41. Memorandum From Secretary of the Treasury Anderson to President Eisenhower0
December 30, 1958.
I thought you might like to have a handy memorandum that would try to state briefly and simply the nature and significance of the formal moves to nonresident convertibility by the European countries which were announced over the past week-end and which became effective on December 29, 1958. To that end, I am sending you this brief memorandum.
- 1.
- Since the war the European countries, including the United Kingdom, have had exchange controls which put limits on the freedom of both residents and nonresidents to convert their currencies into other currencies, especially the U.S. dollar. These countries have also had quota restrictions on imports and ordinarily these restrictions have been more severe in the case of imports from the dollar area which means chiefly the United States and Canada.
- 2.
- Much progress has been made in the last few years in relaxing the restrictions on the convertibility of the European currencies into dollars. So far as nonresident holders of those currencies are concerned, the final step has now been taken. Hereafter nonresidents will be able freely to convert their holdings of European currencies into any other currency including dollars, unless the holdings arose out of a capital transaction.
- 3.
- The most important change is in connection with the pound sterling. Heretofore, nonresident holders of the pound sterling, that is, persons outside the sterling area, had to have official permission in order to convert the sterling into dollars at the official rate. Lacking that permission, they could convert the sterling (which was called transferable sterling) into dollars in free exchange markets such as New York or Zurich. But they could do so only at a discount, and this discount in the last year has generally been about 1½ per cent. Under the new regulations, these conversions into dollars can take place without official approval, and can be handled by banks in the United Kingdom and at the official dollar rate for sterling.
- 4.
- This move to nonresident convertibility is an important step toward full convertibility of the leading European currencies, especially sterling, the German mark, the Belgian and French francs, the Italian lira, and the Dutch guilder. From the special standpoint of the United States, it means that people who want to buy American goods will no longer have to pay a higher price for dollar exchange than they would if they were buying goods which could be paid for with sterling or some European currency.
- 5.
- The important remaining step to be taken by these European countries before they will have established full convertibility for their currencies is to eliminate import restrictions which are based on balance-of-payments considerations. Some of them, especially the Netherlands, and Belgium, have already virtually completed this task. But others, especially the United Kingdom and France, still have fairly severe import quota restrictions and even prohibitions. These aim at preventing the residents of those countries from importing as much from abroad as they would like to. Moreover, these restrictions are more severe in the case of imports from the United States and other countries of the dollar area than in the case of imports from other parts of the world. Also, the residents of these countries are not allowed to have all the foreign currency they want in order to travel abroad or to make remittances to people in foreign countries in foreign currencies. However, there are very encouraging signs that the United Kingdom in particular and the other European countries intend to make real progress in the next year further to reduce the discriminatory restrictions against imports from the dollar area and also to reduce still further their total restrictions on imports for balance-of-payments reasons. If they can do this without having severe strains on their foreign exchange reserves, they will have reached the point where they can safely make their currencies fully convertible for residents as well as for nonresidents.
- 6.
- There were two other events which were related to the move to nonresident convertibility: (a) France established a new par value which devalued the franc by about 17 per cent, to 493 per dollar. [Page 99] France has made good progress toward stability in the 12 months since the United States, the Fund, and the OEEC backed a stabilization program. The new action is intended to be the capstone of the whole effort and to equip France to relax restrictions on trade and to compete in the Common Market which begins its first year on January 1. (b) The European Payments Union went out of existence on December 29 and was replaced by the European Monetary Agreement. This Agreement provides for a European Fund with $600 million in resources, partly from the capital of the EPU to which the United States contributed, and partly from new contributions by the European members. This Fund will make short-term loans to the members.
- 7.
- In general, the new move to nonresident convertibility, together with the prospect for further reductions in restrictions imposed on residents of European countries who wish to buy goods or services from abroad, has provided the best promise of the achievement of full convertibility of leading currencies which has existed since the end of the war.
Bob1