This was a surcharge on the price of dollars arising from the U.K. exchange control regulations, with particular reference to portfolio investments. After the post-war imposition of exchange control regulations and nonconvertibility of sterling there still remained a pool of dollar securities which could be dealt in. The proceeds from the realization of these securities were available for further investment but in order to obtain such dollars an additional amount, a premium, was payable by the purchaser.
The rate of exchange for dollars therefore increased according to the quantity of dollars available from the realization of the securities. The object of the premium was to inhibit the purchase of dollars, the one agreed hard and safe currency, by making them more expensive for the potential investor. It was not in the British national interest to buy too much from the United States until, by building up our exports, we had sufficient dollars to spare. With the sudden advent of complete convertibility, the dollar premium disappeared,
|Reference: The Penguin Business Dictionary, 3rd edt.|