the EEA’s mandate expanded dramatically: it absorbed the nation’s gold reserves, commandeered foreign securities, and underpinned Britain’s issuance of sterling-denominated liabilities to finance wartime imports and expenditures, all the while keeping these activities outside the official government balance sheet. Drawing on extensive archival sources and time-series data, the paper scrutinises the EEA through the lens of the Monetary Architecture framework, which gauges the international monetary and financial system as a hierarchical web of interlocking balance sheets shaped by political and institutional power, through which liquidity and credit are distributed and contested. From this perspective, the EEA operated as a critical sovereign liquidity facility, enabling Britain to fund large-scale war mobilisation without overtly breaching norms of fiscal orthodoxy or destabilising sterling’s international position. In doing so, it exemplifies how states deploy hidden financial infrastructures to manage monetary-fiscal boundaries and navigate systemic shocks.
Presentation at the Finance & Society conference in Copenhagen (09/2025).
Co-authors:
Andrei Guter-Sandu, University of Bath
Verena Gradinger, Global Climate Forum
Olan McEvoy, Global Climate Forum
Download link:
OBFA-TRANSFORM Working Paper No. 9-EN
