THE EPU
Which was the more surprising because through the 1950s Europe had a means of dealing with balance of payments problems independent of the IMF. This was the European Payments Union and, unlike the Coal and Steel Community it had been set up under the auspices of the OEEC and covered all the countries of Western Europe - excepting Spain but including Portugal, Iceland, and Turkey. According to Halevi it was devised by two American economists he admires - Robert Triffin and Charles Kindleberger - but it was far removed from the original American vision. Halevi calls it 'an institution that operated as close as one could imagine to Keynes's idea of an international clearing union that the US Government rejected at Bretton Woods.' (4)
(4) Joseph Halevi and Peter Kriesler: 'Stagnation and conflict in Europe', International Journal of Political Economy, Vol.34, No.2 (Summer 2004), p.23.
Milward gives a rough description of how it worked:
'The EPU was a multilateral mechanism, replacing the network of bilateral agreements which had promoted and financed the growth of intra-Western-European foreign trade since 1945. National currencies had to be made freely transferable between central banks up to the limits set out in the agreement for the settlement of current account deficits and surpluses. The settlements were made not directly between central banks themselves, but through the medium of a multilateral clearing house, the Bank of International Settlements (BIS) in Basle. The limits within which currency transfers had to be automatically made in settlement were expressed by initial currency quotas allotted to each member-state on the basis of the estimated value of its foreign trade. These, together with $350 million allotted from Marshall Aid, made up the working capital of the EPU. Deficits were settled monthly by multilateral compensations between the various debts and surpluses, carried out by the BIS in terms of the EPU's own unit of account, the écu, equivalent in value to the American dollar.
'The terms on which overall net deficits had to be settled were far more generous than under earlier international multilateral payments systems such as the gold exchange standard of the 1920s. An initial tranche of 20 per cent of each country's original quota had to be provided as credit to potential trade debtors. After that initial tranche debtors paid on a sliding scale in which the proportion of gold or dollars that they were required to pay in settlement of their debt increased and the proportion of their national currency decreased with each successive tranche of the quota. When the debt was between 20 and 40 per cent of the original quota it was necessary to make 20 per cent of the settlement in gold/dollars. When the debt reached more than 80 per cent of the original quota it was necessary to settle up to 80 per cent in gold or dollars, and only once the quotas were exhausted did settlements have to be made entirely in hard currency.
'Although the aim of these rules was to provide a progressive disincentive to run trade deficits, the volume of credit which they allowed was still much greater than that which the IMF could make available to its members. Furthermore it was a negotiating machinery. The Management Board of EPU reported to the Executive Committee of OEEC and it was supposed to follow the same cooperative methods. With agreement, a debtor could increase its import barriers without question of retaliation ...' (5)
(5) Alan S.Milward: The European Rescue of the Nation-State, London, Routledge, 1992, pp.348-9.
I gave a rough account of the Keynes proposal in an earlier essay in this series (6) - also pointing to the similarity with the European New Order announced in July 1940 by Walther Funk. (7) All three have in common that national governments retain sovereign control of their currency; that, to quote a near contemporary account by Graham Rees, Professor of Economics in the University College of Swansea: 'by means of offsetting bilateral surpluses against bilateral deficits, this currency clearing house submerged bilateral balance of payments positions in the anonymity of a set balance of payments position of each country with the group as a whole'; (8) and that there was an accepted common currency - Funk's Reichsmark, Keynes's 'bancor' (a currency independent of the interests of any particular state), the EPU's 'écu' with a back-up in the gold based dollar. The great advantage of the system was that it allowed the different countries freedom to pursue a wide variety of interventionist policies and restriction of international trade, including against the US. According to Milward (European Rescue, p.356) 'discriminatory trade controls over OEEC as a whole were applied against 40 per cent of manufactured exports from North America.'
(6) Peter Brooke: 'The road to Bretton Woods (Part Two): Fighting for Britain against the US', Irish Foreign Affairs, Vol 14, no 2, June 2021, also on my website at http://www.peterbrooke.org/politics-and-theology/eu-economics/part-three/
(7) Funk's speech, which impressed Keynes, can be consulted at http://www4.dr-rath-foundation.org/brussels_eu/roots/06_economic_reorganization_europe.html.
(8) Graham Rees: 'The Anatomy of successful cooperation: the example of the European Payments Union', Il Politico, Vol.25, No.3 (September 1960), p.651.