CHAPTER 15 The Fund and the EPU

International Monetary Fund
Published Date:
February 1996
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Margaret G. de Vries

THE STORY OF THE FUND’S REACTIONS to plans in the late 1940’s for European payments arrangements, and of its relations with the European Payments Union (EPU) which was formed in 1950, belongs to an era of the Fund’s history which has little relevance to the present. The EPU was terminated in 1955, and long before that—in fact after 1952—relations had distinctly improved.

However, this period of the Fund’s history has, time and again, been the subject of possibly the severest attacks that the Fund has experienced. It has been contended, for example, that as the EPU became the main instrument by which the trade and exchange restrictions of European countries were reduced, the Fund, by failing to organize under its own aegis a multilateral system of European settlements, “missed the bus.”1 And the Fund has been characterized as having been thenceforth outside the principal stream of important international economic events.2

The critics stress that, once European countries had developed the habit of intraregional cooperation on economic questions, they continued to make their most crucial financial and monetary decisions in small meetings among themselves rather than through the wider framework of the Fund. In some respects, the EPU thus formed the nucleus of the Group of Ten.

Whether or not these criticisms are wholly valid, it did appear to many observers that for some years following the establishment of the EPU the focal point of important monetary decisions was that organization rather than the Fund. Only after the Fund commenced to have large-scale financial operations with European countries in 1956 did this impression begin to change.

Accordingly, it is worthwhile to take a brief look at what the Fund’s records show about its reactions to proposals for intra-European payments arrangements, including the EPU itself. A reading of these records suggests that the story was neither so simple nor so one-sided as the one heretofore publicly revealed.


The EPU, established in September 1950, was the outgrowth of discussion and experimentation from 1947 to 1950 among European countries, looking to some sort of clearing union to facilitate trade and payments between them. Meetings to explore European payments arrangements were held as early as August 1947, shortly after General George C. Marshall (in June 1947) proposed that the U.S. Government should undertake a special program to help in reconstructing the economies of Europe. Although intra-European trade had made a remarkable recovery after World War II, that trade had expanded much less rapidly than either the industrial or the agricultural output of most European countries; and a much greater expansion of trade was considered necessary for the general economic recovery of Europe.

A number of officials, both in the U.S. Government and in several of the governments in Europe, had come to the conclusion that, although the bilateral payments agreements established among European countries immediately after the war had facilitated the restoration of intra-European trade, these payments arrangements were preventing further increases in that trade. Trade deficits in excess of the credit limits specified in bilateral payments agreements had to be financed with gold or convertible currencies. European countries with such deficits tended to restrict imports from other European countries in order to conserve their scarce supplies of gold and convertible foreign exchange for payments to the dollar area.

These misgivings about the existing payments arrangements were reinforced by developments in the fall of 1947. By that time, the effective credit or debit balances under existing payments agreements were tending more and more to exceed the bilateral ceilings, and had forced a resumption of gold settlements. Simultaneously, there had been an actual decline in the volume of intra-European trade. Illustrative of the thinking which related these two events was that of Mr. Robert Triffin, a staff member, who in July 1948 was to take charge of the Fund’s Paris Office; Mr. Triffin regarded the decline in European trade as probably due in part to the progressive paralysis of the payments agreements mechanism.4

A number of officials believed that intra-European trade could be expanded by the institution of some system of multilateral compensation and a multilateralization of credits among European countries. What was required was a mechanism by which European countries having bilateral surpluses with other European countries could use these surpluses to finance (or to offset) their deficits with third countries in Europe. Payments in gold and convertible currencies between European countries could thereby be held to a minimum.

In addition, some way was needed to finance any over-all deficit a European country might have with its European trading partners as a group. The fact that some European countries, such as France and the Netherlands, had tended to have deficits with nearly all their European trading partners, while other countries, such as Belgium, tended to have surpluses, made it extremely difficult to establish a payments system through which even the bilateral positions that in theory could be offset against one another could, in practice, be cleared. Since all European countries had deficits with the dollar area, there were no dollar surpluses with which a European country could finance its deficit on intra-European account. By the same token, creditor countries, such as Belgium, that tended to have persistent surpluses with their European partners were anxious to receive convertible exchange with which to cover deficits with the Western Hemisphere.


Following meetings in London and Paris in the late summer and early fall of 1947, Belgium, France, Italy, Luxembourg, and the Netherlands signed a five-nation agreement on multilateral compensations in November 1947. The successful operation of compensation machinery of this kind was dependent, however, upon the balance of creditor-debtor relations between the participants in the system. The predominant creditor position of Belgium among European countries at the time, and the few participants in the scheme, narrowly limited the scope for compensation. It became apparent before long that, if any clearing system was to succeed, all the sixteen countries that had by then formally come together in the Organization for European Economic Cooperation (OEEC) would have to be brought into the system. Further, some way would have to be found to deal with those countries that were predominantly creditors or debtors of most of the other European countries.

There was considerable divergence of opinion among European countries as to what arrangements for multilateral clearing were preferable. Differences of view prevailed as well between European countries and officials of the Economic Cooperation Administration (ECA), an arm of the U.S. Government that had been set up in April 1948 to administer the European Recovery Program (ERP) on the U.S. side. Much debate concerned, for example, the arrangements to be made for the settlement of payments between debtors and creditors that were in excess of agreed limits. Especially basic was the question of how liberal should be the terms under which credits to debtors would be extended. If credit terms were too liberal, the pressure on debtor countries to correct the causes of their balance of payments deficits might not be sufficient.

In addition, creditor countries did not like the prospect of extending further substantial credits to their European neighbors; such credit extension not only entailed the loss of current receipts of convertible exchange, but also had an inflationary impact on the economies of the creditors. Belgium, therefore, as well as some other countries—including France, Italy, Luxembourg, and the Netherlands—favored a completely multilateral payments system, with excess credit positions being covered by an arrangement for U.S. aid. Belgium in fact did not like any arrangement which did not provide for the conversion of credit positions into gold or dollars. The United Kingdom and the other OEEC countries, however, hesitated to adopt such a scheme, on the ground that it would introduce too much dollar competition into intra-European trade.

The United States, for its part, was unwilling in the initial stages of the ERP to allocate aid to a special clearing fund from which it would be used automatically. The intent of the U.S. Congress in passing the Economic Cooperation Act in April 1948 had been that ECA aid should cover specific dollar deficits of European countries for programs to achieve particular recovery goals. Moreover, the ECA wished to stimulate competition in intra-European trade, so that European industries would be induced to improve their productivity vis-à-vis both the industries of other European countries and the industries of the Western Hemisphere.

On October 14, 1948, the sixteen OEEC countries signed an Agreement on Intra-European Payments and Compensations, covering the year July 1948 to June 1949. This agreement had been made possible by the adoption by the ECA of a new arrangement for the settlement of intra-European deficits. Under a system of “conditional aid,” part of the ECA’s assistance to European countries was based upon the amount of each country’s planned bilateral surplus with each of the other members. Recipients of conditional aid were, in turn, required to provide drawing rights to each bilateral partner with whom they expected to have a surplus during a specified period. Thus each ERP country would receive drawing rights on the member countries with which they were expected to have bilateral deficits, entitling them to incur a given amount of deficit without being required to pay gold or to accumulate an indebtedness. By this device, nearly every country entitled to ECA aid both extended drawing rights to other members (equal to the amount of conditional aid received) and received drawing rights from others.

With some relatively minor changes, a second such agreement was adopted in September 1949, for the year ending June 30, 1950. But, because these agreements did not permit the full offsetting of deficits against surpluses among participating countries, and because their operation required estimating the anticipated bilateral surpluses and deficits, they, like the earlier five-nation clearing scheme of 1947–48, were not wholly satisfactory. The system remained basically bilateral.


Late in 1949, at the suggestion of the ECA, the countries in the OEEC began to discuss again ideas for a payments arrangement for Western European and related currencies that would provide a better solution to intra-European trade and payments problems. In December 1949, the ECA and a number of European countries submitted to the OEEC proposals for a European clearing union.

There were long negotiations over numerous difficult problems. One problem, for example, concerned the treatment of the pound sterling. Should sterling be treated differently from other European currencies because of its international character—that is, because sterling was widely used in third country settlements and as a form in which monetary reserves were held? Additional complications arose from the fact that the sterling area encompassed a large number of independent monetary authorities, whereas each of the continental European currencies was controlled by a single monetary authority. What, for example, would be the relations between an independent country like Australia and the European members of the EPU? Accounts within the sterling area were already settled between the member countries; if the sterling area settled its accounts with the EPU on an aggregated net basis, the United Kingdom would have to cover with gold and dollar payments the EPU deficits of the rest of the sterling area as well as those of Britain alone.

There was also the problem that some OEEC members held sizable accumulated sterling balances. If these countries were permitted to use such balances to settle EPU deficits, Britain might be required to pay gold to the EPU on account of large transfers of sterling to the EPU by these OEEC members. To settle these difficulties, the ECA agreed to reimburse the United Kingdom for any net payment of dollars to the EPU which might result from the use of accumulated sterling holdings by participating EPU countries to cover their deficits with the Union.

The agreement setting up the EPU was finally signed on September 19, 1950, to be effective for a period of two years from July 1, 1950 to June 30, 1952. The new Union was designed to facilitate liberalization of intra-European trade on a nondiscriminatory basis; to assist its members in their progress toward viable economies, especially by supplying credit and providing incentives; and to encourage them to achieve or maintain high and stable levels of trade and employment. Like the Fund, the EPU also stood for the maintenance of internal and external financial equilibrium and the need for European countries to return to full multilateral trade and to currency convertibility.

There were two important features of the arrangements: the full multilateralization of payments among members of the OEEC and their associated monetary areas through a compensation mechanism, and a means of facilitating the net payments due from debtors after the compensations were effected. The first feature came from provision for a complete netting of all bilateral payments positions at the end of each accounting period. Each member country was to report its position with every other member to the Bank for International Settlements (BIS) at the end of each month. The BIS was then to determine for each country its “accounting surplus or deficit” for that month. The bilateral positions with other members were thus eliminated in exchange for a position with the EPU.

The complicated nature of the EPU derived from the method of net settlement—not from the clearing operation. Within certain limits, the settlement of accounting surpluses and deficits was to consist merely of the crediting or debiting of each member’s account. EPU credits were to be available for use in covering a deficit with other EPU members, since each member agreed to accept EPU credits in settlement of a credit against any other member. When a member’s accounting credit or debit reached a certain level, additional amounts had to be settled partly in gold. Schedules fixing the proportions of the monthly settlements to be made in gold by debtors and to be received in gold by creditors provided for the payment of an increasing proportion by debtors as their cumulative deficits rose and the receipt of a decreasing proportion by creditors as their cumulative surpluses, for which a quota was set, rose.

While most of the liquidity of the payments system was provided by the members themselves through the extension of credits, some working capital was provided by the ECA. At the beginning of the EPU’s operations in the middle of 1950, the ECA made available to the EPU $350 million to be used in the event that gold payments to creditor countries exceeded gold receipts from debtors.

The EPU was to be administered by a Managing Board, whose policymaking power was, however, limited to making proposals to the OEEC Council, by which it was appointed. The EPU remained in existence until December 1958, when it was terminated following the establishment of external convertibility for the major European currencies. In accordance with an agreement reached by the OEEC in July 1955, the European Monetary Agreement (EMA) then came into force.


In view of the similarity of the objectives of the European payments arrangements, and those of the EPU as established, with those of the Fund, it might have been expected that the Fund’s reactions to these arrangements would have been at least favorable, if not enthusiastic. Indeed, in the early stages, the Board agreed to send observers to the meetings of the Financial Committee of the Committee on Cooperation of European Countries, held in London in the fall of 1947. However, several Directors were anxious that the Fund should not become committed to any particular clearing scheme, especially as a number of proposals were just beginning to be discussed among the European countries.

Fund observers did attend meetings in London. However, although the report of the participants in the London meetings had indicated that the Fund was invited to send an observer to the next series of meetings in Paris in October 1947, the Fund was not in fact represented. The absence of a Fund observer at these meetings was to have lasting consequence. For it was then and there that Belgium, France, Italy, Luxembourg, and the Netherlands signed the first European payments agreement. While the Fund was not represented, the BIS was. The first draft of the payments agreement signed by these five nations had provided for the Fund to act as a clearing agent, but, in the absence of a representative from the Fund, the BIS’s offer of its services as a clearing agent was accepted. The BIS remained the agent for all later intra-European payments organizations, including the EPU and the subsequent EMA.

The Fund has at times been criticized for failing to become at least the clearing agent for the EPU. However, as far as the Fund’s records show, its absence from the Paris meeting in October 1947 was accidental, although how the accident happened is not clear. In a statement to the Board on November 12, 1948, the Managing Director stated that it had been due to a “genuine misunderstanding.” Actually, the Managing Director, some Executive Directors, and most staff members were inclined to advocate a stronger role for the Fund than that of clearing agent. As early as December 1947 the staff suggested to the Executive Board that additional credits were essential to enable a European clearing mechanism to work and that the Fund could and should provide them. In May 1948, the Board discussed a specific staff plan for the Fund’s participation in European multilateral clearing arrangements; this plan would have had the Fund make available resources of $338 million, in the form of drawings of Belgian francs or other European currencies.

But, although some Directors believed that the aims of multilateral clearing in Europe were in accord with the Fund’s objectives, other Directors had misgivings. Would European payments schemes, in fact, help to lay the basis for eventual convertibility of European currencies? Would a clearing arrangement not tend to postpone the solution of Europe’s problems rather than help to solve them? Was there not a danger that increasing the means of payment in Europe would encourage nonessential and luxury imports more than essential trade? In addition, since the Fund had in the previous month taken a decision (the “ERP Decision” of April 1948) limiting European members’ access to the Fund’s dollar resources during the life of the ERP, several Directors inquired specifically about those portions of any plan which called for use of the Fund’s dollar resources.6 Would not a contribution from the Fund to clearing arrangements be counter to the Fund’s “ERP Decision”? What guarantee could there be that the Fund’s commitments under the clearing arrangements proposed would not be excessive, using up in a few months resources which should be made available over several years?

Concern of the kind indicated by these questions led the Directors to take, on June 4, 1948, a decision which limited the Fund’s involvement in European payments arrangements.7 The decision stated that the Fund hoped that an arrangement could be made for multilateralizing European payments. The Fund also hoped that a revision of and a moderate rise in credits could be agreed for use in multilateral payments and, reiterating the Fund’s “ERP Decision” on the use of its own resources, hoped that any increase in credits could be financed by the creditor countries. The Fund was also willing to place its advice and technical facilities at the disposal of its members in connection with the formulation and administration of any multilateral payments arrangements and for other purposes related to their payments problems.

Mr. Triffin, as head of the Fund’s Paris Office, strongly advocated participation by the Fund in European multilateral clearing arrangements. Early in 1949 he submitted to the Executive Board a second specific proposal for a modification of the European payments arrangements then being discussed; this proposal again envisaged the possible use of the Fund’s resources as an aid to multilateralizing payments in 1949–50. However, the proposal was not accepted by the Board.

The Managing Director of the Fund, Mr. Gutt, was also very much in favor of the Fund’s cooperating actively with the plans for multilateral clearing which were continuing to go forward in Europe. On one occasion, in November 1948, he made a powerful plea to the Executive Board for the Fund to take an active share in these plans. He was concerned, inter alia, that if the sixteen nations assembled together in Europe did not have enough contact with the rest of the world, they might tend to build up a so-called European monetary policy, which might be different from, or opposed to, an international monetary policy. Again in January 1950 he recommended to the Board that the Fund participate in the discussions for the setting up of the EPU.

Anticipating that the Managing Director’s appeal might bring favorable response from the Board, the staff came up with new suggestions as to how European clearing could be conducted through the Fund. While recognizing that the Fund had been used very little for the purchase of European currencies, the staff believed that the Fund constituted suitable machinery to facilitate payments within Europe if a large group of European countries decided jointly to use the Fund for this purpose. However, for reasons discussed in the next section the Board was unwilling to proceed along these lines.


Throughout these years, the Board was kept informed by the Paris Office of the various proposals for clearing arrangements which were put forward in Europe. After studying these, however, the staff formed the view that the clearing mechanisms being considered would be more likely, at least in the short run, to impede than to advance convertibility and a solution of the dollar problem. The argument was that, while the progressive removal of trade and payments restrictions within Europe as called for by the planned arrangements was an objective of great importance, it could not be regarded as transcending the basic need that must dominate European policy: a tenable dollar payments position.

It was pointed out that even for the countries participating in the OEEC, intra-European trade as measured by imports was only 46 per cent of their total trade; and that the magnitudes of the payments deficits within Europe were quite small compared to the dollar deficits. The staff stressed that the restrictions from which European countries suffered most were not those against one another, but those which they had to impose on their dollar imports because of their own inadequate dollar earnings, and concluded that it was in the interest of European countries to reduce restrictions on trade and payments between them to that minimum which was consistent with positive progress in the solution of the dollar problem.

Elaborating this argument, the staff reasoned that before September 1949 Fund members had tended to concentrate on exporting to the high-priced markets of Europe. This was because inflated demand within Europe had made these markets, despite restrictions, more attractive than dollar markets. Under such conditions, the general removal of trade and payments restrictions within Europe could only have added to the difficulties that European countries already faced in instituting positive measures to meet their dollar problems. Since the devaluations of September 1949, there had been a great change in the relative attractiveness to exporters of dollar markets and of markets in Europe and associated currency areas. If the active and latent inflation within Europe and in the associated currency areas could be eliminated, the case would be exceptionally strong for the removal of nearly all trade and payments restrictions in the countries participating in any intra-European payments scheme. But until inflation had been at least sharply reduced, liberalization of European trade would not be likely to solve the dollar problem.

Recognizing that their conclusions were contrary to the usual opinions about European clearing arrangements and the liberalization of intra-European trade, staff members added some qualifications to their analysis. Their conclusions would be affected if the tendency that had been occurring among European countries for exports to the dollar area to be reduced were to be reversed after a new payments scheme had gone into effect. Furthermore, their conclusions could be altered depending on what happened to the productivity of European industries as trade barriers were relaxed and greater competition among European countries was induced. In the longer run, greater productivity might result in lower costs and prices which, in turn, would help to solve Europe’s dollar problem.

Thus there were genuine differences of opinion, both in the staff and in the Executive Board, from the views being expressed in Europe concerning the advantages and disadvantages of the various proposed mechanisms.

The official policy of the Fund early in 1950 was exemplified by the Board’s instructions to a staff mission which was to participate in discussions in Europe on the proposals for an EPU. The position of the Fund was that European countries needed primarily to overcome their inflationary difficulties and that, while inflation remained a threat, the role of credit, particularly of long- and medium-term credit, in the settlement of intra-European current balances should be restrained. Settlement in gold or dollars should be relatively large and should become the rule whenever possible.

The Fund considered that, in any European payments arrangement, credit had two functions as regards debtors and one as regards creditors. As regards debtors, credits were a substitute for grants insofar as they tended to undo the deterrent effect of any payments scheme on a debtor’s building up of deficits. On the other hand, if credits were a substitute for required gold payments, they acted as a safety valve to prevent a scheme from acting too rigorously and perhaps from breaking down. As regards creditors, the function of credit was to make earnings inside Europe less attractive than gold, in order to discourage undue attempts by creditors to earn dollars by trading with European countries rather than by exporting to the dollar area. Moderate amounts of credit, with large amounts of settlements required in gold or dollars, would best reconcile these conflicting functions of credit.


Apart from the merits of European clearing arrangements, the question of liaison with any European organization that might be established was also carefully weighed in the Fund. Once it had become evident that the EPU was to come into being, the question of liaison became, for the Fund, a more pertinent issue than the nature of the particular clearing mechanism to be set up.

Need for collaboration

Many, both among the Fund staff and on the Board, believed that the closest possible relationship should be established between the Fund and the EPU. The fact that the EPU involved a number of the Fund’s members was itself sufficient, several thought, to argue for close collaboration. The provisions agreed upon by the OEEC Council could lead to actions by European members of the Fund which would be inconsistent with their obligations under the Fund Agreement. To avoid such situations, and to protect other members of the Fund from the consequences thereof, the Fund should be in close touch with the EPU and make its views known to its European members. Moreover, the shape which the EPU had taken might be changed from time to time, and the Fund had a duty to all of its members, including those in Europe, to do its best to assist in improving the system and in bringing about as rapidly as possible conditions under which the purposes of the Fund Agreement could be achieved.

The Fund also believed that it had a vital stake in any decisions taken by the EPU Managing Board. The Fund’s attitude, prior to the establishment of the EPU, had been that the degree of its interest in the management of any European clearing arrangement depended greatly on the purposes of that management. If such management was to deal only with the financial terms on which credits were extended, such as the conditions for repayment and the rate of interest, the Fund had no concern with it. The Fund would have some concern if an EPU management was to deal with the amounts of credit granted; and if that management was to prescribe the policy conditions on which credits were granted, the Fund believed it was vitally concerned.

Once it was evident that the Managing Board of the EPU would have broad powers and would be discussing the policies of the OEEC members, the Fund believed its interests were definitely involved and that collaboration was important. The Board decided that, although the Fund’s representatives should not seek to secure any special arrangements with the EPU, these representatives might ask to attend meetings of the EPU Managing Board. The Managing Director, Mr. Gutt, and the Deputy Managing Director, Mr. Overby, visited Paris several times in the last planning stages of the EPU in April, May, and June, 1950. The Managing Director went to Europe again prior to the Annual Meeting in Paris in September 1950, and simultaneous and subsequent visits to European countries were also made by the staff. The suggestions made by these Fund representatives were that the Fund might have a permanent observer on the EPU Board; then, after experience in Fund-EPU cooperation had been gained, a more formal relationship between the two organizations might be established.

Opposition to the Funds participation

Several circumstances, however, operated against the possibilities of close cooperation, at least in the early years, between the Fund and the EPU. European countries were not necessarily eager for the Fund to have much, if any, participation in their arrangements. European countries had, to some extent, been disturbed by the Fund’s “ERP Decision” on the use of its resources. They apparently did not take seriously the possibility, which was mentioned during the Board’s discussions, that the amount of ERP aid might be reduced to the extent that Europe received dollar resources from the Fund. They therefore viewed the Fund’s decision as a curtailment of the amount of dollar resources that might have been available to Europe. The Fund’s non-dollar resources were of less interest to them, because these currencies were inconvertible at that time and repurchases would have to be made in gold or dollars. There was also some feeling in Europe that the Fund was dominated by the U.S. Government, with which the Europeans already had to deal through the ECA.

That the European countries hesitated to have close participation by the Fund in their arrangements was manifested as early as the summer of 1948, when the Fund’s representative in Paris was endeavoring to obtain representation for the Fund in the OEEC and a role in the proposed first Intra-European Payments Agreement. He was then told by Mr. Hubert Ansiaux, Chairman of the Financial Committee of the OEEC as well as an Executive Director of the Fund, that there was a great deal of resistance in the OEEC toward inviting international organizations to be represented officially at its regular meetings, as the OEEC considered itself primarily a European organization. Again, at the end of January 1950, Mr. Ansiaux wrote to the Managing Director about the EPU proposals and, especially, about European attitudes toward the Fund’s participation in such a Union and in the OEEC. He indicated that while it would be possible for the Fund to have an observer to follow the discussions in the OEEC on the EPU proposals, it appeared impossible, for both political and practical reasons, that the Fund should participate either in the discussions of the plans or in their implementation.

Later in 1950, discussions with the continental European countries showed that they were willing to have an observer from the Fund on the EPU Board. However, discussions with the British representative in the OEEC and the EPU showed that the United Kingdom opposed the idea of any Fund observer. The reasons given were as follows: First, the United Kingdom wanted to keep the number of people around the table very small. Second, the discussions of the EPU Board were confidential even vis-à-vis members of the EPU not represented on the EPU Board. Third, some countries in the EPU were not members of the Fund. Finally, the British representative argued that the Fund was unable to maintain the necessary confidentiality in view of the insistence of its Board on receiving all information given to the staff and of the right of the Executive Directors to report to their governments.

Still another political consideration militated against the Fund, with its worldwide membership, taking much of a role in European arrangements. The U.S. Government, in particular the ECA and the State Department, had become committed to an independent EPU as an essential means of promoting European political integration. Integration was expected to be furthered principally by getting the European countries to coordinate their monetary policies toward the common end of balance of payments equilibrium.

In addition to the political considerations that made it difficult for the Fund to participate effectively either in the discussions for European clearing or in their implementation, there were two practical difficulties which precluded any effective role for the Fund. One was that it appeared inconceivable that decisions taken at a ministerial level in the OEEC should be subject to review by the ministers’ own representatives on the Fund’s Board. The other was that EPU operations had to be directed from Paris, not from Washington, and if decisions made in Paris had to be approved by the Fund’s Board, there would inevitably be delays.

All these circumstances, taken together, had the result that a representative from the Fund was not invited to attend meetings of the EPU Managing Board until 1952.


Improvement in Fund-EPU relations, when it came, resulted not from any formal decisions but rather from the more favorable attitudes in Europe toward cooperation with the Fund which followed the Fund’s agreement in June 1952 to a request from Belgium for a stand-by arrangement.

In June 1952, the OEEC Council agreed to extend the EPU for another year, until June 30, 1953. But among the problems that had to be solved was the emergence of Belgium as a large creditor. It was necessary for the EPU to reach agreement concerning payment to Belgium for its past surplus and to arrange for new credits for the coming year. Part of the settlement worked out between the EPU and Belgium was that $50 million would be paid to Belgium in five annual installments. But Belgium was reluctant to agree to this arrangement unless it was, meanwhile, safeguarded against a possible dollar drain, and the U.S. Government had decided not to commit any more funds to the EPU. A way was found around this impasse when the Fund agreed to a stand-by arrangement with Belgium for $50 million which was automatically renewable for five years unless canceled by either party. The commitment from the Fund gave the National Bank of Belgium assurance that, if necessary, it could mobilize in advance the dollar debt owed to Belgium by the EPU.

The OEEC Council, in its meeting of July 11, 1952, formally expressed its appreciation of the prompt and favorable response of the Fund to the Belgian request, and declared its hope that “it may also be possible to have fruitful collaboration in the future between the Fund and the Organization in connection with problems of mutual concern.” As a result, members of the Fund’s Office in Paris were invited with increasing frequency to meetings of the EPU Managing Board.

In the spring of 1953, the EPU Managing Board’s recommendations for the extension of the Union contained three paragraphs on relations with the Fund. It was stated that close cooperation with the Fund was increasingly necessary and practical, especially as European countries needed more reserves to continue their progress toward derestriction. Examples were listed of circumstances in which EPU members could usefully draw on the Fund, which seemed to raise no problems except for one which suggested the possibility that the Fund and the EPU open joint credits for European countries so as to stabilize their currencies. Also suggested were a joint examination of problem countries and coordinated decisions on the measures to be taken. These suggestions were discussed by the two staffs, but no formal proposals were made to the Fund.

In the summer of 1953, the Fund staff suggested, and the Executive Board approved, the formal transmittal of certain Fund documents, including Part II of the Fund’s consultation reports, for the use of the OEEC, subject to approval in each case by the Executive Director concerned. In April 1956, the Board also agreed to transmit to the OEEC Part I of the Fund’s consultation reports, again subject to the right of any Executive Director to object to the transmission of any report in which he was interested.

Closer liaison between the Fund and the OEEC also developed as the latter assumed responsibilities for supervising the progress of its members toward liberalization of trade. As the trade of OEEC countries began to be freed from restrictions, the objectives of the OEEC and of the EPU came closer to those of the Fund than had been thought likely when the EPU was set up. The result was that Fund-EPU relations steadily improved.

Some doubts remained as to whether the EPU made restrictions against dollar area imports more discriminatory than they would otherwise have been. A few Directors argued that the EPU actually contributed to reduce such discrimination, but others continued to have misgivings. After the EPU had come to an end, the Managing Director of the Fund, Mr. Jacobsson, stated that “the European Payments Union, for eight and a half years up to the end of 1958, made a most useful contribution to progress in Europe by assuring prompt payments and by giving an impetus to the relaxation of trade restrictions.”8

One final word may be added about the Fund’s reactions in 1947–50 to European payments arrangements. The Fund itself was a young institution. It was just beginning to formulate general policies to guide it in its relations with members. Moreover, it was having difficulty in establishing its own authority, especially in the field of exchange rates. In these circumstances, it is understandable that the prospect of a European financial organization dealing with many of the subjects in the Fund’s field, and including many of the Fund’s important members, was viewed with some anxiety.

During the next several years the Fund was able to work out the policies it would pursue—toward exchange rates, the use of its resources, the transitional period, restrictions, and the restoration of convertibility. By 1952 its own consultation program with its members had also commenced. Hence it is not unlikely that, had the whole matter of European payments arrangements come up five years later than it did, the outcome might have been quite different from what it was.


See, for example, Robert Triffin, The World Money Maze, p. 406.


Harry G. Johnson, The World Economy at the Crossroads, Chap. 3.


A comprehensive description of the development of the EPU can be found in William Diebold, Trade and Payments in Western Europe, and in Raymond F. Mikesell, Foreign Exchange in the Postwar World. The first three sections of this chapter are based largely on Mikesell’s volume, Chap. 6, pp. 100–102, 108–23.


Triffin, World Money Maze, p. 408.


Details of the Executive Directors’ discussions of the various plans for European payments arrangements may be found in Vol. I above, pp. 212–23, 288–90.


The “ERP Decision” is reproduced in Chapter 18 below (pp. 395–96). Other implications of the decision are discussed later in this chapter (p. 328).


See above, Vol. I, p. 221.


Summary Proceedings, 1959, p. 15.

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