John R. Presley

Pioneers of modern economics in Britain

Lionel Robbins, William J.Baumol G.L.S.Shackle, J.L.Ford Nicholas Kaldor, Mark Blaug Sir John R.Hicks, John R.Presley James Edward Meade, David Greenaway Joan Robinson, G.K.Shaw Harry G.Johnson, Chris Milner.

The Beginning of European Monetary Co-operation

The recent upsurge of enthusiasm for monetary integration shown by all members of the European Economic Community, and the multiplicity of plans put forward, tend to obscure the humble beginnings of what has been a gradual process of monetary co-operation and integration in Europe. Such a process really began after the Second World War with a series of formal intra-European schemes designed to facilitate multilateral trade and payments. These schemes may seem, in retrospect, infinitely less ambitious than current plans for supranationality and a common currency in the Community, but at that time they represented a revolutionary step away from the ‘strait-jacket’ imposed upon Europe by bilateralism in international trade and payments. This chapter examines these initial steps in European monetary co-operation up to the formation of the European Payments Union in 1950.

Trade Liberalisation and Monetary Integration

The process of monetary integration can be regarded as the continual movement of the E.E.C. countries towards full convertibility within the Common Market, and eventually towards a common currency within a United States of Europe. The ultimate objective of the E.P.U. was to create those conditions in Europe which were required to restore limited convertibility. This limited convertibility took the form of partial convertibility in relation to current account transactions. Non-resident holders of a currency were given the right to sell that currency for any other currency. This was sufficient to promote multilateral trading in Europe without the need of the E.P.U. However, complete convertibility for current transactions means much more than simply extending this right to non-resident holders of a currency. It means the complete freedom of residents and non-residents to buy or sell any currency within the Community for the purpose of current account trading.1 This was the next stage of monetary integration in the Community. To achieve this the absolute freedom of intra-Community trade and payments in current transactions was required.

The Second Werner Report and the Subsequent Agreements

The main body of the much awaited Second Werner Report (dated 8 October 1970) does not differ greatly from the First Werner Report. There is once again a desire to achieve a complete economic and monetary union in the European Economic Community by 1980. As in the first report, only the first stage of integration, 1971–3 inclusive, is spelled out in any detail, and as before budgetary policy is emphasised. However, on this occasion there are two fundamental differences with the first report. Firstly, despite the repetitive nature of the main body of the document, parts of the new sections emerged as a compromise between the views expressed by the ‘economists’ and the ‘monetarists’. The Council of Ministers had indeed asked the Werner Committee to seek out common ground between the sides when they had asked for the preparation of a second report in June 1970. Thus whilst the Report does seek a complete economic and monetary union by 1980, it also draws attention to the dangers of regional imbalance, unemployment, environmental problems and the disequilibriating effects of capital movements. It agrees that financial compensation should be given in the first two cases and that such a responsibility may be too much for individual states to carry.

The European Payments Union

The improving economic climate in Europe in 1949 removed the reluctance of most European countries to make further progress towards convertibility and trade liberalisation. Europe was not yet prepared for general convertibility, but there was a common desire finally to escape from bilateralism, from trade discrimination, and from trade and exchange restrictions,1 which were the main obstacles to the expansion of competitive intra-European trading.

Proposals for a Monetary Union

The authors have on numerous occasions during the past year1 put forward their famous ‘nine points’ for a monetary union. In the light of the conciliatory agreements reached by the Council of Ministers in Brussels in February 1971, these proposals have been slightly modified. The basic philosophy, however — economic co-ordination moving towards the introduction of a European currency — has not changed. The nine points are set out in detail in the pages that follow.

The Earlier Plans, 1969–70

On 12 February 1969 the now famous Barre Plan was presented to the Council of Ministers of the E.E.C. The main aim of the Plan was the co-ordination of economic policies and monetary co-operation. This was to be achieved through: (1) The provision of immediate, automatic and unconditional short-term credits to member countries experiencing balance of payments difficulties. (2) The provision of conditional medium-term credits to member countries experiencing persistent balance of payments difficulties. (3) An agreement between member states regarding future growth rates. (4) Consultation between member countries on the coordination of their medium-term economic plans.

Monetary Integration and Britain’s Entry

Of the numerous problems raised by the plans for monetary integration for Britain, three issues are of crucial importance. Can Britain afford to surrender the right to devalue or revalue the pound? Are the reserve facilities available in the Community adequate to support sterling? What form and degree of harmonisation of national budgets could we contemplate?

Postscript: The ‘May Events’ of 1971

During the weekend of 1–3 May, the influx of dollars into West Germany, which had been substantial ever since the beginning of the year,1 reached astronomical proportions. On the one day, 4 May, the Bundesbank had to buy up over

The Evolution of European Capital Markets, 1958–70

1,000 m. in order to maintain the dollar parity above the official floor.