Current Usage of Payments Agreements and Trade Agreements

TWO MAIN FORMS of inconvertibility may be distinguished. Inconvertibility on resident account (internal inconvertibility) means that persons or firms in a country whose currency is inconvertible (hereinafter called an inconvertible country) are not permitted to use the currency of their country to make to nonresidents (wherever the nonresidents may be) payments at their own discretion and for any purpose not specifically prohibited for reasons of public order. Similarly, they are not permitted to receive payments freely from any source outside their own country. Inconvertibility on nonresident account (external inconvertibility) means that nonresidents receiving proceeds in the currency of the inconvertible country, or having claims therein, are not permitted to use that currency freely in all parts of the world and for any purposes, whether to obtain goods and services from the inconvertible country or to exchange the currency received for other currencies.


TWO MAIN FORMS of inconvertibility may be distinguished. Inconvertibility on resident account (internal inconvertibility) means that persons or firms in a country whose currency is inconvertible (hereinafter called an inconvertible country) are not permitted to use the currency of their country to make to nonresidents (wherever the nonresidents may be) payments at their own discretion and for any purpose not specifically prohibited for reasons of public order. Similarly, they are not permitted to receive payments freely from any source outside their own country. Inconvertibility on nonresident account (external inconvertibility) means that nonresidents receiving proceeds in the currency of the inconvertible country, or having claims therein, are not permitted to use that currency freely in all parts of the world and for any purposes, whether to obtain goods and services from the inconvertible country or to exchange the currency received for other currencies.

The Organization of Inconvertibility

TWO MAIN FORMS of inconvertibility may be distinguished. Inconvertibility on resident account (internal inconvertibility) means that persons or firms in a country whose currency is inconvertible (hereinafter called an inconvertible country) are not permitted to use the currency of their country to make to nonresidents (wherever the nonresidents may be) payments at their own discretion and for any purpose not specifically prohibited for reasons of public order. Similarly, they are not permitted to receive payments freely from any source outside their own country. Inconvertibility on nonresident account (external inconvertibility) means that nonresidents receiving proceeds in the currency of the inconvertible country, or having claims therein, are not permitted to use that currency freely in all parts of the world and for any purposes, whether to obtain goods and services from the inconvertible country or to exchange the currency received for other currencies.

Formally, inconvertibility on nonresident account among inconvertible countries—not, of course, vis-à-vis the United States and other dollar countries—is organized largely on the basis of bilateral agreements between governments or central banks. These agreements are usually referred to as bilateral payments agreements.1 In Western Europe, nonresident inconvertibility has been organized since mid-1950 on the basis of a plurilateral payments agreement, the European Payments Union (EPU) agreement, concluded by the 18 countries that are members of the Organization for European Economic Cooperation (OEEC). When the European Payments Union was established, these countries adapted the bilateral payments agreements already in force among them, or concluded new agreements where they did not exist, with a view to permitting monthly clearing of their net payments positions with all other members of the group. The organization of nonresident inconvertibility between pairs of inconvertible countries may be facilitated by the transferability of a third country’s inconvertible currency, as in various countries that use sterling for a large part of their international settlements. This has been particularly important where payments agreements have not been negotiated. External inconvertibility between two countries may also be enforced by the unilateral or bilateral subjection of reciprocal payments to a clearing regime of the interwar type. This has been rare, however, in the postwar world. An illustration is the introduction by Switzerland in January 1954 of a clearing regime for all payments to and from Uruguay relating to direct trade in goods originating in either country.

Nonresident inconvertibility vis-à-vis convertible countries has been imposed mainly in relation to capital transfers. Convertible countries’ current earnings from inconvertible countries are, in nearly all cases, settled in convertible exchange or in domestic currency of a type which is convertible upon demand, such as American Account sterling. Exceptions have been made mainly with regard to payments for oil and motion picture films; the use of these proceeds has occasionally been subject to special arrangements between the exporter and the exchange control of the importing country.

Resident inconvertibility in relation to other inconvertible countries is largely organized on the basis of bilateral trade agreements establishing quotas for imports, exports, and invisibles, and of the OEEC Code of Liberalization. Resident inconvertibility vis-à-vis convertible countries is implemented mainly by unilaterally imposed quantitative import and exchange restrictions that usually are subject to a high degree of administrative discretion.

There are today2 over 400 bilateral payments agreements and similar arrangements in force. Of these, approximately 235 are between pairs of European countries, including more than 90 between EPU members. Next in numerical importance is the network of payments agreements between European countries on the one hand and Latin American republics on the other; their number is approximately 100. European countries also have close to 60 payments agreements with countries in the Middle East and the Far East. Finally, there are a much smaller number of intraregional bilateral payments agreements in Latin America and in the Middle East and the Far East. Most payments agreements are accompanied by bilateral trade agreements.

In addition to these bilateral payments agreements, there are many arrangements which create a direct link between two countries although there is no formal payments agreement. The link consists of other methods of exchange binding. In some cases, these arrangements provide for the financing of reciprocal trade in one of the two countries’ currencies. Thus Belgium finances its trade with Argentina mainly in Belgian francs and, despite the absence of a payments agreement, does not consider that country part of the dollar area.3 No payments agreement has been concluded between Finland and Sweden, which finance their intertrade in Swedish kronor, and, since the termination of their bilateral payments agreement, effective October 1, 1954, trade between Finland and Western Germany has been financed in transferable deutsche marks. Some of Chile’s nitrate sales contracts create a situation similar to that in which a bilateral trade agreement is combined with a bilateral payments agreement. A second type of arrangement in this category is Italy’s global compensation agreement, such as it has had with Chile, Peru, and some Central American republics. Under an arrangement of this type, it is agreed that there will be a series of private compensation transactions for a predetermined total amount, each transaction being financed either in free U.S. dollars or (in one case) in sterling. Normally, they are concluded only with dollar area countries with which Italy is not linked by a payments agreement. Third, there are a number of compensation agreements between West European and East European countries, under which, whether there is a payments agreement or not, trade is carried on—usually on the basis of individual compensation transactions—within pre-established totals; thus these agreements might be described as global compensation agreements. Sometimes there is no agreement between governments, but the western signatory is a trade organization, such as a Chamber of Commerce, because the western country has not given diplomatic recognition to the other country. This has been particularly important in relation to Eastern Germany.

In a fourth type of bilateral arrangement, one partner commits itself to spend in the other country a certain proportion of its exchange earnings from the latter, although payments either way continue to be made in convertible exchange.4 This is the kind of arrangement that was agreed between Western Germany and Peru. Under some other trade agreements where all trade is financed in convertible exchange, an industrial country may obtain preferential access to the import market of a primary producing dollar country by undertaking certain specific purchase commitments with regard to the latter’s exports. Thus a considerable number of European countries have been able to bypass the obstacle of the Colombian prohibited list by undertaking to purchase specified amounts of coffee, bananas, and minor exports. Similarly, Austria, Western Germany, and the United Kingdom have been granted preferential tariff treatment by Cuba in exchange for purchase commitments respecting sugar, cigars, and certain minor exports. Bilateral relationships may also be created where trade is financed in free U.S. dollars under the terms of a “payments agreement” which provides that trade shall be balanced at the highest possible level. Japan’s “cash dollar” agreements with Belgium, Peru, Syria, and Uruguay are examples of this relationship.

Finally, there is frequently some formal element of bilateralism in the trade and payments relations between countries financing their reciprocal trade in an inconvertible currency under the terms of a multilateral arrangement. Examples are the West German trade agreements with Ceylon, India, and Pakistan, and those of Australia with Argentina, Brazil, Indonesia, and Western Germany. Under all these agreements, payments are effected in sterling in terms of payments agreements concluded with the United Kingdom. There is at least one bilateral trade agreement between non-sterling area countries which provides for financing in transferable sterling.

The network of payments agreements and similar arrangements is vast, and the use made of inconvertible exchange is considerable. The United Kingdom and the other countries of Western Europe have concluded payments agreements with each other and with many East European, Latin American, and Middle Eastern countries. In the Far East and the Middle East, Indonesia, Japan, Egypt, Iran, and Israel make extensive use of bilateral payments agreements. The same is true in Latin America of Argentina, Brazil, Chile, Paraguay, and Uruguay. A calculation made for 1951 shows that at least 60 per cent of the trade of the noncommunist world in that year was settled in inconvertible currencies.5 The EPU alone settles probably some 50 per cent of the payments resulting from world trade.6 The payments turnover under payments agreements not compensated through the EPU mechanism, however, is relatively small and probably corresponds to only 5 or 10 per cent of world trade, despite the fact that the number of payments agreements between OEEC countries constitutes less than one quarter of the total number of payments agreements. The Netherlands Bank Annual Report for 1953 states that barely 15 per cent of the country’s total turnover of goods and services in international transactions that year was accounted for by transactions in convertible currencies. Even Switzerland, which applies virtually no restrictions on transfers to convertible countries, has in recent years settled about 70 per cent of its international trade in inconvertible currencies, and figures for other major trading countries in Europe are similar. Payments agreements or similar arrangements constitute the formal framework of nonresident inconvertibility in nearly all important bilateral relationships between inconvertible countries. They have provided the institutional basis for the acceptance and use of inconvertible currencies. The agreements do not relate directly to the inconvertibility that exists vis-à-vis the convertible countries. Indirectly, however, the character and intensity of the import and exchange restrictions applied against convertible countries are greatly affected by the functioning of the various inconvertibility arrangements. The importance of these relationships is to some extent obscured, first by the secrecy that in most countries surrounds both the text and the implementation of many bilateral arrangements, and second by the considerable scope that exists for administrative discretion even under arrangements whose terms have been made public.

Main Features of Payments Agreements and Trade Agreements

Payments agreements

Under bilateral payments agreements, the partner countries undertake to effect their reciprocal current settlements in a way that will minimize the use of convertible exchange and gold. In a typical case, the two central banks open accounts in their respective currencies in each other’s names, but agreements may also provide for one (main) agreement account. All permitted payments are channeled through these agreement accounts. In a single-currency agreement, the currency of account may be the currency of either partner, or a third currency, frequently the U.S. dollar and less frequently sterling or the Swiss franc. Although such pacts usually provide for a single account, there may be accounts in both partner countries. In a dual account agreement, each account is usually in the currency of the country where it is held, but infrequently both accounts are in U.S. dollars, sterling, or even the currency of one of the partners. And apart from this distinction between dual and single accounts, payments may be either centralized or decentralized. In the latter case, authorized banks are permitted to carry subaccounts.7

Settlements in convertible currencies or gold have to be made only when one partner’s net debtor position in the designated accounts exceeds an amount established in the agreement as the limit up to which each partner is prepared to sell its currency for the other’s currency without demanding cover. This reciprocal credit margin is frequently referred to as the “swing” (also “manipulation credit,” “reciprocal revolving credit,” or “working balance”). It provides each central bank with a masse de manoeuvre in the other’s currency. The “swing” is usually established after taking into consideration the volume and timing of reciprocal trade that is expected in the next few years, and theoretically it should be sufficient to prevent the need for convertible settlements in connection with overdrafts which might be caused by seasonal deliveries, strikes, and other irregularities. In some agreements, the swing ceiling is a “gold point” or “dollar point,” where the creditor is entitled to require settlement of the excess in gold, U.S. dollars, or a currency acceptable to the creditor; even where the swing ceiling is a “dollar point,” its impact is sometimes softened by a reservation that the excess overdraft does not become payable until the swing has been exceeded continuously over a specified period, e.g., three months. It is sometimes stated explicitly that, if the swing is exceeded, the creditor party is entitled to restrict the licensing of exports to the debtor. In other cases, the swing is a “talking point,” requiring discussion of corrective measures but not entitling the creditor country to ask for instant and full settlement of the excess overdraft in convertible exchange or gold. In some cases the swing is lopsided, one partner being obliged to accept a higher claim than the other, or it may be unilateral rather than reciprocal. A few agreements have also been noted in which no swing ceilings are indicated.

The reciprocal swing margin is an essential characteristic of the typical bilateral payments agreement. It does away with the “waiting period” which frequently occurred under interwar clearing agreements, where the exporter could not be paid in his own currency until importers in the same country had paid sufficient amounts in that currency to the clearing office.8 The swing therefore permits uninterrupted trade. Because out-payments need no longer be effected in chronological order, the swing also permits decentralization, with the commercial banks carrying subaccounts and providing their usual financing facilities, in contrast to the centralization of all clearing payments in a compensation office. More important than these technical characteristics, however, are some of the policy implications of the signing of a payments agreement. The assumption that no convertible exchange need be involved in the financing of their reciprocal trade permits both partners to base their discriminatory trade and exchange policies on their pattern of payments agreements. If trade between the two countries previously was financed in dollars, the signing of the agreement normally will be sufficient to eliminate the partner country from the inconvertible country’s exchange control definition of the dollar area, and the swing credit provides each party with accommodation in the other’s currency and thus may function as a pump-priming device; if one raises its purchases, the other may be induced to do likewise, and a bilateral expansion of trade may result.

Even where a swing is included, the agreement may provide for periodical settlement in gold or dollars of net balances (sometimes limited to net extra-swing balances). For example, it is envisaged that such periodical settlement will be made on June 30 of each year under the Japanese-Indonesian payments agreement, and quarterly under the agreement between Japan and Sweden. Provisions of this type tend to limit the dollar-saving character of a payments agreement. So do interest clauses and other penalty clauses which under some pacts render costly any lengthy occupation of a substantial portion of the swing. The swing usually relates only to in-payments and out-payments registered on the agreement accounts. Any commercial or banking credit obtained or given is additional. This may be of importance where large amounts are involved, as in the credits repeatedly granted by London commercial banks for the financing of French and Austrian imports of raw wool, or in the export credit extended by European exporters to importers in underdeveloped countries.

Another basic provision in a typical payments agreement specifies the exchange rates to be applied by the partner countries to each other. In most cases, the two currencies are related to each other at the middle rates for the U.S. dollar, or the rate of one currency is established directly in terms of the other and in line with the official par values, so that the exchange rate between the two currencies is generally stable, and the various bilateral exchange rates thus officially defined usually contain no broken cross rates.9 In trade with a country employing explicit multiple rates, the use of the U.S. dollar or the unitary currency of the partner country as the agreement currency leaves the former free to determine the rates at which it will convert domestic currency into the agreement currency, and vice versa, in respect of different types of transaction. But that freedom may be restricted by clauses guaranteeing the partner country nondiscriminatory treatment in exchange rate matters. A separate clause usually permits the two central banks to work out technical details; these include the spreads to be maintained between buying and selling rates.

Other important provisions of a payments agreement indicate the types of underlying transaction which are to be financed in accordance with the terms of the agreement. These usually cover all commercial payments, including incidental charges, although some agreements, in particular many Latin American agreements, exclude transit trade by defining trade as the exchange of goods originating in and consigned from one partner country and having their final destination in the other, where they must either be absorbed into domestic consumption or be processed. Transfers on capital account in nearly all cases require previous consultation. Current transactions that have frequently been excepted are capital earnings, capital amortization, and various invisibles, such as certain insurance payments. In Egypt’s payments agreements, one of the crucial points is whether Suez Canal dues may be settled through the agreement accounts or must be paid in dollars or sterling. Specific payments agreements, however, may be of much narrower scope than the usual type. It is sometimes expressly provided that certain exports continue to be settled in U.S. dollars, as German coal was under the early postwar agreements. The agreement most limited in coverage appears to be one between Argentina and Mexico under which only sales of books and periodicals may be financed while all other payments continue in convertible exchange. Most payments agreements are based on the so-called residence principle according to which transfers based on the agreed types of transaction may be effected between residents of the partner countries regardless of the origin of the claim. The origin principle, on the other hand, restricts transfers through the agreement accounts to claims of national origin—in the case of commodities, therefore, to direct trade in goods originating in the monetary areas of the two partner countries. The difference is also important as regards financial remittances.

Payments agreements often contain clauses regarding devaluation guarantees on outstanding balances and the liquidation of such balances if the agreement is terminated. Where such provisions have been either absent or unsatisfactory, the result occasionally has been a marked unwillingness to hold claims on the partner country or to allow the partner country to run up a significant claim. The resulting difficulties in the functioning of specific payments agreements, although also important in Europe, have been manifest particularly in relations between certain South American countries and some of their European partners. Cases have occurred, for example, where both partners to a payments agreement treated each other as a dollar area country and issued import licenses very sparingly—one partner because it considered the termination clauses an incentive for the other to insist on liquidation of any large balance outstanding, the other partner because its import requirements were likely to exceed export proceeds considerably if these continued to accrue at the old rate. The desire for satisfactory exchange guarantees appears to have been one of the main reasons for the increasing use of the U.S. dollar as the currency of account in bilateral payments agreements.10 With regard to the exchange guarantee affecting balances arising during the validity of the agreement, there is a choice between insuring a credit balance only against depreciation of the debtor’s currency and providing also for readjustment if the creditor’s currency is depreciated or appreciated or the debtor’s currency appreciated. There is also a choice between gold and the U.S. dollar as the standard of reference. Moreover, there are the technical questions of whether and how to take account of the spot balances of commercial banks and any outstanding forward exchange transactions, and of letters of credit outstanding and payment orders registered in only one of the partner countries. The exchange rate guarantee also has implications on the national level. Since usually the central bank, acting as the agent of the government, signs the payments agreement, or at least holds agreement balances, provision must be made for the sharing of losses and profits on agreement balances (including any balances in the domestic currency) as well as the sharing of any interest earnings and expenditures.11

Frequently clauses are included that indicate the currencies in which invoices should be expressed and that determine the method by which the currency of invoicing is to be reduced to the currency of account. Under many agreements, traders on both sides are explicitly permitted to invoice in any currency they choose while, under others, invoicing in the agreement currency or currencies is prescribed. The matter is of general importance from the point of view of the exchange rate risks involved in the transactions of private traders, and therefore may affect competitiveness with prices quoted by exporters in third countries. Under dual currency agreements, the invoicing arrangements are likely to affect the actual use of the currencies in which the agreement accounts are expressed. The preference of private traders in regard to invoicing is largely an institutional datum and must therefore be taken into account both in negotiating specific payments agreements and in deciding policy issues affecting the character of a country’s exchange rate, particularly the choice between a fluctuating and a stable rate.

Many payments agreements have to define the monetary areas to which their provisions will apply. The U.K. monetary area comprises all “Scheduled Territories,” i.e., the entire sterling area. The agreements of various other West European countries cover their dependent overseas territories which are included in the respective monetary areas. Under the agreements of the BLEU, Belgium and Luxembourg act as one partner. Liechtenstein is included in the Swiss monetary area, and Indonesia often in that of the Netherlands.

Although payments agreements primarily affect settlements between the two partner countries, many agreements contain provisions permitting, subject to mutual approval, the use by either country of a claim on the partner country to make settlements with third countries.12 Such clauses formally make inconvertible currencies transferable among inconvertible countries. The best-known and most significant types of transferability are those established in the EPU arrangements and sterling transferability. In the EPU, the plurilateral compensation of all bilateral net positions on the accounts of the central banks implies the complete transferability within the group of all claims accruing to any one member on any other member, to the extent that those claims are admitted under their respective payments agreements. Except for the sterling and EPU arrangements, however, the transferability of inconvertible currencies among inconvertible countries in accordance with provisions of the type referred to has, in practice, been negligible.13

Regardless of whether or not it has been laid down in the agreement, certain goods have continued to be traded in U.S. dollars even between countries linked by a payments agreement.14 Thus trade in Spanish rice, Norwegian nickel, and Chilean copper has frequently been settled in U.S. dollars. This tends to create problems of commercial policy, since the buying countries will tend to put the country of origin under pressure to permit such sales under the terms of their payments agreements; they may do this by refraining from direct purchases and either buying on a transit basis or shifting to other suppliers. If they do not take such counteraction, their sales to the dollar-earning country are likely to suffer, since the dollars involved are almost certain to be spent in the dollar area instead of in the importing countries. With the worldwide increase in production and the spread of payments agreements, dollar commodities have tended to become softer. On March 4, 1950, the Tokyo Oriental Economist could still write, “Goods like Egyptian long staple cotton and Chilean copper and saltpetre that are exportable for dollars are being referred to as ‘hard’ commodities and are often excluded from trade agreement items. India’s control over cotton exports in an attempt to restrict sales to hard currency areas only and our own preference regarding purchases of steel ships are examples of the general scramble for U.S. dollar earnings ….” All these commodities have since become much easier to acquire under payments agreements. Even some Chilean copper from the large mines is now being sold for soft currencies—for example, under the payments agreements with Argentina, Spain, and Italy—and in 1954 it was occasionally available against payment in sterling.

Many bilateral payments agreements (or the accompanying trade agreements) provide for a mixed commission composed of representatives of both countries. These commissions are charged with supervising the functioning of the agreements and with preparing the negotiations for the next trade agreements. Under certain payments agreements, the commissions are convened as soon as a specified proportion of the swing has been occupied by one partner over a specified maximum period. They have made significant contributions to smoother trade and payments relations under specific agreements. Of course, the appointment of such commissions depends, to some extent, on the availability of staff in embassies and legations in partner countries. Mixed commissions have only gradually become a usual feature of Latin American agreements, presumably since European diplomatic representation in South America has expanded.

As stated above, the European Payments Union is based on an agreement concluded by 18 European countries, the members of the OEEC, in which they undertake to offset periodically among themselves all bilateral credit and debit agreement balances of their central banks arising from agreed payments made and received in the currencies of the participating countries. Thus there is full transferability within the group of the currencies of the member countries. Convertibility, on the other hand, exists only to the extent that gold and dollar settlements occur. As long as countries are within their “quotas,” these settlements are limited to specified proportions of the countries’ over-all creditor or debtor positions. Excessive debtor positions must be settled fully in gold or dollars, whereas excessive creditors are paid in gold or dollars for only part of their surpluses, and have to grant credit for the remainder in accordance with various “rallonge” arrangements. The quotas are comparable to the swings in bilateral payments agreements since they determine the maximum deficits and surpluses that can be accommodated under the agreement.15

The signing of the EPU agreement in 1950 rendered inappropriate certain features of the previously existing bilateral payments agreements among the European countries, but modified payments agreements are now in force between all pairs of those EPU countries which have individual quotas. These bilateral payments agreements are still necessary for various technical purposes. From the accounting point of view, the agreements are indispensable since members have an obligation to furnish the Bank for International Settlements with monthly data on all bilateral positions, from which the net over-all positions are then determined. The agreements also define the partners’ exchange rates, list the types of transaction between each pair of countries which are to be settled through the EPU mechanism, and contain provisions regarding the steps to be taken in the event that either country leaves the EPU or the EPU is terminated. Bilateral swing margins, on the other hand, are now unnecessary. More basically, the agreements still provide the legal basis for accepting and holding the currencies of the participating countries during the intervals between accounting dates.

Trade agreements

The bilateral trade agreements of the postwar period are, of course, short-term agreements in which partners enter into certain commitments mainly or exclusively regarding their reciprocal trade. The usual period of currency is one year. The predominant type is that between inconvertible countries where each government commits itself to issue upon application import licenses to specified value or volume limits for certain listed exports originating in and shipped from the other country, and to issue export licenses for its own export products similarly listed. Occasionally, the quotas are not confined to direct trade. Coffee quotas in East-West trade are an example of transit trade quotas. Because of the balance of payments aspect involved, quotas are preponderantly value quotas rather than volume quotas; the latter are more appropriate for the implementation of protective policies and of allocation schemes for scarce commodities. Another consideration is that value quotas provide a stronger incentive for exporters and importers to trade at low prices. Unless state trading is involved, the quotas are permissive rather than binding, since they constitute a licensing commitment instead of a purchase commitment.16 In some cases, not even permissive quotas seem feasible, and indicative lists of export and import commodities are agreed instead. Correspondingly, the total volume of trade scheduled in a trade agreement may represent either a minimum target or an estimate. Scheduled quotas are not exhaustive in the sense that either partner is not free to license imports and exports of listed goods over and above the agreement quotas, or of goods for which no quotas have been established, but the other partner is not obliged to grant additional export or import licenses for them. Usually, the trade is to be financed under a bilateral payments agreement, the totals of the quotas for a year being approximately balanced in order to keep net payments positions within the swing limits. There is sometimes a planned discrepancy between the totals which is intended to cover invisibles, transit trade, capital investment, or debt liquidation.

Bilateral trade agreements may contain provisions relating to many other matters. They may, for example, contain quotas for invisibles, such as exchange quotas for tourist travel in the partner country, or provisions regarding transit trade, insurance, shipping, the treatment of investment income, and taxation or immigration matters. Some trade agreements, for example, various Anglo-Argentine pacts, have amounted on one side to government purchase programs, with qualities, prices, packing, etc., specifically defined. Price provisions other than a general undertaking that there shall be no discriminatory treatment of the partner country are, however, rare. Among EPU countries, the progressive liberalization of intra-EPU imports has steadily reduced the length of the quota lists, since import licensing commitments are needed only for nonliberalized products and for purchases from and sales to the non-metropolitan areas, whereas export commitments can be dispensed with except for goods subject to allocation or restrictive export licensing. Since 1951, bilateral trade agreements between highly industrialized countries and less industrialized or underdeveloped countries have increasingly included clauses regarding supplies of capital goods on deferred payment terms. In such cases they become similar to credit or investment agreements. Conversely, trade agreements may implement the amortization of a bilateral debt through an export surplus. Agreements of this type, in which an underdeveloped country is the debtor, assumed increasing importance after 1952. Some trade agreements with such countries enable certain exports to continue under additional credit arrangements, while at the same time a portion of the creditor’s import payments is set aside to collect overdue claims. Agreements that formally are trade agreements only, sometimes contain financial clauses which in their effects are equivalent to those of a payments agreement. That is the case, for example, where country A’s proceeds from sales to country B must be received in the currency of B and may be used only for direct imports from B.

Trade agreements usually exclude private compensation transactions unless approval of any specific deal is obtained from the authorities on both sides. Nevertheless, under certain pacts, particularly with East European countries, all or most of the transactions under a trade agreement have been effected on a so-called compensation basis. Italy has made much use of so-called reciprocity, or parallel, transactions which represent private compensation with settlement both ways through the accounts established by virtue of the payments agreement in force with the partner country. Compensation and reciprocity have been resorted to mainly for three purposes: to offset unfavorable export prices, to limit the accrual of bilateral balances, and to ensure that goods of equal “hardness” are received in return for the exports licensed.17 This last consideration in particular has frequently caused import and export licenses for extra-quota transactions (including transit trade) to be given on a compensation basis, even where most of the partners’ reciprocal trade has been realized in independent sales.

Most bilateral trade agreements either supplement a bilateral payments agreement or are between a pair of OEEC countries, though there are also some bilateral trade agreements between “dollar countries” and inconvertible countries not linked by payments agreements, and their number has been growing. Thus Cuba and Colombia, which have concluded few payments agreements and are “dollar countries” to most of their inconvertible trading partners, have entered into various trade agreements under which European partner countries are granted certain import privileges in exchange for purchase commitments for listed Cuban or Colombian exports. The import privileges granted by Colombia since 1949, when it greatly simplified its exchange rate structure and its system of quantitative restrictions, usually have consisted of exemption from the provisions of a prohibited import list, while those given by Cuba generally have been tariff concessions. Since February 1954, Colombia has permitted the import of commodities previously on the prohibited list, but only from countries with which it had either a trade or payments agreement or an approximately equilibrated balance of trade. Imports of goods required for the execution of public or semipublic contracts were limited to the same groups of countries. Under the Colombian and Cuban trade agreements, settlements continue to be made in convertible currency unless, as happens only rarely, a bilateral payments agreement has also been concluded.

Whereas the nature of trade agreements requires frequent renegotiation, with account being taken of changing supply and demand conditions, bilateral payments agreements do not require repeated revision and may remain in force with little or no change for several years, although swing provisions in particular have often been revised. Sometimes, however, a trade agreement and a payments agreement formally constitute a single instrument; that is true, for example, of many Argentine agreements. Changes in either set of provisions are then usually implemented through supplementary protocols to the original trade and payments agreement.

In Europe the OEEC countries started in 1949 a program of relaxation of trade and exchange restrictions among each other. The liberalization rules for trade and invisibles may be viewed as in fact constituting a plurilateral, regional trade agreement.

Institutional changes since the war

The institutional arrangements described above show some significant changes from the practice of the 1930’s, when a considerable number of clearing agreements and similar arrangements were also concluded. Most of the arrangements of the 1930’s were between European creditor countries and either European or South American debtor countries. With the single exception of Germany, which had clearing arrangements with most European countries and also the aski-mark procedure for financing trade with Latin American countries primarily, payments relations among the major European countries remained on a convertible basis, as did those between all European countries and the United States and Canada. Late in 1937, 170 clearing agreements and similar agreements were in operation,18 including those of the Baltic border states and Danzig.19 Of these, around 20 were so-called payments agreements under which the use of convertible exchange continued. By January 1939, the United Kingdom, France, Switzerland, Belgium-Luxembourg, and the Netherlands were each party to around ten payments or clearing agreements.20 Thus clearing arrangements were far less widespread than the postwar payments agreements, although the element of bilateralism in the employment of import quota systems (often on the basis of formal bilateral agreements) was considerable, and although some countries (for example, Germany and Turkey) were parties to a large number of clearing agreements. Countries such as the United Kingdom, France, Belgium-Luxembourg, or Switzerland might subject their trade relationships with each other to quota agreements, but they did not subject payments with each other to clearing. While in the 1930’s a large proportion of world trade continued to be financed in two convertible currencies, sterling and the U.S. dollar, most international trade is now financed in a large variety of inconvertible currencies, of which sterling is by far the most important.

How clearing arrangements gradually became important for the major trading nations of Europe in their relations with various debtor countries may be inferred from the Swiss experience.21 Switzerland signed two of the first clearing agreements ever negotiated, those with Austria on November 12 and Hungary on November 14, 1931, the year in which France introduced the large-scale use of import quotas.22 Clearing agreements with Bulgaria and Yugoslavia were signed in 1932; with Rumania, Greece, and Turkey in 1933; and with Chile in 1934. Two agreements with Germany regarding transfers of capital earnings and of certain commercial payments were signed in 1933, but, effective August 1, 1934, a bilateral agreement submitted all payments between the two countries to a clearing regime from which only capital and insurance transfers were excepted. After the establishment of the Swiss Compensation Office late in 1934, bilateral payments arrangements came into being vis-à-vis Italy (1935), Brazil (1936), Spain (1936), Poland (1936), Nationalist Spain (1937), and Iran (1938). At no time before World War II did Switzerland have more than 14 clearing systems in force. At present, in contrast, Switzerland has payments agreements, clearing agreements, or similar arrangements with 26 countries. In two years alone, 1945 and 1946, it signed 12 new payments agreements, and by the end of May 1947 it had 19 such agreements in force.

The experience of other European countries has been similar to that of Switzerland. At the end of 1946, France was a partner to 20 payments agreements, Belgium to 17, and the Netherlands to 14. By June 1947, 200 bilateral payments agreements were estimated to be in effect.23 Since then, the growth of the network of payments agreements has been less spectacular, but their number has never ceased to increase. Thus the number of Netherlands payments agreements and similar arrangements had risen to 20 by the end of 1953, in addition to those concluded with the OEEC countries, while Western Germany at that time had concluded 17 agreements with non-OEEC countries.

A second distinction between the interwar and postwar periods is that in the 1930’s restrictions on resident convertibility were implemented to a greater extent through unilaterally imposed nondiscriminatory import and exchange quotas, rather than bilaterally agreed quotas, and that there was no plurilateral liberalization of quantitative trade and exchange restrictions.

Thirdly, there were important exceptions to convertibility on resident account in most major trading countries, but in virtually all of them the distinction between convertible and inconvertible currencies was largely academic, and usually there was substantially full resident convertibility, both on current and capital account, vis-à-vis the United States and Canada. Although import quotas discriminated between commodities, between countries, and between currencies, such discrimination was not applied for hardness-of-currency reasons except where it served to affect the functioning of bilateral clearing arrangements. Under the latter, the main problems (from the creditor’s viewpoint) were how much should be imported from those countries in order to feed the clearing, and how to allocate the balances resulting from those in-payments to exporters and investors, respectively. The first of these questions generally required a decision as to the specific commodity imports that should be controlled in order to safeguard domestic employment. The creditor had two conflicting interests: to protect employment by stimulating exports to, and reducing imports from, the partner country; and to provide the finance for exports and capital earnings by importing more.

A fourth major characteristic of the 1930’s was that, after the devaluation of sterling in September 1931, many of the major trading nations employed fluctuating exchange rates, into which only the Tripartite Agreement of 1936 brought orderliness, whereas in the postwar period most major currencies have had fixed official exchange rates with correct cross rates. In addition to the relevant commitments under the Articles of Agreement of the International Monetary Fund, most bilateral payments agreements provide for fixed exchange rates. This tends to reduce the ability of countries to manipulate exchange rates; and in many payments agreements, exchange guarantees provide a further deterrent to such action. Clearing agreements, furthermore, often created explicit broken cross rates, while a considerable volume of compensation trade involved further deviating cross rates of an implicit or explicit character.

Finally, the bilateralism under clearing agreements and similar arrangements in the interwar period probably was stricter than that of the postwar years, which have been characterized by various types of transferability (sterling transferability, ERP drawing rights, multilateral compensation of bilateral payments positions in the EPU) and of regional adaptation of exchange policies and commercial policies, and during which governments have deliberately and jointly striven toward monetary multilateralism (in accordance with the IMF Articles of Agreement) and commercial multilateralism (under the rules of the General Agreement on Tariffs and Trade).

Purposes of Payments Agreements and Trade Agreements

Payments agreements of the postwar type began with the Belgo-Dutch (1943) and Anglo-Belgian (1944) payments agreements.24 Toward the end of 1944, the United Kingdom started negotiations with a number of continental countries with a view to the signing of payments agreements, several of which were concluded between October 1944 and May 1946, namely (in chronological order) those with Belgium, Sweden, France, Denmark, the Netherlands, Czechoslovakia, Norway, Switzerland, and Portugal. These and other continental countries also signed similar agreements among themselves. They were acceptable as emergency devices because of their technical superiority over the interwar clearing arrangements as a result of the elimination of the waiting period and the decentralization of payments. Except for the U.K. pacts, most of them were accompanied by one-year trade agreements establishing bilateral import and export quotas.25

The incentives for European countries to enter into such bilateral payments agreements and bilateral trade agreements were partly commercial and partly financial. The negotiation of trade agreements may be viewed as “the opening of a door to the world abroad” by countries still cut off from each other and which had prohibited all transactions with nonresidents unless specifically authorized by a special or general license. Postwar shortages of nearly all kinds of goods made it imperative to obtain essential supplies from other countries. It was natural that bargaining for these supplies should develop. The results of the bargaining were laid down in bilateral trade agreements. The war had imposed heavy losses of monetary reserves on most European countries, which were, therefore, anxious to economize in the use of convertible exchange and gold, while the countries with stronger reserve and balance of payments positions could support their exports by granting tied credits to various European countries. Countries may also have intended to further the use of their own currencies in international trade by entering into payments agreements, and to fix their exchange rates vis-à-vis their main European trading partners. Once a number of important payments agreements had been signed, countries had an incentive to conclude additional agreements of this type. First, the agreements offered a means of obtaining or giving a tied credit. Second, countries that already had payments agreements adopted import licensing techniques and policies discriminating against the dollar area and favoring their bilateral payments and trade agreement partners. After the war, the United Kingdom at first assumed a position different from that of other European countries in that it made little use of bilateral trade agreements. However, after the attempt to establish convertibility of sterling in 1947, the United Kingdom also concluded a number of trade agreements with countries with which payments agreements already were in force, and expanded the number of its payments agreements.

In the 1930’s it had become apparent that in most countries commercial policy was no longer a matter mainly of import tariffs. Of course, there still was a tendency for tariffs to be raised where quantitative import restrictions—for instance, because of the dualism in their use as a barrier to keep out imports and as a bargaining counter to push exports—were unable to protect employment sufficiently, or did not satisfactorily relieve the pressure on the balance of payments. But commercial policy and exchange policy went hand in hand, while customs tariffs tended to assume secondary importance where import quotas were highly restrictive. Both clearing systems and import quotas were manipulated in such a way as to stimulate exports and to protect agriculture and manufacturing industries against imports that threatened to increase domestic unemployment. A similar mingling of commercial policy and exchange policy became evident when, soon after World War II, inconvertible countries used payments agreements and trade agreements as instruments for the joint implementation of discriminatory trade and payments policies. The emphasis everywhere was on the balance of payments aspects of these policies, whereas in the earlier period the employment motive had been predominant in the creditor countries. The latter had tried by means of quota systems to prevent the importation of deflation and unemployment, and had striven to offset their imports with equivalent exports by subjecting their payments relations with debtor countries to clearing arrangements. The postwar systems of payments agreements may rather be viewed as instruments to influence, through the prescription of currencies for inward and outward transfers, both the level and the composition of monetary reserves; only in a few countries with strong monetary reserve and balance of payments positions was the accent on the maintenance of exports and employment.

In the use of bilateral agreements, certain “rules of the game” soon evolved, especially with regard to swing overdrafts, differences in the treatment of essential and nonessential commodities, and the use of compensation transactions. Most of the early payments agreements provided for multilateral use of bilateral balances, but in practice this has been of limited significance except for sterling. Similarly, whereas most agreements provide that settlement in respect to extra-swing overdrafts can be effected in any currency acceptable to the creditor country, such settlement, where insisted upon, usually has to be made in gold, U.S. dollars, or free Swiss francs, although much sterling also is used. But creditor countries have frequently found it advisable to grant their debtors special facilities rather than to require settlement in convertible exchange, since another “rule of the game” is that debtors will limit the use of convertible currencies by stopping imports when swing credits threaten to be exhausted, or incur arrears rather than produce dollars. The trade involved in compensation transactions has usually been “additional,” i.e., either covering extra-quota imports and exports or involving goods that could not be exchanged without some price connection. The distinction between essential and nonessential goods causes countries to watch each other’s import licensing policies closely and to make purchases of nonessential goods and sales of essential goods dependent on sales of nonessential goods or on the partner countries’ exports of essential goods. Industrialized countries are unlikely to make capital equipment available to underdeveloped countries on attractive credit terms unless they also are able to sell consumer goods. It is difficult to extend a special favor to one country without extending it to other agreement countries. Thus, essential exports have to be allocated equitably between the various bilateral partners in order to avoid retaliation by countries that might be hurt by low export quotas. Similarly, if importers are permitted to import a certain nonessential commodity from country A, it is difficult to refuse licenses for such imports from country B; and if an overpriced export commodity is offered to country C on a private compensation basis, it normally has to be offered to country D on the same basis.

The European experience with payments agreements and trade agreements in the early postwar years may be summarized as follows.26 In the first year, the agreements permitted a quick revival of trade; in the second year, many swings were used continuously in the same direction, and countries therefore attempted to negotiate trade agreements more likely to lead to equilibrated trade; in the third year, the difficulties of reaching bilateral equilibrium proved insurmountable because of such factors as leads and lags in trade, the impossibility of estimating invisibles accurately, unsatisfactory exhaustion of trade agreement quotas, etc. At that stage, “drawing rights” were created to keep the flow of trade going and prevent the network of European payments agreements from breaking down. These drawing rights kept the life lines open until 1950, when the European Payments Union was created. Meanwhile, the pattern of agreements grew increasingly more complex. For one thing, the negotiation of payments agreements tends to work as a cumulative process. For the sake of illustration, a “dollar” country such as the Philippines may be taken. If the Philippines had entered into a payments agreement with, for example, the United Kingdom, and consequently had been shifted from the American Account to the Bilateral Account group under the U.K. exchange control regulations, other inconvertible countries would have had a double incentive for reducing their direct purchases in the Philippines. First, they probably would have been able to buy certain Philippine commodities for sterling from commodity dealers in Hong Hong, Singapore, or London. Second, by reducing their purchases from the Philippines they might seek to place pressure upon the Philippines to conclude a payments agreement, so that they would be in no less favorable a position than the United Kingdom.

As soon as a dividing line was drawn between convertible and inconvertible countries, both had an incentive to conclude additional payments agreements, since their desire was to cut gold and dollar payments to nonagreement partners, or to expand export markets in nonagreement countries. In fact, an exchange incentive and a commercial policy incentive usually went side by side. Where a payments agreement was concluded, soft currency countries could limit settlements in convertible currencies and in gold to overdrafts in excess of the swing margins. Also, if a new partner country should display any marked discrimination between dollar and non-dollar imports, there would normally be prospects for larger exports to that country—particularly since either party to a payments agreement, by importing first, can force any partner country accumulating a currency that (within the swing margin) is inconvertible to shift to it as a source for some imports.27 Conversely, there were incentives for convertible countries, particularly the smaller dollar area countries lacking a well-diversified economy, to conclude bilateral payments agreements with inconvertible countries in order to surmount the obstacle of discriminatory import licensing which in the inconvertible country was directed against dollar imports. However, such countries had an incentive to enter into bilateral trade agreements rather than payments agreements if they had simple nondiscriminatory import licensing systems under which quantitative and cost restrictions were applied to specific goods regardless of the currency in which they were payable. The creation of a direct link and a bargaining basis was also an objective of inconvertible countries in concluding payments agreements with each other despite the availability of soft currency financing facilities such as those provided by the transferability of sterling.

Consequently, the movement toward bilateral agreements became stronger after mid-1947 when the prospect of convertibility seemed to recede. The U.K. trade agreements have already been mentioned. India negotiated a large number of bilateral trade agreements after 1947, but as a member of the sterling area could finance its trade with soft currency countries in accordance with the payments agreements of the United Kingdom. Western Germany in 1948 started to conclude payments agreements and trade agreements with Latin American countries. In Japan, the SCAP (Supreme Commander for Allied Powers) embarked on a policy of bilateralism in 1948 and a number of Japanese agreements were concluded with European countries, followed in 1949 by the first series of trade and payments agreements with Latin American countries.28 Also, European countries rounded out their systems of agreements by concluding agreements with the smaller European trading partners. The establishment as a sovereign state of Israel in 1948 (as Palestine it had been part of the sterling area) and of Indonesia in 1949 led to a further series of bilateral payments agreements.

During the last two or three years, underdeveloped countries generally have had new incentives for negotiating payments agreements. Their terms of trade deteriorated after the end of the boom that had resulted from the Korean conflict, and many of them had incurred substantial losses of reserves (including holdings under payments agreements with the United Kingdom and other European countries) owing to heavy importing on the basis of the especially high export earnings accruing immediately after the outbreak of hostilities in Korea. By concluding payments agreements, their effective monetary reserves were increased by the amount of the swings in those agreements, which enabled them to license imports more freely than could have been done in the absence of agreements.29 Various primary producing countries also have been inclined to enter into payments agreements in order to intensify or diversify their trade with Europe—as opposed to the dollar area—and thus diversify their export outlets, or in order to facilitate sales of high-priced exports. This is true also of trade agreements. This incentive was reinforced by Europe’s recuperation of its productive powers. Another incentive to enter into bilateral payments agreements has been the breaking down of previously satisfactory arrangements involving transfers of a third inconvertible currency. Thus, various industrial countries in Europe, which had regularly been concluding sales in sterling to Egypt, entered into payments agreements with that country when Egypt’s available sterling holdings were greatly reduced toward the end of 1952. EPU countries generally in this period have had two main reasons for maintaining their payments agreements with underdeveloped countries. They wish to avoid being treated by the latter as hard currency countries and, more specifically, to protect their exports of nonessentials.

In view of these various incentives, it is understandable that additional payments agreements have been signed in every postwar year. On the other hand, the termination of a bilateral payments agreement has been rare. The simple conclusion that may perhaps be drawn is that the incentives indicated above have usually proven stronger than the disincentives which will be mentioned below, although in 1954 both the United Kingdom and Western Germany embarked on a policy of reducing the scope of their comprehensive bilateral trade and payments arrangements. A well-known example of an agreement that has been terminated is the payments agreement between Belgium and Switzerland. This agreement, which was terminated in 1949, had to be renegotiated later, however, when it proved impossible for Belgium and Switzerland to arrive at mutually satisfactory figures regarding their bilateral positions for monthly communication to the Bank for International Settlements. In 1952 it was considered necessary to revert to settlements in convertible exchange between Western Germany and Mexico since the agreement accounts were constantly out of balance in one direction, primarily because of European export bonuses and commercial switch transactions. Other payments agreements that have been terminated and not renewed include those of Belgium-Luxembourg with Argentina (1950) and Brazil (1948), Denmark’s agreements with Uruguay and Egypt (both in 1951), and those of Ethiopia with Norway and Israel (both in 1954). In recent months, Western Germany notified a few South American payments agreement partners that it wished to terminate its agreements with them in order to finance trade in convertible exchange or in partly convertible deutsche marks. Since then, the German payments agreements with Colombia and Finland have expired. On the other hand, Belgium-Luxembourg and Switzerland, which for several years had had no formal payments agreements with Argentina, were negotiating such agreements at the time this paper was written.30

The Transferability of Sterling

The use of inconvertible sterling is based in most cases on payments agreements concluded by the United Kingdom acting for the sterling area as a whole. Apart from the fact that sterling is the most widely used inconvertible currency, the payments agreements of the United Kingdom are of particular interest for two reasons. First, most of the agreements with non-European countries are of the single currency type and have no swing clause. This creates problems in avoiding accumulations or shortages of sterling. Of the six South American agreements, only the Argentine pact has a swing, and this was not inserted until 1951. The dollar clause which had been incorporated in the Anglo-Japanese payments arrangements since 1947 was eliminated in 1951. It must be recalled, in that connection, that the United Kingdom did not embark on a policy of concluding bilateral trade agreements until 1948.31 Earlier, there had been trade agreements only in exceptional cases, such as those of Argentina and Brazil. In more recent years, the United Kingdom has shown some reluctance to enter into detailed trade agreements with non-OEEC countries; a trade agreement with Brazil was not renewed, and with Japan there was a tendency to have no more than estimates of trade with the sterling area.32 Secondly, the agreements provide for the use of sterling among third countries. Until March 22, 1954, this transferability of sterling was automatic only between countries having transferable account status, i.e., the Anglo-Egyptian Sudan, Austria, Chile, Czechoslovakia, Denmark, Egypt, Ethiopia, Finland, Western Germany, Greece, the Italian monetary area, the Netherlands monetary area, Norway, Poland, the Spanish monetary area, Sweden, Thailand, and the U.S.S.R., and applied only to direct current transactions; in all other cases, transferability was administrative, requiring the approval of the Bank of England. These transfer facilities were independent of the existence of any payments agreement between payor and payee; but, in the bilateral relationships affected, the existence of such agreements usually reduced the role of sterling in current transactions to a marginal one, apparent mainly in the oil trade, and in freight, insurance, and transit trade. The “unification” of sterling in March 1954 involved the abolition of the distinction between these two kinds of transferability, substantially all previously bilateral account sterling becoming automatically transferable regardless of the purpose of the transfer. At the same time, the rule restricting the holding of transferable accounts to banks was abolished.

The use of sterling is important because it provides a substitute financing mechanism between countries not joined by a payments agreement and unwilling or unable to finance their trade in dollars. Thus Brazil, before it negotiated a payments agreement with the Netherlands in 1948, could finance part of its trade with that country in sterling because of the administrative transferability rules.33 For countries not participating in the EPU, transferable sterling has virtually been the only vehicle for multilateral clearing. Finland, for example, has used about one fifth of its sterling earnings for expenditure in countries outside the sterling area.34 Since sterling earnings and sterling expenditures between two non-sterling area countries are totally independent of each other, the substitute mechanism has offered fewer commercial policy advantages than a bilateral payments agreement. In addition, countries using these transferability privileges have been apt to record significant fluctuations in their sterling holdings and to adapt their trade and exchange licensing policies accordingly; that is, countries holding unusually large sterling balances would limit the acceptance of transferable sterling and, instead, seek payment in dollars for their exports, while conversely they would stimulate the use of sterling in settlement of imports by refusing to pay in dollars for imports from countries to which sterling transfers could be made with the consent of the Bank of England. And if a country maintained a fluctuating rate for sterling, further uncertainties arose from the movements in the broken cross rate which at one moment might favor financing in U.S. dollars and the next in sterling.

The use of transferable sterling in automatic and administrative transfers has been affected by the extent of sterling holdings of non-dollar countries outside the sterling area, by their willingness to accept or spend sterling (which may not always be strictly related to their actual or prospective sterling position), and by the existence of bilateral payments agreements or similar arrangements among them. Thus the signing during the last two or three years of a considerable number of such pacts by Egypt, Iran, and Israel is likely to have reduced the use of transferable sterling in the Middle East, both in absolute and in relative terms. In some bilateral relationships where the administrative use of sterling would have been feasible, such use has been excluded by agreement between the partner countries to use convertible exchange only. This has been the case, for example, under Western Germany’s agreement with Peru, and under the Japanese “cash dollar” agreements with Belgium, Peru, Spain, Syria, and Uruguay.

Effects of Payments and Trade Agreements

Payments agreements helped European countries quickly to restore their intertrade in the first postwar year. Later, in several cases, they also caused a sudden expansion in trade between countries which had previously treated each other as dollar area sources of supply. It may be said that payments agreements usually have been successful in realizing their immediate limited objectives. This has often been reflected in the annual expansion of the quotas in complementary trade agreements and in the extent to which the quotas have been completely used. However, once the agreements had served their purpose of increasing trade between the partner countries, difficulties in operation, and also adverse long-run effects, frequently became apparent.

Countries adhering to payments agreements usually employ exchange and import policies that are based on “hardness-of-currency” considerations. This implies an attempt to limit expenditures in convertible currencies and in currencies of which a country holds small balances, e.g., payments agreement currencies under agreements whose credit swing has been nearly exhausted. Payments agreements may thus be a serious impediment to the use of resources in accordance with comparative cost patterns, and increase the difficulties of realizing fully the benefits to be derived from international division of labor. Not only does inconvertibility cause misallocation of productive resources; under strict bilateralism, the level of trade is determined by the production levels and pricing policies of the weakest participants in the network of payments agreements.

One of the main economic effects of payments agreements results from the incentive which such agreements are likely to give to discrimination. By discriminatory import licensing policies, inconvertible countries tend to concentrate their purchases in other inconvertible countries and, consequently, price discrepancies may arise or be increased, the same commodity being available in convertible currencies at a price lower than in inconvertible currencies; for example, certain types of Brazilian cotton have been used as a substitute for similar U.S. cotton and have usually been more expensive. Such discrepancies, in turn, do not urgently require corrective action if high-priced commodities continue to be bought preferentially by the principal trading partners for balance of payments reasons or for commercial policy reasons. As a result, sections of the inconvertible part of the world have for some years tended to constitute high-cost, high-price areas. Export retention quotas and other directional export promotion devices have tended to accentuate this tendency by enabling exporters in inconvertible countries to reduce their prices to countries buying in dollars. Also, as a result of official action in the partner country, importers often have been unable to obtain scarce commodities under payments agreements, and have had to acquiesce in longer delivery dates and less favorable terms of payment than are offered to importers paying in dollars. The counterpart to action on the governmental level is the response of private business. The deterioration of trade patterns is accelerated by the fact that governments cannot force private exporters to direct their sales to low-price markets. Private traders tend to shun convertible markets where prices are low and prefer to sell in payments agreement countries where the lack of competition from low-cost producers enables them to reap high profits. This aggravates the problem of excessive claims held by the stronger inconvertible countries on the weaker. Countries with a healthy domestic economy may, by trading largely with inconvertible areas such as those of the OEEC countries, import any inflation prevailing in their main partner countries. This may cause the permanent loss of markets in hard currency countries, and may contribute to the maintenance of restrictions on expenditures in convertible currencies and indirectly impede the return to convertibility.

One of the main dangers inherent in the use of bilateral payments agreements is the tendency toward a division of the country’s export production into two sectors, with contrasting price and cost conditions. There is likely to be pressure to continue the production and sale of some commodities at a dollar price level, that is, a price level permitting continuing sales to the United States and other countries which settle in dollars, while other commodities are sold mainly at soft currency prices under payments agreements. This seems to be essentially what has happened in Brazil and Chile, for instance. Both have been selling one major export relatively easily for dollars (coffee and copper) and another mainly for inconvertible currencies (cotton and nitrates). In such circumstances, there is also likely to be pressure to permit broken cross rates.

Once the basic pattern of payments agreements had been established, and countries’ discriminatory trade and exchange policies had been adapted to that pattern, exporters in convertible countries found that, although they were shut out of various markets, they could maintain their sales in those markets if they started manufacturing either in those countries or in other inconvertible countries linked with the markets by payments agreements. In the postwar period, some U.S. investment in, for example, the United Kingdom, the Netherlands, and Italy was induced by such considerations, and so was the use in those countries of certain U.S. patents and processes. Capital movements between payments agreement partners, on the other hand, have been affected by the fact that the protection provided by the intergovernmental financing mechanism was likely to assure the continued availability of exchange for imports of spare parts, the expenditures of sales organizations, and generally the transfer of funds between parent companies and subsidiaries. This is likely to have had some bearing on the postwar tendency for European manufacturers to effect a higher proportion of their exports to underdeveloped countries on a direct basis, that is, without the intermediary of export merchants. This preference for direct selling, in turn, seems to have reduced the willingness to halt exports to countries in balance of payments difficulties, and thus appears to have contributed to the large extra-swing overdrafts observed under some payments agreements.

The composition of the monetary reserves of countries that do not find themselves in a weak external position but nevertheless start to use payments agreements has an inherent tendency to deteriorate. Since economically weaker countries tend to exhaust the swing credits rapidly, and even exceed them significantly without discharging the excess overdrafts in convertible exchange, there are likely to be illiquid claims on weaker partner countries. On the other hand, these claims will normally find their counterpart in swing debts to stronger countries with which payments agreements are also maintained. Cautious monetary authorities may then feel bound to assume that their claims represent frozen assets and that the debts are payable in convertible exchange. This suggests that inconvertible countries may in some circumstances consider it essential to require a proportion of convertible reserves in relation to total annual imports that is higher than under conditions of convertibility. In other cases, however, where bilateral debts and claims are also found side by side, the need for convertible reserves is likely to be considered less than under conditions of convertibility, viz., if there is little likelihood of a need for net use of gold and dollars under the country’s payments agreements; in a convertible world, some convertible exchange would presumably be held to cover emergency requirements (or even normal swings in payments) vis-à-vis the same group of countries. Which of these considerations will be the more important depends primarily on the institutional environment. In countries running significant balance of payments surpluses with the inconvertible world, on the other hand, all bilateral positions tend to be in the same direction. Thus, Western Germany under its 17 bilateral payments agreements35 with non-EPU countries on April 30, 1954 was a creditor in 16 cases, for a total amount equivalent to US$181 million, while the total of the swings in the relevant agreements was US$191 million. Conversely, Brazil since 1952 has been a heavy debtor under practically all its bilateral payments agreements. For several underdeveloped countries, the swings of their payments agreements have constituted an elastic, but non-recurrent, secondary line of reserves. This is similar to the early European experience, when the weaker countries obtained credit in the same way from their stronger partners. These effects on the composition of reserves have sometimes served not only to intensify but also to perpetuate exchange and trade restrictions vis-à-vis convertible countries. It is only fair to add, however, that the exchange guarantees on balances earned under many payments agreements have created an element of security that was usually absent before World War II.

The existence of bilateral payments agreements has greatly complicated countries’ commercial policies and has in itself been the basis for a distinction in import licensing between dollar and non-dollar countries, with discrimination against supplies from dollar resources and preferential licensing for goods from non-dollar sources. Within this group of non-dollar countries, it became necessary to apply different policies to different countries, which were also implemented primarily through trade agreements. While one country might be a non-dollar country because a payments agreement had been signed with it, it might still be a hard currency country because either a structural surplus or other exceptional circumstances made the country’s exports to its partner consistently and significantly larger than its imports from that country; for instance, the Netherlands for several years ran a current account deficit against the BLEU and Argentina and had to consider both as hard currency countries, although they were linked to the Netherlands by payments agreements. Among a country’s payments agreement partners, the only really soft currency countries would be those with which trade tended to be in equilibrium or even to show a surplus. Until the EPU was established, most of Switzerland’s agreement partners considered it a hard currency country despite the fact that it had made available between Sw F 700 million and Sw F 800 million in swing credits. A similar attitude toward Belgium-Luxembourg and Western Germany was usually adopted by their payments agreement partners. Japan is an extreme creditor vis-à-vis Indonesia and an extreme debtor vis-à-vis Germany, and therefore encourages direct and transit exports to the latter, while applying the opposite policy to the former. The EPU arrangements subsequently simplified the participating countries’ commercial policies, since the currencies of all member countries could then be considered equally hard or equally soft. Members of the EPU could roughly classify the rest of the world in three categories, the EPU area, non-EPU payments agreement partners, and the dollar area.

The impact of payments agreements on transit trade was also great. Many countries tended to limit their payments and trade agreements to direct reciprocal trade, at the expense of traditional transit trade for which they were reluctant to grant appropriate quotas. Some traditional transit trade could not be consummated because of the different degrees of hardness of the currencies involved, particularly when the initial purchase had to be made in dollars or in a relatively hard payments agreement currency. Another obstacle was that the authorities of an intermediary country might prefer to see the partner country make transfers in respect of direct imports or the servicing of financial obligations rather than spend the intermediary’s currency on transit imports. On the other hand, the existence of payments agreements together with discrepancies in price levels gave rise to commercial switch trade. In comparatively few cases was the specific implementation of over-all transit trade policy laid down in a trade agreement.

The efforts made to counter the compartmentalization of trade and certain other effects of trade and payments agreements threaten the stability implied in the fairly general maintenance of fixed official exchange rates. The technical methods resorted to are indicated on pages 378-85 of this paper.

The exchange rate problem arising from bilateral surpluses is closely related to the problem of their financing. Where export proceeds are paid to exporters subject to a surrender obligation, the payment results in a net addition to the money supply and greater liquidity of the banking system without any equivalent receipt of convertible exchange. This has led to attempts in various countries to provide for the financing of such surpluses by the domestic capital market or by the exporters themselves. In order to offset the inflationary effects of (particularly) EPU surpluses, the Swiss Federal Government has applied a policy of sterilization, under which available funds are not used to retire outstanding debt, and has resumed the limited issue of gold coins. This purpose also has been an important consideration when certain other OEEC countries resorted to the blocking of part of the export proceeds accruing in inconvertible exchange. A further aspect of interest to central banks conducting agreement accounts is that of the interest, if any, to be paid or received on agreement balances, and of the conditions to which any permitted investment of agreement balances is subject. All these matters require close and constant consultation between central banks and government departments.

Both payments agreements and trade agreements may have to be renegotiated or terminated if one partner changes its restrictive system significantly. The existence of such agreements thus creates an element of inelasticity in countries’ exchange and commercial policies. When Brazil adopted an exchange auctioning system in October 1953, all import commodities were classified in five categories, and the review of applications for individual commodities was discontinued. Consequently, trade agreement quotas lost their meaning. Previously in February 1953, when Brazil deviated from its basic unitary rate structure by permitting varying percentages of the exchange proceeds of certain slow-moving exports to be sold in a free market, this export aid could not be given to exports to countries with a payments agreement providing for cruzeiro accounts, which included Argentina and the Netherlands. With both these countries, new agreements had to be negotiated, in which the U.S. dollar was used as the currency of account.36 The liberalization of dollar imports, e.g., cotton, may affect trade with specific payments agreement partners to such an extent as to require revision of the trade agreement, if the country that has relaxed its dollar restrictions wishes to avoid the accumulation of excessive inconvertible surpluses. The wider access to the reopened West European commodity markets may have similar effects.

One aspect of payments agreements and trade agreements that has attracted much attention is the struggle for export markets. There has been a tendency to conclude that such agreements have not given European inconvertible countries competitive advantages of strength sufficient to displace the United States and other convertible countries in the markets of third countries. But there is no proof that in a convertible world, i.e., in the absence of trade and payments agreements and of discriminatory import regimes based on corresponding “hardness-of-currency grounds,” the U.S. share in Latin American markets, for example, would not have increased much more in relation to the European share than it actually has increased. The basic flaw in the line of reasoning frequently followed is that it rests on a comparison between the trade patterns of the prewar convertible world and the postwar inconvertible world. On the other hand, if the question is raised whether Western Germany’s return to South American markets has been facilitated by the dense network of agreements built up by that country after the end of 1948, the answer can be only in the affirmative. By the time that the German agreements with South American countries were concluded, the latter already had based their exchange policies and commercial policies on bilateralism and on discriminatory treatment of hard currency suppliers to such an extent that it would have been well-nigh impossible to build up exports to such countries as Argentina and Brazil rapidly if the supplying country had insisted on financing its trade in convertible currencies.37

Problems in the Operation of Trade and Payments Agreements

Since one of the main purposes of bilateral payments agreements is to reduce the use of convertible exchange, countries tend to limit their debtor positions under such agreements to the amounts of the swings provided therein. A continuous deficit cannot be maintained, however, with a country that has traditionally run a bilateral surplus, unless the debtor country is prepared to settle deficits in dollars regularly, as has been true, for example, under the Franco-Peruvian payments agreement.38 Since such persistent imbalance in bilateral relationships has sometimes shown itself even where payments agreements had been negotiated, the accounts have in many cases become lopsided and trade between the partner countries has come almost to a standstill. Many inconvertible European countries were faced after 1951 with what is referred to in Denmark as “the third country problem,” arising from a pattern of excessive claims on most bilateral payments agreement countries, the main non-EPU, non-dollar countries. The problem is especially disturbing when the creditor is at the same time faced with a current deficit against the dollar area, which would be alleviated if the bilateral surpluses could be converted into dollars, or when a country, such as Finland which is not a member of EPU, is in need mainly of European continental currencies but acquires large claims on East European countries while going into debt under its West European payments agreements.39 Western Germany’s problem is different in degree because the German over-all balance of payments surplus is composed of surpluses with the three currency areas: the dollar area, EPU, and the bilateral agreement partners. This is also true of a few other creditors in the EPU. The United Kingdom, on the other hand, because of the nature of its payments agreements with non-OEEC countries, has not acquired extra-swing claims on them; these partner countries have tended to run down their sterling holdings and thus incur commercial and financial arrears. It is too early to say to what extent these “third country problems” are due essentially to long-run changes in the terms of trade between industrial and underdeveloped countries, and to structural bilateral deficits that may have resulted from economic, social, and political changes during and after the war, including the pressure to adopt development programs of wide scope.

The first technical problem encountered in the operation of any specific bilateral agreement is that involved in the application of any exchange control system, viz., the prevention of illicit transactions in general and of undesirable capital movements in particular. The over-all efficiency of the exchange control systems in the two partner countries will determine how far these transactions can be prevented. The volume of illicit transactions which went undetected must have been substantial in many instances. They have taken place particularly from soft currency to harder currency inconvertible countries, such as Belgium-Luxembourg and Switzerland, frequently for purposes of further flight to the dollar area. A somewhat similar technical problem arises from speculative leads and lags in the collection and settlement of outstanding claims, which also are known to have affected significantly various bilateral positions.

Further technical problems arise from the need to ensure that the swing margin under a payments agreement is not exceeded in either direction, and that claims below the swing ceiling do not become frozen. Particularly where a swing is low in proportion to the total trade turnover to be financed between the partner countries, it is difficult to prevent extreme bilateral positions, which in turn lead to import cutting, from arising. The first impediment to accurate calculation is in the leads and lags that arise because importers are free to make payment early or late, while exporters, even if they must collect outstanding claims when they fall due, are free to postpone the surrender of the accruing exchange proceeds for two or three months. Second, seasonal deliveries may require a large swing to cover a seasonal extreme bilateral position, and the wide swing margin may then cause incautious licensing policies that result in too large a proportion of the swing being used before the seasonal deliveries for which it was in fact intended are effected. Third, the swing is usually established at a certain proportion of the trade turnover scheduled in a bilateral trade agreement signed with the same partner country. Whenever the trade quotas on either side do not materialize for one reason or another, the swing will be subjected to strain. Obvious examples are a crop failure or the loss of orders for capital goods for which tentative quotas corresponding to a significant proportion of listed quotas had been included in the trade agreement. Fourth, it has frequently proved very difficult to obtain an accurate impression of the amounts at any time “in the pipeline” in either direction, particularly where there has been imperfect coordination between import and exchange control authorities, or where deliveries of capital goods constitute a significant proportion of one partner’s exports to the other. The uncertainties have been enhanced where exporters of capital equipment have been permitted to enter into sales contracts before obtaining an export license.40 Fifth, a country, after having liberalized a significant proportion of its imports from the EPU area, the dollar area, or both, will find it difficult to increase imports from any specific payments partner. Liberalization, whether of imports or exports, renders the remaining bilateral relations less manageable. Finally, there is a danger that a country in a weak balance of payments position will, as a matter of policy, try to use all the swing credits available to it, in order to alleviate its dollar import payments to the largest extent. This may be done by discriminating in favor of imports from the payments agreement countries while at the same time discriminating against these by export controls or measures with similar effects, such as creation of preferential buying rates for exports settled in convertible currencies.

In addition to the volume and timing of settlements either way, the type of underlying transaction involved may give rise to difficulties, especially in relation to invisibles. The categories of operation in respect of which both countries will permit settlements to be effected through the agreement accounts are usually listed in the agreement. Unless the contrary is explicitly stated, however, these operations remain subject to the exchange control regulations in force in either country during the period of the agreement. Thus the transfer through the agreement may be free while the conclusion of the underlying contracts is severely restricted. For example, if capital amortization or releases of blocked “old” capital are listed in the schedule of permitted transactions, it may well be that one partner does not license such transfers to the other except in hardship cases, or that the other country permits the corresponding inward transfers only exceptionally. Conversely, one partner may wish to add to the approved list certain transactions not listed as permitted. The other country will then have to be consulted in order to obtain permission for transfer through the agreement mechanism. A situation may result where a country does not wish to accept inward transfers in respect of certain specific types of transactions, whereas various partner countries release the corresponding amounts for transfer. Thus Switzerland has prohibited inward transfers through its payments agreement accounts in respect of various capital and transit transactions. These amounts released by the partner countries are usually referred to as “provisional accounts” and are freely negotiated at discounts for convertible exchange. Where transactions are not on the permitted list, there is always a danger of evasion. For example, in their payments agreements many underdeveloped countries have limited commercial transfers to those in respect of direct trade in order to exclude transit trade except for any transactions specifically discussed and approved on both sides, but evasions continually occur.

Where payments agreements are resorted to in order to promote reciprocal trade, the difficulties in their operation frequently have caused, or contributed to, the stopping or delaying of financial transfers (interest, amortization, profits, pensions), even though initially such transfers may have benefited from the negotiation of an agreement.

Most of the difficulties in managing payments agreements have their cause in trade developments. A basic cause which makes it difficult to influence trade in at least one direction arises when the demand in one country for one of the partner’s leading exports is small. For example, large purchases of Brazilian coffee for domestic consumption seem unlikely in the United Kingdom, which is mainly a tea-drinking country. Similar in kind, but different in degree, is the reduction in per capita consumption of coffee in various continental countries which has persisted since the abolition of rationing. Where the demand for certain of the partner country’s exports is known to be low, small quotas will normally be included in trade agreements. On the other hand, where a high quota is agreed because demand is expected to be strong, the quota in practice may be used only to a small extent and the resulting shortfall of anticipated exchange earnings may unbalance the agreement accounts. The causes of the nonfulfillment of quotas may lie on either side. The quotas normally—unless state selling or government purchasing is involved—are not binding commitments to export or to import; they merely commit the authorities to the issuance of the necessary licenses to interested parties applying for them. Consequently, listed exports may not become available to the partner country because alternative export outlets have meanwhile been opened up or become more remunerative. Such marketing reversals may arise particularly where the exporting country relies on fluctuating broken cross rates and on varying directional export promotion devices. Similarly, the importing country may show no effective demand for listed goods; for example, because alternative suppliers have meanwhile captured a large share of the market, which may in turn be due to the signing of a payments agreement with a country previously classified in the dollar area and treated accordingly, or to a relaxation of quantitative restrictions on imports from the dollar area. Countries faced with a sudden deterioration of their external position tend to plead hardship in not licensing fully the agreed quotas for certain imports, particularly those of consumer goods. As a guarantee of specified minimum exports, therefore, trade agreement quotas are far from perfect. Also, excessive export quotas tend to be inserted in some trade agreements under pressure of export interests.

Consequently, shortfalls in the fulfillment of agreed trade quotas are particularly likely under trade agreements with countries resorting to broken cross rates, employing multiple exchange rates that are subject to frequent revision, or changing their criteria for the approval of transit transactions. The same is true in other cases in periods when hard currency goods become soft currency goods, or vice versa. For example, the opportunity to buy Cuban dollar sugar under the terms of a bilateral payments agreement may have direct repercussions on the importing country’s purchases from soft currency suppliers, such as Hungary, Brazil, or Peru. There are so many sets of circumstances in which the planned flow of trade deviates widely from the pattern actually materializing that completely satisfactory functioning of payments agreements is rare. Indeed, the experience both with bilateral payments agreements and with the EPU has been that sudden, sharp reversals of bilateral positions may always occur and are hard to prevent. Such reversals may even be cumulative. If, because of an extreme debtor position vis-à-vis Argentina, a European country shifts its wool purchases from Argentina to Uruguay, the bilateral position against Uruguay also will move in a negative direction. And if, because of an extreme creditor position, a European country restricts its exports to Argentina, firms specializing in transactions with South America may then shift their frustrated exports to Brazil, so that the bilateral position with Brazil is likely to show an increased surplus or a reduced deficit. All of these fluctuations are strengthened in bilateral relationships between industrialized and underdeveloped countries by the over-all movements in the terms of trade between wide regions which occur as a result of differences in the behavior of primary commodity prices and prices of manufactured goods.

Another main problem in the operation of bilateral agreements results from the classification of both imports and exports as essentials and nonessentials.41 The classification may be explicit, as where imports are divided into first, second, and third categories that are allocated exchange at different effective exchange rates. In the major trading countries, however, the distinction is not explicitly and officially made. It varies from time to time, and from country to country, according to both commercial policy and general supply and demand criteria. It is therefore difficult to classify any specific commodity. Only the extreme positions are unequivocal. Dollar goods normally admitted from dollar sources and raw materials in short supply which are needed to keep production going are undoubtedly essentials from the viewpoint of the importing country. Many consumer goods, both durable and nondurable, are considered nonessentials because the producing country in its planning finds that a significant proportion can be set aside for export without hurting productivity or creating social unrest, while the importing country is not eager to take these goods because it, again in the view of the authorities, finds that they do not positively (by increasing productivity) or negatively (by preventing social unrest) strengthen the economy, or that they may even hurt it (e.g., by competing with protected infant industries). Countries where goods usually treated as nonessentials have been admitted in large volume because the importing countries considered them useful as a stimulus to increased production have included Belgium-Luxembourg (watches, for example) and Indonesia (“inducement goods”). Even so, the treatment accorded to any specific commodity by the majority of importing countries determines its over-all bargaining value to the exporting countries. Many products of the textile, leather, and furniture industries are generally considered nonessentials; this also is true in many countries of passenger cars, refrigerators, radio and television sets, watches, cutlery, glassware, china, toys, perfumes, wines, and horticultural products. Commodities may come to be considered nonessential temporarily if they move sluggishly because of their high price, which has been true in recent years of some of Brazil’s so-called produtos gravosos.

In dealing with nonessentials there is often hard bargaining, and the quotas established for them are frequently fulfilled less completely than other quotas, despite the fact that pent-up demand for such goods may well be high, particularly in countries suffering from inflationary pressures. Some countries have consistently failed to grant licenses for more than a negligible proportion of certain agreed nonessential quotas. Nonessential import quotas tend to be balanced with nonessential export quotas. However, they may also be linked to essential goods by bargaining. Countries may not be prepared to sell to their partners certain goods, such as capital equipment, unless the partners also accept specified goods which they value less, such as textiles. The provision of appreciable swing credits or of similar payments facilities has often induced a partner country to acquiesce in larger import quotas for nonessentials than would otherwise have been acceptable. Trade agreements frequently contain commitments binding both parties to “harmonious utilization” of the agreed quotas, i.e., to observance of the proportions between essentials and nonessentials established in the commodity lists. Similarly, clauses prescribing pro rata temporis issuance of import licenses attempt to realize a harmonious division of trade during the period of the agreement, e.g., by prescribing quarterly licensing of 25 per cent of the quotas. Particularly in an environment of bilateralism, a country’s bargaining position, and consequently its over-all balance of payments, is greatly affected by the composition of its “export parcel,” that is, by the types of commodities available for export.42

Trade under many payments agreements is likely to have suffered from lack of facilities for forward cover and from a shortage of short-term financing. The revival of the forward exchange markets in Europe is largely a phenomenon of recent years, and even so the facilities offered are greatest for a few major currencies. Where there were no regular forward facilities, central banks had to buy agreement currencies forward from the exporters selling to the partner countries, or the exporters had to be referred to credit insurance companies. In either case, the resulting transactions were likely to involve a preponderance of relatively weak currencies; the risks involved would tend to rest ultimately on the governments that had to subsidize the credit insurance companies or might expect to see their central banks incur losses on forward transactions. Resort to London and a few other sources in third countries of acceptance credit and other short-term finance has been, for the most part, impossible in trade between payments agreement partners. This, like the difficulties in the field of forward exchange, probably contributed to the high prices observed in such trade.

Over the years, payments agreements and trade agreements have tended to become more flexible in their operation. In fact, the continued increase in their number during recent years has coincided with strong tendencies in some of the major trading countries, particularly in Western Europe, toward an extension of multilateralism. The reopening or expansion of various U.K. commodity markets is evidence of that trend, as is the increased transferability of sterling, the deutsche mark, and certain other European currencies, both within the European currency arbitrage system and by other means. Other evidence is the relaxation of restrictions on dollar imports and a reduced willingness to purchase high-priced commodities from bilateral agreement partners. These trends have made the effective administration of bilateral agreements increasingly difficult,43 particularly because of the nonutilization by major trading nations of part of their bilateral claims and in view of the reduced opportunities for debtor countries to acquire major inconvertible currencies from direct sales to their partner countries. The trend toward multilateralism has been furthered by a reduction in the scope of state importing. It has also been reflected in triangular trade and in sales of agreement balances to third countries.

Methods Used to Influence Bilateral Positions

Since the orthodox methods used to influence the over-all balance of payments position tend to affect both bilateral and plurilateral positions, both may be improved by restrictive monetary, fiscal, and credit policies, by measures to increase productivity, or by devaluation of the currency. Conversely, over-all policies serving to increase domestic consumption and investment may result in a global reduction of excessive bilateral and plurilateral claims. Such global action has been taken particularly in certain OEEC countries. Ad hoc action with regard to specific bilateral or plurilateral positions, on the other hand, has been both more frequent and more widespread. Even domestic measures which are formally of a general nature seem sometimes to have been undertaken (or speeded up) primarily with a view to their impact on the trade and payments relations with specific agreement partners. The abolition of coffee rationing and reductions in taxes and customs duties on coffee and tobacco are instances of such action. Most of the decontrol measures affecting coffee were taken in 1952 or later. While restrictions on dollar coffee from Colombia, Mexico, Venezuela, and Central America were maintained, coffee from EPU sources, such as the Belgian Congo, British and Portuguese East Africa, or Indonesia, had already for some time been imported with a considerable degree of freedom. The decontrol measures, therefore, tended particularly to increase purchases from Brazil. For example, the Danish derationing of coffee on October 15, 1952 followed immediately the liberalization of imports of coffee from Brazil (against payment in Danish kroner only) and from the EPU area.44 Similarly, measures tending to stimulate the consumption of tobacco seem in certain instances to have raised the level of trade with Greece and Turkey. Nondiscriminatory tariff reductions on commodities for which the partner country is a principal supplier may serve to reduce claims on partner countries that have incurred an extreme debtor position on bilateral account. Western Germany in its trade agreement of November 4, 1954 with Iran undertook to lower the import duty on certain rugs.

Ad hoc methods to influence specific bilateral positions can be classified in four groups: quantitative measures, price measures, credit measures, and transferability measures. Many of the techniques involved may also be used to affect countries’ positions in EPU, and the techniques in the different groups have often been used in combination with each other.

Quantitative measures

Quantitative measures are those intended to affect, through the manipulation of quantitative trade or exchange restrictions, the volume of payments to be recorded in one or both directions in the agreement accounts. They include the adaptation of imports and exports both within and outside the quotas established in any bilateral trade agreement accompanying a payments agreement; this may require the revision of exchange budgets. Usually the expansion of reciprocal trade by increased exports from the debtor to the creditor country is difficult or impracticable even if an open general license is granted for the debtor’s main export products, as is done in Western Germany through certain types of offene Ausschreibungen,45 or if the creditor applies its OEEC liberalization list to the partner country. Consequently, quantitative correction measures tend to result in a contraction of trade because of the downward adjustment of the debtor’s purchases, and of the creditor’s sales, often in response to action undertaken simultaneously in the two partner countries. Country A has an incentive to restrict exports (particularly of essentials) to country B which is in an excessive bilateral debtor position, while simultaneously B will be inclined to restrict imports (particularly of nonessentials) from A. Thus, European countries have at various times substantially reduced the granting of licenses for exports to Argentina without raising their purchases significantly. But since unilateral measures are apt to lead to retaliatory action, they tend to be put off as long as possible. Also, in order to correct its creditor position, A may unilaterally increase the exchange allocations for purposes not referred to in the trade agreement, or for types of outward transfer not envisaged in the payments agreement, such as extra-quota imports of listed goods, tourist travel, outward capital movements, etc.46 Conversely, B may permit A to undertake additional transit transactions of a type already approved; for example, A may be permitted to purchase products originating in B for resale without price or exchange adjustment to country C to which B had previously sold the same products directly. A reduction of traditional transit sales by A to B will work in the same direction. Quantitative corrective measures may include purchases by A of some of B’s products in excess of, or in anticipation of, requirements. For example, Western Germany in 1953 considered the purchase of Argentine grain on condition that Argentina should store the grain until it was required in Germany. Also, the authorities in the creditor country may use part of the accumulated soft currency by awarding contracts for public works to firms established in the debtor country. This, however, has been rare, since the countries that have held large bilateral debtor positions over long periods have, on the whole, been underdeveloped countries. In certain cases it is agreed, as a corrective measure, that a specific ratio shall be observed between the countries’ sales to each other. A simple type of linking that has been used in Western Europe to prevent further claims arising on East European countries is to prescribe that exports shall be compensated with equivalent imports. Some element of price or exchange rate adjustment is seldom absent from compensation deals, however. Quantitative measures have frequently involved sudden shifts from one source of supply to another; for example, from dollar to soft currency sources or from one payments agreement partner to another. In all cases, it is easiest to take these corrective measures where there is extensive state trading and where highly restrictive trade and exchange licensing policies are applied. The marked reduction in the role of state importing and exporting since the end of the boom caused by the Korean conflict has contributed to a shift of emphasis to other corrective measures, particularly those involving prices or exchange rates.

Price measures

Corrective pricing measures may affect the commodities traded, the exchange rates, or both. The simplest type is a nondiscriminatory price correction applied to a generally overpriced export commodity. Dual and multiple pricing practices may lead to an export price different from that paid by domestic consumers, or to different export prices for different importing countries. For example, the Argentine Trade Promotion Institute (IAPI), the state trading monopoly, usually quotes different prices for the same export commodity depending on the relative scarcity of the currencies offered in settlement, the lowest prices usually being reserved for sales in U.S. dollars and, in the last two or three years, in sterling. It has also quoted buying rates for various currencies that were not in line with their official parities. When France applied the more favorable type of “EFAC treatment” (i.e., the retention in special accounts of export proceeds, for use only in specified transactions) to exports to Mexico and Peru, against both of which France ran continuous bilateral deficits under payments agreements, that action tended to cheapen French exports to those countries and thus alleviate the French debtor position. Sometimes bilateral creditor countries have forced exporters to excessive debtor countries to pay a levy which was then transferred to importers buying overpriced commodities in the debtor country. Price corrective measures may also take the form of discriminatory tax remission on exports.

The exchange rate may be used as a corrective device; for example, in a number of Egyptian payments agreements which provide for a fluctuating rate. Where a payments agreement provides for a fixed exchange rate, the effective exchange rate may nevertheless be made into a fluctuating one; for example, by the use of export retention quotas. Thus, there is a fixed rate under the payments agreement between Egypt and Western Germany, but Egyptian exporters to Germany are granted so-called import entitlements, i.e., rights to import German merchandise, imports of which are otherwise severely restricted or prohibited. The import rights are negotiable, and importers are prepared to pay exporters an amount for them that varies with the general supply and demand situation in Egypt and with the flow and composition of imports from Germany. Similar price-corrective measures have been applied through the exchange rate system under several payments agreements between European and Latin American countries when European central banks ceased buying the full proceeds from exports to specific partner countries. The cross rate may also be broken in the debtor country. Chile in 1953 and 1954 permitted both sterling and the West German agreement dollar to rise to significant premia in the Chilean banking free market, compared with the U.S. dollar, while there were large discounts on certain other agreement dollars. Brazil, under the auction system introduced in 1953, allowed separate selling rates to arise according to the currency and the import category involved. In Brazil, too, the broken cross rates in certain cases (including sterling and the West German agreement dollar) have at times involved quotations for payments agreement currencies in excess of those for the U.S. dollar for the same import category. Argentina, in addition to its multiple pricing policy and its regular multiple rate structure, has created special subsidy export rates for wool and hides provided they are either part of an intergovernmental compensation deal or are settled in U.S. dollars or specified agreement currencies. Earnings in one currency theoretically may be stimulated by granting to those who surrender the currency privileges in the use of a different currency. This principle has been applied in Denmark, where a retention quota on exports to the dollar area may be used to purchase a scarce, nonliberalized commodity (automobiles) from EPU countries. Similar is the Japanese “linking system” under which unprofitable exports were linked with highly remunerative imports of heavily restricted goods, particularly dollar commodities, such as sugar and canned pineapple. Japan has also operated a system of linking imports from hard currency and soft currency sources. Imports of raw cotton from the United States, for example, were permitted only if a certain quantity of cotton was also bought outside the dollar area. Exports to the dollar area may be hampered if the effective buying rates are more favorable for important agreement currencies than for the U.S. dollar. In Western Germany that situation cannot arise, since in April 1954 the quotations of the U.S. dollar and of substantially all agreement dollars were unified (the measure did not affect the Brazilian accounting dollar). Broken cross rates may be applied simultaneously by both parties to a payments agreement, e.g., in Argentine and Brazilian trade with several European countries. Another type of price measure (used mainly to keep trade in certain specific commodities moving rather than to correct a bilateral position) is the authorization of barter or compensation transactions in which part of the windfall profits on a severely restricted import commodity serves to offset a loss on an overpriced export commodity. Where the import commodity is one not normally allowed to enter from the partner country, there is in effect a combination of price and quantitative measures. The United Kingdom in principle does not permit compensation transactions, but in 1950-51 they occurred on a large scale between Brazil and the United Kingdom, when a considerable proportion of Brazilian sales of minor exports to Europe was effected on that basis.47

Credit measures

Where bilateral positions have impaired trade between partner countries, the agreed swing margins have frequently been adjusted in one way or another. The creditor country might refrain from requiring settlement in respect of the excess overdraft to which it was entitled, or might formally agree to an increased swing. Hard currency cover for excess overdrafts might be pledged by the debtor and later returned by the creditor, the cover serving only as a guarantee against a further increased debtor position. One way to alleviate a bilateral creditor situation where the payments regime is centralized is to decentralize it by permitting commercial banks to carry agreement balances. Where letters of credit outstanding have been charged against the swing, a further corrective measure is to ignore these amounts in calculating the extent to which the swing credit has been exhausted. Both measures apparently were resorted to by Western Germany and Japan when they renegotiated their bilateral payments agreement in 1954, when Japan was an extreme debtor. A fairly general trend toward increased swing margins was checked and reversed in 1952 when many excessive bilateral positions had become frozen. Thus Western Germany in 1953 reduced the swings in the payments agreements with certain bilateral debtor countries (Finland, Hungary, and Spain), making the swings variable in two cases.

Apart from swing credits, European countries have sometimes made lines of credit available to underdeveloped countries for the specific purpose of facilitating sales of capital equipment on deferred payments. Also, the export credit facilities provided by official and semiofficial institutions have usually been drawn upon heavily by exporters to bilateral account countries with weak balance of payments positions, and the availability of such credit has occasionally been the subject of intergovernmental negotiations. Credit measures further include changes in export credit insurance coverage and premiums vis-à-vis payments agreement partners. Where exchange control regulations set limits on the terms of payment that exporters may offer to their foreign buyers, these regulations may be adapted in such a way as to encourage sales to payments agreement partners who are not in danger of running an excessive debtor position, and to discourage sales to partners against whom significant claims already exist. Prescribing the opening of a letter of credit for sales to a country where similar products are offered on a collection basis by other countries, for example, will tend to frustrate some potential sales to that country. Other discriminatory techniques in the credit field are differentiation between the conditions on which export bills drawn in different currencies may be discounted, and between the amounts to which importers may effect advance payment or the sums in domestic currency which must be deposited when ordering goods abroad.

Transferability measures

Apart from access to specific inconvertible currencies via the International Monetary Fund or the International Bank for Reconstruction and Development, transferability of balances under payments agreements is obtained mainly in four ways. The simplest and most important method is that where an inconvertible country, under the terms of its payments agreement with another inconvertible country, is permitted to use its claims on the latter for financing current trade with third countries. Thus, even before the changes of March 22, 1954 in the U.K. exchange control system, sterling could be used for transfers among substantially all inconvertible countries outside the sterling area. For example, if it was agreeable to both the Bank of England and the Netherlands Bank, Peru could make settlement for imports from the Netherlands in sterling that might have been earned either from direct Peruvian sales to a sterling area country or from, say, sales to Chile or France. Another case of transferability is that involved in cheap currency deals, in which inconvertible claims are sold to nonresidents in free exchange markets at home or abroad. Whereas this type of measure frequently has been at variance with the wishes of the partner country whose currency was sold at a discount, ad hoc transfers of existing payments agreement balances—unrelated to any specific underlying transactions—have occurred with the approval of all countries concerned. Such transfers appear to have been effected mainly between OEEC countries. Approval of transit transactions of a kind not previously authorized may also serve to render an agreement currency transferable. Brazil has permitted Western Germany to purchase certain Brazilian products for resale to specified destinations with financing under the German-Brazilian payments agreement. In undertaking such triangular transactions, Germany in effect was enabled to finance imports from third countries with part of its bilateral claim on Brazil. Without necessarily entering into commercial switch transactions, some countries, such as Japan and Yugoslavia, during the last two or three years have made some use of dollar commodities to reduce overdrafts under bilateral payments agreements. Since dollar goods usually bring a premium in inconvertible countries if sold in inconvertible currency, such transactions would allow the debtor country to save a little on the amounts to be settled. The creditor countries would again be enabled to finance imports from third countries with part of their bilateral claims.

The only simple way to revive paralyzed trade with a country against which an excessive bilateral payments agreement claim has been accumulated is to consolidate all or part of the claim and thus wipe the slate clean, that is, clear the accounts. Once a backlog develops, the debtor country tends to grant exchange first for settlement of outstanding claims in respect of essential imports, while disregarding the chronological order of outstanding claims, or even for financing further current imports of essentials, particularly oil. The liquidation of bilateral arrears in one way or another is at the expense of the creditor country’s exports to the partner country. Consolidation of bilateral claims, nevertheless, is a measure that creditors tend to avoid as long as possible, although there has been such consolidation a number of times, particularly between industrial European and underdeveloped non-European countries. It has been effected less explicitly where bilateral trade agreements between such pairs of countries have included significant quotas for deliveries of capital goods on deferred payment terms by the European partner.

Impact of EPU on Bilateralism

With the establishment of the EPU, the payments agreements between pairs of participating countries were left with nothing but a technical function. Since all member currencies became transferable among EPU members, they all became equally hard (or equally soft) to any one of them. Consequently, an EPU member no longer had hardness of currency as a reason for discriminating among other members. This enabled a nondiscriminatory approach to be adopted in licensing imports and invisibles. At the same time, the settlements to be made by debtor countries were sufficiently soft because of the working of the quotas to enable liberalization of trade and invisibles. The liberalization measures greatly facilitated exports of goods and services from previously hard currency countries, such as Belgium-Luxembourg, Switzerland, and Western Germany, to other members of the group. In respect of commodities and services (particularly tourism) involved in intra-EPU trade, trade in nonessentials was facilitated disproportionately with the progressive relaxation of restrictions, since essentials usually were the first to be liberalized. The equivalence of all EPU currencies from the balance of payments point of view permitted a substantial simplification of exchange control policies and techniques, and resulted in a significant reduction of the degree of bilateralism practiced among OEEC countries. Members were faced with only two wide currency areas, the dollar area and the EPU area, including overseas territories, plus a number of “third countries” outside both areas, with most of which bilateral payments agreements were in force. The last group included Eastern Europe. This in turn made it possible to permit the importation of liberalized goods originating in any OEEC country (or nonmetropolitan territory) via any other OEEC country. Also, import licensing could be changed from advance reviewing of applications to retroactive checking of declarations (notifications) of imports effected. Presumably because of the need for strategic export and transshipment controls, the declaration method seems to have remained of minor significance in the export field.

Trade agreements, constituting the main instrument for the implementation of discrimination within the group, continued to be negotiated among the participants in the EPU but, in view of the high degree of liberalization of imports and invisibles, the quota lists could be shortened considerably, and in some agreements they have now been omitted. Commodities for which quotas are still included in most trade agreements between OEEC countries are agricultural and horticultural products, various textiles, passenger cars, trucks, radio and television sets, and other appliances. Bilateral liberalization, on the other hand, has occasionally led to the opening of quotas for goods not previously traded between two countries.48 Bilateral bargaining about the over-all composition of reciprocal trade has also continued. For example, it was reported49 that the revised Austrian-Netherlands trade agreement of early 1952 included a provision requiring that an attempt be made to establish a more symmetrical trade structure, meaning that the percentage of semifinished goods exported by the Netherlands should rise and that of industrial products should decline. Nevertheless, the simplification of discrimination between OEEC countries has now proceeded to the point where the results of some negotiations are merely laid down in agreed minutes and where the negotiations occasionally are conducted by mail. The application by most EPU countries of so-called OEEC free lists (or soft currency open general licenses) to all other participants was equivalent to the existence of a plurilateral trade agreement with unlimited import quotas for most of each country’s import commodities.50 In addition, the OEEC free lists in several cases were applied also to European non-OEEC countries, such as Spain or Finland, and to overseas countries, such as Indonesia and certain outer sterling area territories. In part, this was a result of the need to maintain imports from bilateral debtors with high costs and prices in the face of the easy imports from EPU countries. EPU countries applying their OEEC free lists to outside countries, however, thereby relinquished much of their bargaining power vis-à-vis the beneficiaries. This by itself represented a move away from strict bilateralism, even in trade with non-EPU countries.

Another consequence of the reduced significance of bilateral positions in EPU was the increased use of global quotas for imports of a specific commodity from all member countries. The use of these quotas has put certain export prices under pressure, but the practice has drawn much criticism, since it tends to cause a rush to exhaust the quota, which disturbs existing trade channels, causes price cutting, and may have other adverse effects, particularly on seasonal exports (the timing of a global quota may prevent a traditional supplier from effecting deliveries) and on exports of perishable goods.

The exact level of the holdings of specific currencies under bilateral payments agreements with other EPU countries has become largely immaterial, although naturally countries still tend to use bilateral deficits as a bargaining device to obtain import concessions from their creditors. The nature of the bilateral accounting positions, moreover, was changed greatly in 1953 by the resumption of multilateral exchange arbitrage, spot and forward, among nine EPU countries. The bilateral positions between countries participating in the arbitrage no longer reflect their bilateral balance of payments positions. The Annual Report for 1953 of the Swiss Compensation Office indicates that the bilateral position vis-à-vis the United Kingdom, as compensated by the EPU mechanism, in 1953 amounted to a Swiss credit of Sw F 213,700,000, which resulted from a credit of Sw F 302,968,000 before arbitrage and a debit of Sw F 89,268,000 owing to arbitrage; the corresponding figures for the position vis-à-vis Western Germany were a Swiss debit of Sw F 71,071,000 resulting from a debit of Sw F 187,318,000 before arbitrage and a credit of Sw F 116,247,000 on account of arbitrage.

Bilateral trade agreements among EPU countries have increasingly reflected the results of bargaining for basic commercial policy objectives, mainly agricultural and industrial protectionism, rather than for bilateral ad hoc objectives. The more progress is made toward liberalization,51 the greater becomes the significance of import tariffs, sales taxes, etc. Progressive liberalization also seems to have led in some circumstances to greater reliance on export incentives of various kinds, in order generally to offset increasing import expenditures by rising export receipts or to facilitate specific exports to OEEC countries admitting these exports on a nondiscriminatory basis. In contrast to this return to basic commercial policy where hardness-of-currency discrimination no longer is involved, a trend toward bilateralism for hardness-of-currency reasons has also gained some ground recently, particularly in trade with Turkey. There the trend has manifested itself in bilateral arrangements regarding the liquidation of Turkish commercial backlogs, in prescription of currencies designed to prevent imports of Turkish goods on a transit basis, and in price equalization schemes designed to cheapen imports from Turkey and to render exports to that country less remunerative. Earlier, a difficult payments position in Greece resulted in a number of bilateral credit arrangements with that country.52

The renegotiation of payments agreements among EPU countries, although mainly of a technical character, has occasionally involved fairly significant changes affecting the functioning of European exchange markets and the use of specific soft currencies. Thus the Anglo-German “monetary agreement”53 of June 1, 1953 permitted settlements and invoicing in deutsche marks or sterling, at the option of the parties to a transaction, in trade with the sterling area, all of which previously had been financed in sterling in accordance with the “sterling payments agreement” of 1950. The United Kingdom declared the deutsche mark a “specified currency,” so that traders had to surrender receipts in that currency to an authorized dealer, and trading in it was officially permitted. The official exchange rate was established at DM 11.76 per pound. Formerly, Article 2 of the 1950 agreement had determined the exchange rate as follows: “The Bank deutscher Lander shall buy and sell sterling, and the relation between the Bank deutscher Länder’s rate for sterling and its rate for United States dollars shall be the middle rate quoted by the Bank of England for the United States dollar.” The Austro-German payments agreement of May 13, 1954 permits the decentralization of payments between the two countries, envisaging that German commercial banks shall conduct their accounts in deutsche marks and that Austrian banks shall conduct theirs in schillings. The renegotiation of certain other Austrian payments agreements with OEEC countries (e.g., France and the Netherlands) has similarly permitted decentralization and the use of two currencies. Technical revisions of other payments agreements have included shortening of the period required for giving notice of termination, and revision of exchange rate clauses in order to widen the spreads between buying and selling rates in accordance with the needs arising from the revival of the European foreign exchange markets.

The EPU has not entirely done away with bilateralism vis-à-vis the nonmetropolitan areas of member countries. Several EPU members have negotiated bilateral trade agreements with various independent sterling area countries, with Indonesia, or with the Belgian, French, and Portuguese overseas and associated territories (frequently through separate quota lists in the trade agreements with the metropolitan country). This is because the nonmetropolitan areas are not required to liberalize their imports from OEEC countries, and vice versa.

The operation of the EPU has also affected the participating countries’ trade and payments relations with third countries. The high degree of OEEC liberalization is one of the main impediments to the manipulation of bilateral positions vis-à-vis non-OEEC soft currency countries through the use by OEEC countries of quantitative import restrictions. The same is true of the widening scope of commodity markets and other forms of transit trade, and of the return of imports of various cereals, oils, fats, and other primary commodities to private trade. It has not been possible to offset these effects by the application of OEEC free lists and open general licenses for specific commodities to “third countries.” This, in turn, has increased the reliance on manipulation of quantitative restrictions on the export side, and on price or exchange rate devices. Since the non-OEEC soft currency countries have tended to be heavy debtors on bilateral account during the last two years, the alternative in many cases has been either to reduce exports or to sell them on credit. Largely as a result of these factors, there has been a tendency for some EPU members to cease considering their trade and payments relations with their non-OEEC agreement partners on a strictly bilateral basis, even if in so doing the continuation or restoration of high levels of exports to some of the latter has been endangered. On the other hand, quantitative import restrictions on certain goods have been maintained largely for the purpose of influencing specific bilateral relationships with non-OEEC agreement partners. In several EPU countries, quantitative restrictions on citrus fruits, for example, do not serve either balance of payments or protective purposes but facilitate the application of bilateralism in the trade and payments relations with such countries as Spain and Israel.

Trade with the dollar area has been affected on the European import side mainly as a result, directly and indirectly, of the reshaping of dollar import programs (for both direct and transit imports) under the influence of OEEC countries’ dollar settlements with the EPU. Some EPU countries have tended to consider dollar receipts from the EPU as reversible and therefore “mortgaged.” But when a few EPU countries relaxed their restrictions on imports of specific dollar goods, the dollar import regimes for those goods in certain other OEEC countries could not diverge greatly without either causing clandestine transshipments (e.g., of coffee) to the countries with the stricter import regimes or making their export industries uncompetitive (as, for example, the export of raw cotton). There also has been a tendency for extreme debtors in EPU to relax their restrictions on dollar imports in view of the fact that goods payable in EPU currencies ultimately cost dollars and have often been somewhat more expensive. The cumulative accounting principle in EPU, together with the requirement of progressive gold and dollar settlements by debtor countries, has caused a complete reversal of many countries’ evaluation of the relative strength of the dollar, the EPU currencies, and third currencies. Consequently, transit trade policy has also been reversed from time to time, as when the United Kingdom in the second half of 1952 sold for EPU currencies commodities of dollar area origin valued at about $170 million. The reopening and expansion of various London commodity markets may perhaps be regarded as having been hastened by the developments in the U.K. net accounting position in the EPU.

On the whole, therefore, the EPU, although in principle based on regional discrimination against the dollar area, does not seem to have prevented certain developments tending to reduce individual discrimination against dollar imports. This, in turn, seems to have reduced the anxiety of EPU countries to establish some degree of balance at a high level in trade and payments with their non-OEEC agreement partners.

Several significant further moves toward multilateralism were made by OEEC countries early in 1954. On March 22, nonresident current sterling held by non-dollar countries was “unified” by the transformation of most “bilateral accounts” and other inconvertible accounts into “transferable accounts”; and on April 1, 1954, Western Germany permitted German import payments to be credited to two new types of nonresident deutsche mark account, viz., “convertible” marks and deutsche marks “with limited convertibility.”54 In both cases, the principle at work was the multilateralization of bilateral relationships, permitting payments agreement partner A to spend current earnings from sales to the sterling area (or to Western Germany) on purchases from payments agreement partner B;55 the barrier between the dollar area and the non-dollar area was retained, while that between EPU and bilateral payments agreement partners was removed; but a small number of the bilateral payments agreement partners were provisionally excluded from the multilateralization moves.

Some time had necessarily to elapse before these measures could produce their full effect. These effects depended largely on the action taken by other countries with inconvertible currencies. Switzerland notified its traders that imports from Western Germany must continue to be settled through the agreement accounts, and that certain export proceeds might be received in the form of credits to deutsche mark accounts with “limited convertibility.” Finland, on the other hand, consented to the termination of the bilateral payments agreement under which trade with Germany was financed in agreement dollars, and switched over to financing in deutsche marks with “limited convertibility.” Developments at the time this paper was written were already justifying the expectation that both the U.K. and the German moves were likely to facilitate transit trade financed in inconvertible exchange. The new deutsche mark accounts were already being used for that purpose.56 It was also likely that transit trade in sterling would be facilitated particularly by the fact that the privilege of transferability for sterling which had previously been limited to transfers in respect of direct current transactions had, by the changes described above, been established regardless of the type of underlying transaction. The conclusion seemed justified that these measures taken by the United Kingdom and Germany were tending to unify the entire non-dollar world by substantially reducing, for the benefit of those countries prepared to make full use of the new facilities, the distinction—from the standpoint of balance of payments—between EPU and bilateral payments agreement partners, as well as the distinction between the various bilateral partners.


The following tables, based on both unofficial and official sources, summarize the methods used, as of May 1, 1955, for financing international trade. The United States and Canada, neither of which is a party to any payments agreement, have been omitted from the tables. Table 2 is an up-to-date and expanded version of Table 1 in Johan H. C. de Looper, “Recent Latin American Experience with Bilateral Trade and Payments Agreements,” Staff Papers, Vol. IV, No. 1, p. 104. An earlier version of these tables was made available to the U.S. Department of State for reproduction in its Intelligence Report, IR-6110R2, Bilateral Agreements in International Trade, March 4, 1955.

The symbols used in the tables are as follows:

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Table 1.

Financing of Trade Among European Countries

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Turkish-held sterling is not automatically transferable.

Table 2.

Financing of Trade Between Western and Eastern Hemisphere Countries

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Turkish-held sterling is not automatically transferable.

Table 3.

Financing of Trade Among European Countries and Countries in the Middle East, Asia, and the Pacific

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Turkish-held sterling is not automatically transferable.

Table 4.

Financing of Trade Within the Western Hemisphere

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Payments agreement provides for financing of books and periodicals only; all other payments continue in convertible currencies.