That European Payments Union

March 27, 1950

If Congress wants to save the American taxpayer $600,000,000 it could find no better way of doing it than to reject the ECA proposal that we pour that amount into a “European Payments Union.”

This proposed “Payments union” would merely seek to do for Western Europe, and by the same methods, precisely what the International Monetary Fund already seeks to do on a global scale. Assuming that this scheme ought to be carried out at all, why not utilize the already existing IMF to do it? Why not at least place the proposed regional organization inside the existing global fund? Why set up an entirely new, competing, overlapping, and duplicating institution?

But the questions to be raised about this scheme go much deeper than organizational ones. What is proposed is that $600,000,000 more of the American taxpayer’s dollars be thrown into a huge kitty, together with fresh and practically automatic loans of the European governments to each other.

The purpose of this is to enable these European countries to buy more goods from each other. There is no reason to suppose that the scheme wouldn’t, at least temporarily, achieve this result. Anybody can buy more goods if somebody else gives him the money to do it with.

But at what cost, and at whose expense, will this be done? It is argued that if the European countries are encouraged to buy more from each other they will need to buy less from the United States and the rest of the “dollar area,” and so “save dollars.” But by the same reasoning (unless they have unemployed resources), if they sell more to each other they will have less left over to sell to the dollar area—and certainly less incentive to sell it. In other words, they will have less incentive to earn dollars.

There are strong reasons for thinking, in fact, that the tendency of the proposed European payments union would be to turn Western Europe and the sterling bloc into one big soft-currency area—and to reduce the trade between this soft-currency area and the rest of the world. For this intra-European trade would be financed by a new dose of easy dollars and inflationary credit. This inflationary credit would tend to raise price levels still further within the area, increase its price incentive for dollar imports, and reduce still further its ability to export competitively into the dollar area. Moreover, though the member nations promise to cut down their quantitative restrictions on imports from each other, the scheme contemplates that they would continue to discriminate against the outside world, and even be encouraged to do so to “save dollars.”

In short, the scheme threatens not only to turn Western Europe into a big walled-in soft-currency area, but actually to increase on net balance the dollar deficit of that area. It would tend to delay rather than promote worldwide multilateral trade. It would tend to delay rather than accelerate general currency convertibility, and above all the convertibility of sterling and European currencies into dollars.

The greatest single step toward a free and balanced international trade would be to restore the general convertibility of currencies into each other. This can be done only by the abolition of exchange control. The traders of every country must be allowed once more to buy and sell their own or other currencies at whatever rates are established in free markets.

To prevent currency depreciation and violent fluctuations governments must stop resorting to police methods. They must turn to the restoration of confidence. This will require a halt to inflationary policies and to threats of more socialism and expropriation. Ultimately it will require a return to the international gold standard. For Britain it will require to begin with the blocking or funding of the old overhanging sterling debt. But in general what is needed to promote world recovery and restore world trade is not still more bureaucratic tinkering, but the restoration of economic freedom.