Foreign Relations of the United States, 1950, Western Europe, Volume III

840.10/4–1050

Report by the Economic Cooperation Administration ¹

confidential

[ Washington ,] April 14, 1950.

Explanation of the Points at Issue With the British on the Proposed European Payments Union

i. background

In early December 1949, the ECA suggested that the OEEC formulate technical payments arrangements which could ensure complete transferability of European currencies among themselves on current account and substantial liberalization of trade within Western Europe. The ECA suggestions were in effect a set of principles to which we believe any trade and payments arrangements devised by the OEEC should conform. Chief among these principles were: (a) that both trade and payments should be on a truly multilateral basis within Western Europe; (b) that the participating countries should submit to the discipline of settling their net imbalances in intra European trade at least partly in gold or dollars in the case of debtor nations and partly in the extension of credit in the case of surplus nations; and (c) that considerable administrative discretion should be granted to the OEEC (or whatever representative central institution was established to operate the payments mechanism) to adjust the gold and credit ratios, to provide special assistance to individual members, and in general to induce the participating countries to harmonize their national economic policies and conditions in order to ensure that intra-European deficits and surpluses would be of manageable proportions.

On the basis of these principles, the OEEC proposed early in January 1950 the establishment of a European Payments Union (EPU) within the framework of the OEEC. In the OEEC proposals, payments imbalances arising from current transactions between any pair of participating countries would not be settled directly between the two countries concerned. Instead the EPU would provide the facilities of a clearing house and the net surplus or deficit of each country with all of the others would be periodically calculated and settled with the EPU, partly in the payment of gold or dollars by debtors to the EPU and partly in the extension of credit by creditors to the EPU. Sufficient ECA aid would be provided through the EPU to settle the balances remaining after the partial gold and dollar payments and credit extensions by the participating countries to the EPU. Concurrently with the establishment of the EPU, the participating countries would free at least 60% of private trade among themselves from quota restrictions (QR’s), and hope was expressed that the remaining QR’s would be removed as quickly as possible. The OEEC proposed that QR’s be reimposed only on a multilateral basis and only in special and previously-defined situations after consultation with the EPU.

Shortly after the OEEC recommendations were made, the British Chancellor of the Exchequer informed the OEEC Council of certain basic British objections to the proposed EPU and, in March, the British Government circulated a memorandum to the United Sttaes and the participating countries elaborating these objections and proposing an alternative plan.² The British counter-proposal suggests in effect that only the continental countries become members of the type of payments union devised by the OEEC. The United Kingdom would have a special status and would maintain its present bilateral trade and payments arrangements with individual participating countries. To a limited extent, the British would be willing to pay off bilateral debts through the EPU, either with their bilateral claims on other European countries or with gold or dollars. As a whole, however, the payments provisions of the British proposal are unlikely to result in payments of gold by the United Kingdom and would more probably result in receipts of gold from the EPU. Furthermore, the British insist on retaining the right at their own discretion and without prior consultation to reimpose QR’s on imports from individual continental countries whenever they think it necessary to protect their monetary reserves.

The Executive Branch of the U.S. Government, the OSR, and a number of the OEEC countries agree that the British alternative is unacceptable. The British, however, have showed no signs of modifying their position. Unless these differences are resolved in the near future, which we consider unlikely, the problem may arise in one form or another at the Foreign Ministers’ meeting in May.

The ECA believes that disagreements with the British on the proposed EPU stem from certain fundamental differences of policy on the broader question of European unification. Both proposals are extremely complicated and technical but the basic obstacle to agreement or to a satisfactory compromise seems to be British economic isolationism in general and British reluctance in particular to forego any of the bargaining advantages and maneuverability afforded them by the maintenance of bilateral trade and payments agreements. This basic British attitude is exemplified by their position on three specific and technical points at issue in the proposed EPU.

ii. quantitative restrictions on trade

Most trade within Europe since the war has been conducted within the framework of bilateral trade agreements which provide for quotas or quantitative restrictions on imports. These restrictions are designed, at least ostensibly, to keep each country’s imports from any other country down to the level it can finance. The existence of these bilateral agreements constricts the European economy within rigid trade patterns, prevents the most efficient use of resources within the area and seriously hampers recovery. The removal at least of QR’s is a first and necessary step toward the creation of a single, wide, competitive market on which Western European recovery depends.

The British are not willing to limit the exercise of their right to reimpose QR’s to special circumstances defined in advance and, since they would retain their bilateral payments agreements, they apparently wish to be free to reimpose QR’s against individual participating countries. It is clear that countries cannot be asked to surrender the right to restrict imports and ration foreign exchange at least temporarily if necessary to check a loss of monetary reserves. However, the OEEC’s proposal envisages only that participating countries agree to limit the exercise of this right so that it will not be arbitrary, punitive or without regard to the problems and difficulties of other participants who would be seriously affected. But, the British are not prepared to accept an EPU under which QR’s could be reimposed as temporary corrective measures in circumstances clearly defined in advance, on a multilateral basis (since payments would be multilateral) and, whenever possible, after prior consultation with the other countries affected through the EPU or OEEC. Basically, we believe that if a payments imbalance which results in a loss of gold is in fact a symptom of fundamental economic maladjustment, it should be regarded as a signal for the initiation of measures of domestic readjustment, not simply for the erection of artificial restrictions which prevent readjustment and hamper recovery.

iii. bilateral payments agreements

The British counter-proposal envisages the maintenance and possible future extension of the present system of bilateral payments agreements and of bilateral credit facilities between the United Kingdom and the individual continental countries. In the EPU as proposed by the OEEC, these bilateral agreements might perhaps remain in existence but would be very largely inoperative since all settlements of balances would be on a net multilateral basis through the Union. The British contend that the sterling transferable accounts system, to which a few of the participating countries belong, does provide some multilateral settlement facilities. But many of the participants are reluctant to join the sterling transferable accounts system, since it entails the obligation to hold inconvertible sterling without limit. In practice, the transferable accounts system has been so much subject to the arbitrary and unilateral decisions of the British authorities that it does not always provide a satisfactory basis for multilateral payments arrangements among non-sterling countries.

We suspect that the basic reason for the British reluctance to abandon their bilateral payments system is their unwillingness to forego the bargaining advantages and coercive possibilities which it affords. The retention of bilateral payments agreements, combined with the possibility of arbitrary, unilateral reimposition of QR’s against individual continental countries, provide the British with the potent weapon of limiting or denying access to both the British consumer and the British producer. Britain is thereby able to induce other, weaker countries to buy and sell at prices more advantageous to the United Kingdom, to import and export particular types and quantities of goods as desired by the United Kingdom, and to accumulate inconvertible sterling without limit or to extend credit in other ways to the British. In view of the basic need for European cooperation and unification if permanent recovery is to be achieved, the United Kingdom’s evident unwillingness to forego the coercive possibilities and maneuverability provided by bilateralism is an issue of fundamental importance.

iv. partial gold settlements

A specific provision in the British counter-proposal, related to the maintenance of a structure of bilateral payments agreements, would allow the British a unilateral choice between making their payments settlements through the EPU and making them directly with each of their bilateral partners. The exercise of this freedom of choice would enable the British to minimize any gold outflow to the continental countries and to maximize any inflow of gold from them. Thus, although the British have agreed to a system of partial gold settlements in principle, it is an important feature of their counter-proposal that in practice they would generally be able to avoid making gold payments.

The OEEC’s proposal for partial gold settlements and partial extensions of credit to cover payments imbalances among the participating countries is intended to provide automatic incentives for restoring a measure of harmony among the individual national economies of Western Europe. By subjecting themselves to the discipline of having to choose between a loss of monetary reserves and appropriate changes in national economic policies, debtors would be under some pressure to reduce the size of their deficits. Similarly, creditors would have to choose between internal adjustments which would increase their demand for imports or the extension of credit to their debtors via the EPU. It is in this way that the operation of the EPU would provide some incentives to remove the foundamental causes of economic maladjustments and unmanageable payments imbalances in Western Europe and would not merely alleviate their symptoms. Furthermore, partial gold settlements are intended to be a reasonable step in the direction of the general convertibility of currencies, the basis for a world-wide multilateral trade and payments system. The British counter-proposal, however, would permit the United Kingdom to escape from much—if not all—of the gold settlements incentive to keep its national policies in line with those of the rest of Western Europe and to begin a process of readjustment leading to convertibility and multilateral trade with the rest of the world.

v. the basic issue

It is clearly recognized that British participation in any European-wide multilateral system of trade and payments entails special problems because of the position of sterling, particularly because of the existence of large sterling balances held by a few of the European and a number of the sterling area countries. The British maintain that their basic position is largely dictated by their pre-occupation with these special problems. In our view, however, these problems can be dealt with in a manner which does not conflict with the principles and objectives of United States policy. We are prepared to consider, and have in fact already proposed, certain safeguards and special ECA assistance to take care of the sterling problems as such. But the common feature underlying the three points at issue with the British as just described is not a mere difference of views as to the technical solution of the sterling problem, but rather a basic difference of choice as between economic nationalism and economic internationalism.

In trying to minimize gold settlements, Britain is in fact seeking to avoid having its national economic policies limited, influenced or altered in any way by external conditions. Insistence on the right arbitrarily to reimpose bilateral QR’s without prior consultation is in effect insistence on the right to cut the British Isles off from the continent to the extent necessary to prevent continental economic conditions from influencing the economic program of the British government. Insistence on the maintenance of Britain’s present structure of bilateral payments arrangements would leave the door open for bilateral bargaining between Britain and each of the other participating countries, for discrimination by Britain as between different participating countries, and therefore for economic coercion by Britain of its continental neighbors.

The issue is not the desire of the United Kingdom to preserve its legitimate sovereign rights or conduct an independent economic policy. The basic issue is whether Britain, a country highly dependent on foreign trade, is prepared in cooperation with its major trading partners to make those internal adjustments required by external changes which can enable both her and them to participate fully in the European and in the world economies and thereby to enjoy those eventual improvements in productivity and in the standard of living which membership in a wide, freely-trading area can bring. Viewed in another way, it is whether the United Kingdom will insist, at the one extreme, on economic isolation and autarchy or, at the other extreme, on the right to coerce other countries to accept economic policies of benefit mainly to Britain. The implication of the EPU proposal as developed in the OEEC is that all participating countries agree to accept limits on the exercise of national sovereignty, confining its absolute and arbitrary exercise to the legitimate field in which it would not conflict with the economic needs of Western Europe as a whole. This end would be realized primarily by establishment of consultative and coordinating arrangements (the European Payments Union) and of uniform principles of trade and payments for all Western European countries, which would permit all countries to conduct independent policies within their means, but would prevent any country from seeking to push its own national program beyond the point it or its neighbors could afford. Since the policy any one country could afford is directly influenced by the policies pursued by others, the result would be a coordination or harmonization of national economic policies without any intervention from outside in the application of those policies to the domestic situation of each.

This is the: minimum first step in the development of a single wide market and an efficient unity of economic activity in Europe, in turn an essential pre-requisite for progress towards permanent self-support and political and social stability. Thus, it is not only a pre-condition of genuine recovery, but also an indispensable part of European solidarity. We do not believe opposition to this purpose makes sense, whatever the narrowly national motives may be, and we do believe that British opposition is directed to the fundamental purposes, rather than to the technical details, of the EPU proposal.

1. This report was transmitted by Richard Bissell to George Perkins on April 14 with the following comment: “The ECA has drafted the attached paper to inform the Secretary of State of the points at issue with the British on the proposed European Payments Union. This document is an attempt to explain the nature of the points at issue, and does not purport to be a position paper or to make recommendations concerning the strategy which we should adopt. We believe it important, however, that the Secretary of State understand the issues involved in case this subject should be raised during the forthcoming Foreign Ministers’ meeting. This paper has been discussed with various members of the State Department and I believe it represents a common State Department/ECA view of the nature of the issues.” This message is followed by the handwritten notation: “G. W. P[erkins] is holding for briefing with Sec. B. T. M[oore].”
2. The EPU plan handed by Cripps to Harriman on March 7. See telegram 1357, March 10, p. 643.