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J u n e 22



The Agreement on the European Payments Union Statement by Federal Reserve Representative
In December 1949 > the E A submitted to the O E a new plan for
intra-European currency transferability providing essentially for multilateral clearing of intra-European balances through a European Clearing
Union (later renamed European Payments Union) and for settlement of net
balances remaining after clearing partly in gold and partly in credit*
During the N C discussions of the E A proposal, agreement was reached
that the proposed payments arrangements should not be such as to prevent
any one country or any group of countries from moving toward convertibility or toward integration at a faster pace than the rest of the
In the minds of E A and N C the principal objectives of the
European Payments Union were:
(1) To do away, as far as possible, with bilateral payments arrangements in Europe and therefore to make an important contribution, on
the payments side, to the formation of a single market in Europe, and to
the consequent strengthening of the European econonyj
(2) To take a step in the direction of "integration" in vrtiich
i t would be possible for the United Kingdom to join the Continental countries j and
(3) To provide for a settlement of net intra-European balances
that would not be so hard as to prevent the further dismantling of quantitative restrictions on trade, but not so soft as to provide countries
with incentives to create or perpetuate excessive imbalance in their
intra-European payments relations.
The Agreement on the EPU which has now emerged from months of
arduous negotiations in Paris and Washington, no doubt represents a considerable achievement with respect to the first two goals. In agreeing
to establish a net balance with the Continental countries and to settle
i t partly in gold in accordance with a predetermined formula, the United
Kingdom has traveled a long way from the purely negative stand adopted
by i t during the session of the O E Council in January. In our opinion
this agreement would not have been possible without providing for the f
multilateral use of existing intra-European sterling holdings, and ECA s
readiness to indemnify the United Kingdom for actual gold losses resulting from such use was an appropriate price to pay for the agreement.
O the other hand, we view with concern that part of the E U
agreement that relates to the settlement of the net balances emerging
from multilateral clearing. It appears to us that a gold-free credit
margin amounting to 3 per cent of the total trade turnover of the
individual countries, to which must be added a quasi-gold-free credit
margin of another 3 per cent, provides most countries with larger credit
facilities than are at present available to them and is more than ample




Annex IV •

in relation to the actual deficits and surpluses experienced by most countries over the past year* We are not in a position to appraise how much
damage this "softness" will actually do in inducing countries to pursue
unduly expansionary monetary and fiscal policies; we realize in particular
that there are other forces at work in the present situation, in particular the prospect of declining U. S. aid, that might dissuade countries
from such policies* But the best we can hope for from the present arrangement is that it will not encourage countries to adopt the wrong monetary
and fiscal policies, whereas we had hoped that the scheme would be an
active force making for the adoption of the right policies*
While, therefore, we fully recognize the considerable progress
achieved in certain respects, we consider that the volume of credit introduced into the scheme represents a potential danger for the internal and
external monetary balance of the participating countries and therefore for
the ultimate full convertibility of their currencies* The recent special
agreement with Belgium somewhat reduces this danger, not only for Belgium,
but also for Belgium's debtors, since the latter will now have to use part
of their credit margins not for the financing of new deficits, but for the
repayment of old debts to Belgium* Nevertheless, considerable progress
remains to be made before the scheme could conceivably be regarded as containing adequate incentives for countries to achieve external balance* It
is important, therefore, to keep this objective constantly in mind during
the final negotiation and implementation of the agreement. In particular
all possible efforts should be made:
(a) to introduce more "hardness" into the system through the
stipulation of the shortest possible terms for the credits that are to be
granted; and
(b) to leave open the possibility of correcting the defects of
the present agreement by providing for periodic (say, semi-annual) reconsideration of the gold-credit ratios#