Working Paper Series E-2012-01

The inability of the Bretton Woods monetary systemand the British Search for a new international
economic framework in the 1950's

Mei Kudo(Institute of International and Cultural Studies, Tsuda College)©2012 Mei Kudo. All rights reserved. Short sections of text, not toexceed two paragraphs, may be quoted without explicit permission
provided that full credit is given to the source.

1

The inability of the Bretton Woods monetary system and the British Search for a new international
economic framework in the 1950’s 1
Mei Kudo (Institute of International and Cultural Studies, Tsuda College)
Summary
How is the reality of the Bretton Woods system and “embedded liberalism” ideology
immediately after the Second World War II? What is the meaning of European integration in
relation to the international economic regime? To approach these questions, this paper, taking thetwo UK proposals of floating rate and sterling convertibility – “Operation Robot” and “Collective
Approach” – , argues, because of the ineffectiveness of both Keynesian policy and the IMF, in the
1950’s, some of the UK policy-makers try to apply more market-oriented policy to resolve balanceof payments crisis, but rejected by those who thought market solution expose the welfare state indanger. This paper also analyses reaction from the continental Europeans. Although they too
recognized the limit of the IMF, and Marjolin was even looking for new Atlantic framework, theiridea was not corresponded to the “Collective Approach”. What they want was the convertibility
through existing EPU framework, which is more reliable and effective than the IMF.
Introduction
0.1 “Embedded liberalism” in the Bretton Woods system 2
Global financial crisis revealed vulnerability of the international monetary system basing on
dollar and floating rate. On the other hand, European monetary cooperation which was actuallydeveloped from the 1970’s basing on fixed exchange rate system as a defence from dollar based
international system are also facing its limit. Rather than taking place dollar as a core currency,
euro itself is facing the critical phase. In the discussion on Euro, much attention was paid to the
problem of huge budget deficit and public debt to save the Euro, calling for balanced budget eventhough it means adoption of deflationary policies. On the other hand, proposal of strengthening ofEU power to national budget policy too was a product of unanimity. This controversy on external
1 I am very grateful to Professor Eiji Ogawa, Professor Sahoko Kaji, Mr. Hideki
Hayashi, Professor Yuichi Kanai, Professor Naoki Fukuzawa, Professor Ken Fujita for
their comments, criticism and advises, though all the errors remain the responsibilityof the author.
2 There is controversy over the application of the expression “Bretton Woods system”
to international monetary system in the post-war era. However, in this paper, I will notinvestigate in this argument further, and employ expression “Bretton Woods system”
referring to the post-war international monetary order in which the IMF was assumed
to play a crucial role. As to the argument over the expression of “Bretton Woods
system”, see Hiroshi, Makino, Nichi-Bei Tsuuka Gaiko no Hikaku Bunseki: Nixon
shock kara Sumisonian Goui made (Comparison of monetary diplomacy in Japan andthe United States: from Nixon shock to the Smithsonian Agreement), Ochanomizu
shobo, 1999, pp.44-49.

2monetary goal and national policy autonomy remains of the argument on the construction of
post-war international economic framework. In the period, the central problem was how toestablish an international framework in which both external liberalisation and domestic policy goals
could be achieved without contradiction, though the weigh was more on the protection of national
policy autonomy tempering the monetary stability. Thus, looking back on the Bretton Woods era
might have some insight to the current issue on Euro, though not directly give any answers.
Mundell-Felming Trilemma pointed out three policy goals which could not be sustained at thesame time: fixed rate of exchange, free movement of capital, and monetary policy autonomy 3. All
these three could not be achieved at the same time – any one of them must be sacrificed to achieve
the remaining two. The classic gold standard of 19th century was stable, for each country wascooperative to maintain fixed exchange rate. I this case, sacrificing policy autonomy contributed
stability of the exchange rate under the free capital movement 4 However, when they confronted
with recession after the First World War, development of interest rate policy to prevent capitalflight to the high interest rate America prevented them from taking necessary expansionist policy,
and as a result, fixed rate was abandoned 5 . In addition, with the worsening of the World
Depression, some countries like UK and France protected their economy by making trade block ormonetary area with their colonies.
Taking the experience before the war in mind, the architecture of post-war world economy had toresolve following questions. In the newly created international economy, it must necessary to
restrict capital movement, to aim at multilateralism not bilateralism or discrimination, and to assure
policy autonomy of the countries. The so called “Bretton Woods system” supported by the IMF, the
GATT, and the IBRD created after the war was assumed to contribute this purpose. The aims of the
IMF and the GATT was to bring about multilateralism in trade and payments, but the IMF admitted
to maintain controls on movement of capital, and it set the mechanism which support national
policy autonomy while pursuing external liberalisation . Thus, post-war international world in the
Bretton Woods era was constructed to sacrificed capital movement in support of fixed rate andnational policy autonomy.
In the field of the International Political Economy, this international framework by the Bretton
Woods which enables countries to pursue both external liberalisation and domestic policy goals arecalled “embedded liberalism” by John Ruggie 6. Although, the concepts of “embedded liberalism”
itself comes from Karl Polanyi’s description on the gold standard, nor Ruggie himself disregardedmonetary affairs in his article, most of the modern works dealing “embedded liberalism”
framework after Ruggie’s article of 1983 concentrated on its practice in the trade affaires, andSchenk, Catharine, International Economic Relations Since 1945, London, 2011,
pp.6-7
3
4
5

Ibid.

Ibid.
6 Ruggie, John, ‘International Regimes, Transactions and Change’ in International
Organization, 36(2), 1983, pp.379-405.

3application of this framework to the monetary fields is not fully developed 7. Thus, before analysing
the practice of the “embedded liberalism” to the modern world, it is useful to look back what
Polanyi said at first.
According to Polanyi, fundamental transformation of the notion of the policy-makers reflecting
the change in society after the World War II occurred, and this transformation of the policy
environment made the maintenance of fixed exchange rate more complicated one 8. Under theclassic gold standard, it is natural to take every measure to defend currency, however, in the 20th
century, the situation changed. With the emergence of new force like labour party and trade union,
and widening of the voting right, budget and monetary policy now became political affairs too.
Transition from 19 century classic liberalism to 20th century embedded liberalism made monetary
policy secondary issue 9
One example of adoption of “embedded liberalism” to the international monetary system inpost-war era is the work by Barry Eichengreen, and Eric Helleiner adopts the framework to theanalysis of Southern countries. Eichengreen have employed “embedded liberalism” framework to
describe the transition of the monetary system from 19th century to 20th century.
One of the Eichengreen’s theme was to clear whether current tendency to floating rate andmonetary union point to ways of reconciling freedom and stability, pointing similarity of gold
standard and today, in that both are confronting the conflict between democracy and economic
liberalisation 10. Then, in the last chapter, he concludes that the conflict between capital movement,
democracy, and fixed but flexible exchange rate was not solved even by floating the rate but rather
abandoned it among the euro members, and it is not to be known if Euro participants will meetwhat required by “embedded liberalism” 11.
Eichengreen’s work looks at broad framework and dynamism of the international monetarysystem after the war. However, then, how is the practice of the “embedded liberalism” in certain
period or certain region? Helleiner tries to show how “embedded liberalism” was implemented inSouthern countries after the Second World War. According to Helleiner, Southern countries inpost-war era abandoned orthodox approach to the monetary affairs such as central banks withliberal philosophy, or currency boards. Instead, they introduced “embedded liberal” approach to thedomestic monetary policy like capital controls, more rigorous pursuit of national goals ofdevelopment and nation-building 12.
For example, in his edited work of 2008, four of eight articles were trade topics, andno one discuss from the point of view of monetary system, except that of Jacqueline
Best who argues how the IMF get rid of Keynesian norms. Ruggie, John (eds.),
Embedding Global market: an enduring challenge, Hampshire, 2008, Best, Jacquline,‘Hollowing out Keynesian Norms: How the Search for a Technical Fix Undermined the
Bretton Woods Regime’ in Ruggie (ed.), ibid.
8 Polanyi, Karl, The Great Transformation 3rd edition, New York, 1962, pp.133-34.
9 Eichengreen, Globalising Capital 2nd edition, Princeton, 2008, p.3.
7

10
11
12

Ibid.
Ibid., p. 232.

Helleiner, Eric ‘The Southern side of “embedded liberalism”: America’s unorthodox

4Contrasting to Southern example, in the case of Western Europe, “embedded liberalism” underthe Bretton Woods system soon proved to be ineffective, and policy-makers began to search for
new framework to balance external goal and national goal by pursuing more liberal,market-oriented policy. Although, actual abandonment of the Keynesian policy by Western
European countries started from 1980’s, in the 1950’s there had already been policy-makers or
intellectuals who found advantage in more “liberalist” policy, although, the content of the“liberalism” had variety of meanings and defers from country to country 13. Those peoples see’s
Bretton Woods system ineffective, and looked for more liberal way to solve the problem facingthem.
This is the issue we will look at. In Britain, although the policy management by the Labour
government which took power immediately after the war was occupied with domestic concern,such as transition from the war to peace, and welfare state, and used controls and budget as

main

policy tool while cheap money policy was continued in the monetary field, when the Conservative
took office in 1951, some quarter in the government began to contemplate policies relying more on
market-oriented solution, insisting on floating rate of exchange, convertibility of sterling, and more
active role of interest rate. Reactions of continental Europeans to the British proposal of sterlingconvertibility and floating rate varied. There was same recognition of ineffectiveness of the IMF
framework among the Europeans, for them external liberalisation must be achieved through the
OEEC and the EPU progressively.
0.2 British Proposal of floating rate of exchange, convertibility of sterling

Although the international framework itself was ideal, in the actual course of history, stableexchange rate and high economic growth in the golden era of the Bretton Woods system were
only short period, and especially early in the early post-war years, the Bretton Woods did notoperate well. If so, how did the countries tried to overcome the balance of payments crisis in theinability of the Bretton Woods?
In the 1940’s, immediately after the war, when the UK faced balance of payments crisis, they
reacted by restriction of import, strengthening of the Exchange Control Act, devaluation of sterling,
and financial aid from the US also help relief the British problems. However, in the 1950’s, thisway of handling the balance of payments crisis regarded as insufficient and have only temporal
effect, and some of the policy-makers felt the necessity to reform both British economic structure
and Bretton Woods system.
money doctoring during the early post-1945 years”, in Flandreau, Marc (ed.), Money

Doctors: The experience of international financial advising 1850-2000, New York, 2003,

p.249.
13 Articles in Yasuo, Gonjo, Shinjiyusyugi to Sengo Sihonshugi (Neo-liberalism andPost-war Capitalism), nihon keizai hyoronshya, 2006, are interesting works dealing
the concept of “neo-liberalism” which is not necessarily the same as that of
Anglo-Saxon style in continental Europe and the United States, the activities of“neo-liberalist” from the 1930’ to the 1970’s.

5“Operation Robot” was such proposal to react the balance of payments crisis started fromautumn of 1951 to early 1952 not by conventional measures of tightening of controls, rather it
aimed to overcome the crisis by adopting floating rate of exchange and sterling convertibility. The
plan was, in a sense, an approach to the IMF objective of liberalisation of exchange control incurrent account, but breached the IMF rule of fixed rate regime of exchange 14. In spite of the
majority view in the Cabinet that the measure to be taken must be import control and budget cutting,treasury officials though that radical reduction of government spending were, in effect, politicallyhard , and consequently, British industries lost competitiveness. Thus, they proposed “Operation
Robot” to solve the balance of payments problem by introducing market forces, which would settle
the exchange rate at appropriate level, stabilize balance of payments, and improve competitiveness.
Adding to the concern to the competitiveness by Treasury was the Bank of England’s hope tore-establish sterling as an international currency 15. Although, the “Operation Robot” failed becauseof the strong objection from Cabinet Ministers except the Chancellor, the next convertibility plansoon got approval in the Cabinet. This time the plan was “Collective Approach to theConvertibility”.
“Collective Approach” was a plan which called for cooperation with Commonwealth, America,
and Europe in resuming convertibility. In this period, the Europeans too recognised inability of the
Bretton Woods system, and some of the Europeans like governor of Bank of France evidently
support British plan. Nevertheless, the British proposal did not get support from most of theEuropeans, for they support the OEEC and the EPU framework rather than “Collective Approach”
as an alternative to the IMF.
Successive British plans were failed, but the British plans posed the Europeans fundamental
question of what kind of international framework was appropriate to achieve both external
obligation and domestic policy goads.
Existing works on “Operation Robot” and “Collective Approach” were centred on its adequacy
as a measure to tackle the problem of the British balance of payments and competitiveness 16. In
addition to the argument on domestic front, Burnham tried to focus its meaning to international
economic system, reflecting his International Political Economic interests 17. But, though his work
levels details of the policy-making process, it’s description about European reactions are only
partial, lacking common recognition to the Bretton Woods by Europeans, and as to the Bretton
Woods problem, he explains features and problems in international economy in the 1950’s, he did
not fully linked the problem under the IMF and British economic policy management, nor did
explained the meaning of the EPU and the OEEC in relations to dormant Bretton Woods system.
Therefore, in this discussion paper, I will try to clear in what was the “inability” of the Bretton
1415

National Archives, UK: T236/3240, External Action, February, 1952.
Schenk, Catherine, The Decline of Sterling: Managing the Retreat of an International

Currency, 1945-1992, Cambridge, 2010, p. 104.
Argument on this issue, see Schenk, ibid, pp.105-107, Burnham, Remaking the
Postwar World Economy: Robot and British Policy in the 1950’s, 2003, pp.183-185.
17 Burnham, ibid., pp.175-179.
16

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Woods, and what problem Britain faced because of that inefficiency and Keynesian management of
the economic policy, then, look at the policy-making process of “Operation Robot” and “Collective
Approach”, reactions from Europeans
1．Building of the Post-war Economic system and its Reality
1.1 Pre-supposed Function of the IMF and its Reality
Post-war international economic framework, Bretton Woods system originated from thediscussion between Britain and America. Reflecting on the experience before the war, in thenegotiation between the UK and the USA, bilateralism and protectionism were ruled out, andprogress towards the achievement of multilateral trade and finance was promised. The institutions
which set out rules for that purpose were IMF and GATT. In the Bretton Woods system, while
signatories were promised external liberalisation, they left rooms for domestic policy. While IMF
article 8 ruled the abolition of exchange control concerning the settlement in current account,liberalisation of capital movement was not imposed as an obligation. As to the exchange rate, underthe IMF, member countries must commit to the fixed rate of exchange, they are free to change theparity under the consultation with the IMF. In addition, IMF would provide credit to the countries
whose balance of payments are recognised as fundamental disequilibrium. Lastly, as already noted,
article 8 ruled the abolition of exchange control, article 14 admitted the continuation of exchange
control in post-war transitional period which was supposed to be five years.
The system reflected British insistence. On the course of discussion, the US emphasised
importance of liberalisation and multilateralism, the British thought dash to liberalisation of tradeand payments dangerous, though in discussion on “Robot” and “Collective Approach” in the early
1950’S, the UK insisted on dash to convertibility and the US supported gradually approach to theconvertibility. Under the gold standard, if a deficit country tries to resume equilibrium, it must be
done by devaluation of its currency or deflationary internal measures. After the First World War,British policy of high interest-rate policy to keep sterling expensive brought about massive
unemployment at home. In addition to the painful memory of inter-war period, the British
government had promised to realise full employment and welfare states after the Second World War.
However, in spite of the promise of full employment, the war-time estimates had already expectedhuge balance of payments deficits of Britain. Adding up to the balance of payments problem, wasmounting amount of sterling liability during the war. Taking all these problems, external
liberalisation immediately after the war was dangerous for the UK, and Britain required amechanism which assured not only external liberalisation but also domestic policy goals beincorporated in the post-war international economic system.
Although the Bretton woods were systematically assured both external liberalisation anddomestic goal, in the post-war reality, was that dual purpose be achieved by each country without
difficulty? Stephen Gill describes the practice of “embedded liberalism” that notions of thedomestic ‘mixed economy’ and liberalising international economy were, at the time, “relatively

7compatible”. 18.
But, this description did not correctly grasp the historical fact. Yes, it is true that in the Bretton
Woods ear, western countries achieved high economic growth and liberalisation of trade andfinance. However, such a golden period of the system existed only limited period, from 1959 after
the western countries resumed convertibility of non-resident to the 1968. 19. The article 14 of the
IMF which permits exceptional exchange control during the post-war transitional period continued
far beyond five years, and exchange control in current account remained until 1958 convertibilityof European currencies. Adjustment of parity did not used as often as expected except the 1949
devaluation of European currencies. IMF credit facilities did not operate because of the lack of IMF
resource for the early period. Rather than IMF credit, bilateral credit from the USA played an
important role in the balance of payments crisis. Also, in Europe, Bank for international Settlementand European Payments Union acted more effectively than the IMF. After 1959, the system was
relatively stable, but after 1968, again, the system turned to be unstable by sterling and dollar crisis,and stagflation in Europe. The Bretton Woods finally collapsed in the early 1970’s 20.
Thus, regardless of the fact that the Bretton Woods system was structured to assure external
liberalisation and domestic policy goals, in reality, that compatibility were not achieved in most of
the period.
1.2 Balance of Payments Crisis under the Labour Government
Britain after the war was cautious for immediate recession following the inflation, andcontinued to employ cheap money policy from the pre-war years 21. As a result, the Bank rate aimed
domestic purpose rather than to maintain value of sterling or disinflation.
Since the UK could not depend on monetary policy to prevent outflows of gold and dollars
originated from balance of payments crisis, the UK had signed bilateral trade and payments
agreement with the European countries since 1944, and import control or suspension of import wasordinary tool when the balance of payments crises occur.
Balance of payments perspective was worse. In addition to the necessity to increase export, there
was a problem of sterling liability owed by the UK and scarce gold and dollar reserves which
complicated the balance of payments problem more. From the 1945 onwards, amount of theSterling liabilities had been exceeded the amount of gold and dollar reserves. Consequently,
sterling convertibility was continued to be suspended even after the war. Otherwise, call for theGill, Stephen, American Hegemony and the Trilateral Commission, University of
Chicago, 1990, p.96.
19 Bordo, Michael, D., "The Bretton Woods International Monetary System: A
Historical Overview" in Bordo, Michael, Eichengreen, Barry J (eds), Retrospective on
18

the Bretton Woods System: Lessons for International Monetary Reform (National
Bureau of Economic Research Project Report), University of Chicago, 1993, p.4.
20 Toniolo, Gianni, Central Banking Cooperation at the Bank for International
Settlements, 1930-1973, Cambridge, 2005, p.350.
21 Dow, J.C.W., The Management of the British Economy 1945-60, Cambridge, 1964,
p.14.

8

repayment of the debt in dollar reserves which was in short both in UK and in the world would
press on to the UK .
Figure1: Amounts of Sterling liabilities in relation to gold/dollar reserves (million pounds)
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0

sterling liability
gold and dollar
reserves

Source：HMSO, Annual Abstract of Statistics 1938-1951, p.265.
As predicted in the war-wartime, Britain faced heavy balance of payments deficit after theSecond World War, and a progress towards multilateral liberalisation of trade and payments were
delayed. Soon after the end of the war, the Anglo-American Financial Agreement was signed in 6
December, 1945 to provide the British the credit of 3750 million dollars, though the sum was notenough to cover all the deficits of the UK. What was more, the British had to promise to resume
convertibility of the sterling- the action was thought to be premature- by 1947 in exchange for the
dollar. As promised in the agreement, the convertibility of sterling in the current account of
non-residents was established gradually from 1947, however, huge dollar drain was occurred as
predicted, suspending convertibility again on 20 August. In October, the Exchange Control Act wasstrengthened further 22. Now, non-resident holders of sterling were divided into four categories:
American Account (freely transferable inside outside the Account), Scheduled Territory (Sterling
Area) (Free transfer only inside the area), Transferable Account (freely transferable to Sterling Area,
and inside the Account), Bilateral Account (transfer inside the Area required British permission,
though administrative transfers were given in many cases. Transfer to Sterling Area was free) 23.
Recent work on why the British signed the disadvantageous agreement like this,seeYuichi Kanai, ‘The Anglo-American Financial Agreement and the Crisis of Sterling
Convertibility in 1947’ in Economic Science”, Vol.57, No.4, 2010, pp.54～66 (金井雄一「英米金融協定と 1947 年ポンド交換性回復の挫折」『経済科学』第 57 巻第 4 号』、名古屋大学大学院経済学研究科).
23 Bank for International Settlement, Annual Report, 1951, p.140.
22

9After the suspension of sterling convertibility in 1947, British current account tended to stabilize
by the beginning of the Marshall, however, from 1949, the balance of payments prospective once
again worsened, being affected by the American recession whose consequences were the worseningof the Sterling Area balance of payments and the aggravation of the dollar drain. This time, sterling
was devalued, followed by the devaluation of other European currencies like French franc. Since
the sterling rate of $4.03 was continuation from pre-war rate, fundamental revision of the rate wasneeded even there had not been a balance of payments crisis. In 1948, the issue had picked up by
Ernest Rowe-Dutton, an official of Overseas Finance Division of Treasury, Robert Hall, and Bolton.
In the discussion, Rowe-Dutton insisted on letting the sterling float, but floating was not an option
for the Bank in this time, since the Bank thought floating not logical, and must be a last resort,though some of the policy-makers were positive about floating 24.
In the 1949, then Britain faced balance of payment crisis, the focal point was whether to devalue
sterling or not, floating was not a choice. Those who favoured devaluation – Clarke, Rowan ofOverseas Finance Division of Treasury, later involved in the making of “Operation Robot” and“Collective Approach” – thought that deflationary measures must be accompanied, otherwise,
devaluation would be ineffective 25. On the other hand, those who opposed devaluation – officials in
the Economic Section like Robert Hall, Wilson Smith, and Eady – was uncertain about the effect ofthe deflationary measures, and argued that they were opposed to devalue sterling immediately for it
did not take effect without accompanying deflationary measure whose effectiveness was not certain.
The view of the Governor of the Bank of England, Cobbold was against sterling devaluation at thattime, nevertheless, his view had in common with those of Treasury officials in that both emphasised
the necessity of deflationary policy, inclusion of tight money policy in the deflationary measures,and regarded the published government budget cutting in July not large enough 26. Cobbold’s
opposition to the devaluation also stem from his desire to foster sterling convertibility as early as
possible, and he pointed out three problems to be solved before taking any action on the change ofthe exchange rate: (a) cost structure, (b) sterling holdings of non-residents, (c) agreement with the
USA and Canada- all of these factors would thought to be as crucial in the discussion leading up to“Operation Robot” 27. Sterling was devalued 30% from $4.03to $2.80 in September 1949 after
consultation with the United States and Canada. After the devaluation, the balance of payments
recovered, and in 1950, the UK’s balance of payments became surplus, but that was only temporary,
and the crisis would repeat again in 1951.
Thus, in the 1940’s, still in the period of reconstruction, the balance of payments crisis repeated,and since the monetary measures were directed to internal purposes, external liberalisation was
impossible, and sterling was totally at the mercy of the crisis. In 1949, sterling was finally devalued,
but this was exceptional case, and IMF’s adjustable peg was not used frequently. For Britain whose
Howson, Susan, British Monetary Policy , 1945-51, New York, 1993, p.240.
Ibid., p.245.
26 Ibid,, p.246. Cairncross, Alec and Eichengreen, Barry, Sterling in Decline 2nd edition,
2003, New York, pp.122-123.
27 Ibid., p.245.
24
25

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currency was international, devaluation was a last resort.
1.3 Regional approach to the multilateralism – OEEC and EPU
The cause of the balance of payments crisis and dollar problem could be attributed to manyfactors, but deficiency of the IMF could be one of them. As many argues, “For the first decade ofits existence, the IMF played a largely subdued and quite peripheral role in international economic
relations. By the mid-1950s, many thought that it had no longer had any significant function andthat it should be allowed to fade away quickly” 28. According to Eichengreen, most of the help tothe balance of the payments problem comes from the United States, not from the IMF, and in thisperiod, OEEC, EPU, and BIS contributed more than the IMF 29.
The Americans had to help the balance of payments problems of Europe in place of the IMF, foras long as balance of payments deficit continues, the US ideal of a world of multilateral trade andpayments could not be attained, and the US would suffer from trade discrimination by the European
countries. Since the desire of the American government was the opening and liberalisation ofEuropean markets as soon as possible, at first, they provided the dollar bilaterally to the UK by the
Anglo-American Financial Agreement, to France by Blum-Byrnes Agreement, then, multilaterally
to Europe, by the European Recovery Programme. Under the Marshall Plan, it was not theAmericans who decided the sum of the dollar provide, but the European countries were requested
to make a estimates necessary for the recovery by themselves, and under the ERP, the Organisation
for European Economic Cooperation was created as an European agency of the ERP, and topromote intra-European trade liberalisation. The OEEC Trade liberalisation Scheme started from1950. OEEC’s approach to liberalise trade was those which aim to abolish quantitative restrictions
between member countries stage by stage.
The European Payments Union was, then, established in September 1950 as a sub-organisation of
the OEEC, and its aim was to promote multilateral offsets and payments between the member
countries. Before the establishment of the EPU, European trade and finance was dominated bybilateral agreement to economise gold and dollar payments in trade. However, this makes European
trade and finance complicated. In the EPU, existing bilateral agreements were all abolished, instead,all the payments between the member countries was gathered to EPU, the payments were
multilaterally offset, and only sum of net deficit or credit were paid or received. The payments tothe EPU by the deficit countries was settled according to seize of deficits to overall quotas, and thegold payments occurred only at last stage. The EPU also functioned as a financial supporter to thedeficit countries providing credit facilities if the Managing Board admitted.
In spite of the fact that the OEEC and the EPU did not promote removal of the trade
discrimination to the US, rather it temporary admitted discrimination to the United States, the US
regarded the existence of the OEEC and the EPU an essential to the multilateral liberalisation of
28

James, Harold, ‘Who owns “ownership”?: IMF and policy advice” in Marc Flandreau,

Money Doctors: The experience of international financial advising 1850-2000, New
York, 2003, p.80
Bordo, Michael D., op.cit., p.45.

29

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Western World. What convinced the US policy-makers the importance of the regional framework
was the British experience of the suspension of sterling convertibility in 1947. Too early and too
heavy pressure of liberalisation or multilateralism was only to damage the European economies.
This was why the Americans had to admit existence of the OEEC and EPU as necessary eventhough it meant continuation of discrimination the dollar area.
In the negotiation setting up to the EPU, the UK opposed strongly to join the EPU. For the
British, existing bilateral agreements were more useful to save gold and dollar payments, andproposed “unite of account” in the EPU might deprive the role of sterling as an international
currency at least in Europe. The UK was finally decided to participate in the EPU after achieved
US assurance of dollar aide for UK, however, the UK’s, or more precisely, the Bank’s negligence tothe importance of EPU would be continued even after the participation – which we could see in thediscussion in “Operation Robot”.
2．The search for a new way out
2.1 Balance of Payments crisis and “Operation Robot”
From the early 1951, British balance of payments was again turned to be deficit, and thebalance of the whole of the Sterling Area also got into deficit. Foreign reserves, which was ￡3867
million in the second quarter was reduced to ￡2335 million at the end of the 1951, moreover, inthe first quarter of the 1952, it became only ￡1500million. Of course, the balance of payments
surplus from 1950 disappeared, and show balance of payments deficits 1951 onward. What wasworse was the decision of the United States to end the Marshall Plan in 1952, and large reduction of
the bilateral dollar support to the UK in 1951.

Table 2: Gold and Dollar Reserves
March,

June

1950(￡millions)

1,984

March,

June

September

December

1951
2,422

3,758

March,

June

1952
3,867

3,269

2,335

Source; HMSO, Annual Abstract of Statistics 1938-1952, London, p.265.

1,700

1,685

12

Table 3: Current Account of the UK 1946-1951

Total
Visible tradeinvisible

1946

1947

1948

1949

1950

1951

-344
-176
-168

-545
-425
-120

-26
-203
177

5
-154
159

244
-147
391

-521
-789
268

Source：HMSO, Annual Abstract of Statistics 1938-1952,London, p.260.
Under these balance of payments crises, Conservative Government led by Winston Churchill
took office. Criticising Labour government’s policy of high government expenditure contributing to
inflationary pressure, it called for more balanced budget, and to avoid inflation, emphasised thenecessity to activate monetary policy as an economic policy instrument in the 1951 budget 30.
Insistence on the resumption of monetary policy called back the influence of the Bank of Englandto the policy-making. Reflecting these change of philosophy of economic policy, its reaction to thebalance of payments crisis were totally different from that of the former government.
To the balance of payments crisis started from the autumn of 1951, the government at firstsuspended the liberalisation quantitative restrictions to the OEEC countries, but it was regarded as
not enough, and in the Commonwealth Economic Conference held between 15 January 1952 to 21
January 1952, more drastic steps to improve the situation was called by the participating countries 31.
The Chancellor of the Exchequer, R. A. Butler insisted at the Conference that not only direct
measure to reduce balance of payments deficits like import restriction, but also internal measures
were necessary, and Commonwealth countries must also reduce the imports from the dollar area tostabilise balance of payments of the Sterling Area as a whole. For his recognition, this conference
was the last chance to decide the way to secure the sterling 32. Despite the Chancellor’s emphasis on
the necessity of the measures from all aspects, a representative from Australia expressed his
discontents with British approach to the crisis. He instead asked the British to take more drastic
measures to the sterling problem, if they intended to re-establish sterling strong currency as before,saying that it was not enough to reduce imports from non-sterling area. 33. What the Australianthought necessary was the convertibility of the sterling to recover the confidence in sterling, and to
stimulate investment to the Sterling Area.
Reflecting the results of the Conference, the Chancellor had requested their officials in theExternal Financial Division to examine the necessary emergency action, and the task wasundertaken by Second-Secretary Leslie Rowan, and Under-Secretary R.W.B. (Otto) Clarke bothfrom External Financial Division of the Treasury in collaboration with the Governor of the Bank ofDow, op.cit, p.67.
NA: T236/3067, FM(52)1st meeting, meeting of Commonwealth Finance Ministers,th
15 January, 1951.

30
31
32
33

Ibid.
Ibid.

13

England, Cameron Cobbold, and Executive Director, Gorge Bolton 34.
The proposal finally agreed among them was called “External Sterling Plan”, or “Operation
Robot”. The four essences of the proposal were: (a) adoption of the floating rate of exchange, (b)convertibility of sterling, (c) freezing and funding of the sterling balances held by non-residents, (d)re-opening of the London Gold Market.
While the Treasury officials and the Bank were in accordance with the necessity of the sterlingconvertibility to overcome the situation, their intentions to support the convertibility were different,
and their opinions were also different about the issue on floating exchange rate. Whereas theTreasury was more concerned about the deadlock of the economic policy management and lack ofcompetitiveness of Britain rather than the status of the sterling as an international currency, theintention of the Bank was to secure the wider use of sterling as an international currency.
As the domestic economic goal of Britain after the World War II was based on realisation offull employment and welfare state, it was political very difficult to greatly cut the spending on
welfare, housing, food subsidies. Reduction of military spending too was impossible if Britain hope
to remain the Great Power. All these factors contributed to the inflationary budget deficit. In thecrisis of 1949, sterling was finally devalued after controversial discussions in both domestic andexternal front, in the crisis of 1951-52, the devaluation was excluded from the option, because“no-one would believe that this devaluation following only 30 months after the last, was the finalone”, ”foreigners would take such a devaluation as a confirmation that sterling was going the same
way as the French franc” 35.
Other measures like another reinforcement of quantitative restriction to the OEEC country’s
export would mean retreat from the liberalisation of trade, especially because the UK had alreadydid so. In addition, while IMF did not fully work in this period and the only reliable source of credit
to Britain in the event of balance of payments crisis was the United States, unfortunately, theEuropean Recovery Programme would planned to be terminated in 1952. On the other hand, even if
Britain fortunately could obtain another financial support from the US, that could not resolve
fundamental problem of the British economy. The cause of the problem, as discussed by Clarke ofTreasury and the officials of the US in this era, was lack of competitiveness of the British industry.
The effect of American aid would only delay the necessary economic reform in Britain.
Floating rate and Convertibility by the Robot were a measure to provide market mechanism
which would bring about efficiency and competitiveness to the British economy. Clarke though thatas long as the UK remained fixed rate of exchange, she would lose large amounts of gold and dollar
reserves each time the crisis occurs, but contrary to the fixed rate, under the floating rate, the rate ofexchange would take the strain, not the reserves 36. In addition, he expected that the sterling would
be fallen after the adoption of the floating rate, and that would promote export and reduce imports,
thus improve balance of payments. However, the most important reason for him to support floating
The name “Robot” was a code name taking from the initials of Rowan, Bolton, Otto
Clarke.
35 NA: T236/3240, External Action, 1952.
34

36

Ibid.

14

rate was that while the painful processes of higher cost of living and unemployment was inevitable
during transitional period, which would force uncompetitive British industries to restructure its
industries in the long run 37. Secondly, since the reason of the suspension of the sterling after the
war was a lack of gold and dollar reserves, if the problem of scarce reserve would disappear or atleast became minor problem by introducing floating rate, the reason to suspend the convertibility
would also disappear..
Thus, the attitude of the Overseas Finance Division was that the key to approach the British
difficulty was to reform British economy, and the decrease of the value of sterling as aninternational currency as a result was unfortunate but inescapable for that purpose. To the contrary,
the Bank’s intention of the Robot was to re-establish sterling as an international currency.
Under the Labour party, the Bank of England was nationalised, and interest rate had been kept
low for the purpose of economic reconstruction and to avoid recession, consequently, the Bank’srole in the making of monetary policy was very limited one. After the change of the government
from Attlee’s Labour to Churchill’s Conservative in the October 1951, the Bank had started topromote more active use of Bank Rate as a policy tool, and had open the London Foreign Exchange
Market in December 1951t with more flexibility to exchange rate 38.
A problem which bothered the Bank who aimed to resume sterling as an international currency
was “cheap sterling”. From the late 1940’s, in the free exchange markets outside the UK like New
York, Zurich, Transferable sterling was unofficially exchanged with the dollars at the rate cheaper
than official sterling-dollar exchange rate of $2.80 39. The sterling exchanged at free market wascalled “cheap sterling”, and it brought about some disadvantages to the UK.
The “cheap sterling” dealing were, according Bolton, comparatively new phenomena which
could not be assumed in the early 1940’s when the most of the trade was under the government
hands 40 . However, with the increase of private trade, various technics like “cheap sterling”
developed. In this new situation, suspension of sterling convertibility would only to bring about
disadvantages to the UK. Since the Bank of England’s exchange control was effective only to theresident of the UK, continuance of the suspension of sterling convertibility would exclude British
merchant from international dealings. Even by strengthening the exchange control, it would makesterling more and more unacceptable as an international currency. Further, the unofficial dealing
like cheap sterling means loss of dollar earnings, and, reveals the fact that the Bank of England
could not manage or control their own currency thus losing the confidence to the pound more andmore 41. To solve this cheap sterling problem, convertibility of sterling was crucial, for if thearbitrage of the sterling occurs from the existences and differences of both the official rate andtransferable account rate, this arbitrage would disappear once sterling recover the convertibility,
NA: T236/3240, R.W.B.Clarke to Leslie Rowan, 25 January, 1952.
Fford, John, The Bank of England and Public Policy 1941-1958, Cambridge, 1992,
pp.412-416.
39 Ways of cheap sterling dealings, and its genesis, see, Fford, ibid, pp.223-225.
40 NA: T236/3240, Inconvertible Sterling, 16 February, 1952.
41 NA: T236/3240, R.W.B. Clarke to Leslie Rowan, 25 January, 1952.
37
38

15

integrating the two rates into one.
Thus, although the intentions of the Treasury officials and the Bank differed, both found someadvantage in establishing convertibility in this period.

Figure2: Transferable Sterling Rate and Official Rate

US dollars per pound sterling

2.9
2.8
2.7
2.6

Official Selling Rate

2.5
2.4

US Transferable
Account

2.3
2.2
2.1

1949 June Sept Dec Feb Apr June Sept Nov
1950 1950 1950 1951 1951 1951 1951 1951

Source: International Monetary Fund, International Financial Statistics, Washington.
2.2 The deficiencies of Robot Plan
When the Chancellor Butler presented the plan to the Cabinet in February, the proposal
contained four points: flexible rate, sterling convertibility, freezing of a part of the sterling balances,
reopening of the London gold market. But the Robot did not appeal the Cabinet ministers, for theplan had some defects both domestically and externally.
At first, although Clarke regards floating rate convertibility as a remedy to bring about structuralreform in British economy, that would be brought about only after a long transitional period; for the
short-term, the result would be rise of import prices and living standard, damaging the industries
and increasing unemployment 42. In addition, contrary to the presumption of the Robot support’s
thinking that the fall of the exchange rate as a result of the floating would increase the exports, andthen, improve the balance of payments, the critics like Lord Cherwell of the Paymaster-General had
completely opposite opinion that the root of the problem was not a high cost structure of the British
industry, but the shortage of the supply of materials like steel and labour in the industries 43.As aresult, it would be impossible to increase the exports merely by adopting the floating rate.
The second problem of the Robot was concerned with the trade liberalisation scheme in OEEC.
Robert Hall, a chief of the Economic Section of the Cabinet Office, and Edwin Plowden, an

42
43

NA: T236/3240, External Action
NA: T236/3240, The Balance of Payments, Paymaster General.

16

influential member of Economic Planning Board, feared that the unilateral British action of thesterling convertibility would cause downward spiral of the European trade. The reason is that if
sterling resume its convertibility independently, it is natural to think that other soft currency
countries in the OEEC would seek to earn sterling so as to convert sterling to dollar later, but thiswould be done by increasing exports to the UK, and strengthening quantitative restriction to theexports from Britain 44.If British reaction to these measures by soft-currency countries would be
retaliating imposition of the quantitative restrictions, the OEEC would become an arena of not tradeliberalisation but trade war 45. Moreover, Hall estimated that the strengthening of the quantitative
restrictions on British imports would increase unemployment of more than 100,000 people. From
the above reasons, Hall concluded in his memorandum that the implementation of the Robot meant
abandonment of the British objectives of achieving full employment and high level of trade, andBritain should search for another way to tackle the balance of payments problems 46.
The two reasons were plausible enough for the ministers to refuse the Robot. However, theRobot was external difficulties too– its effect on the EPU, Sterling Area, and in relation to theexisting IMF obligations. The assumed effects of the sterling convertibility by the adoption of
Robot to the EPU would occur in three aspects: (a) the meanings or reason of the existence of the
EPU itself; (b) its impact on the working of the multilateral payments system of the EPU; (c)effects on liberalisation of trade.
As to (a), the EPU was a transitional organisation with an aim to promote liberalisation of
payments supporting the liberalisation of trade, and would end its working if the major European
currencies established their convertibility, thus, making the existence of the EPU unnecessary 47.
More precisely, it was formally ruled that in the EPU, convertibility of the currencies of themember countries whose total sum of quotas in the EPU exceed more than 50% of the total, would
bring about automatic clearance of the Union, and it was recognised in this period that if thesterling recover its convertibility, at least Germany, Belgium, and Holland would be followed –total of the quotas of these countries would be over 50% of the total.
Even if hard-currency countries could manage to stay in the EPU after the convertibility by some
way or others, this would cause technical problems in the payments mechanism – this was the point(b) above. If sterling would stay in the EPU after the convertibility, soft currency countries could
possibly try to draw credit – convertible sterling – from the UK as much as they could through EPU
until the obligation of gold payment occurred.
Finally, as to (c) above, the disappearance of the EPU meant not only the loss of the importantorganisation to facilitate multilateral payments in Europe, but it would also have negative effects on
trade side. One of the features of the EPU was its credit facilities to the debtor countries in Europe,and often supported the countries like France when they got into severe balance of payments crisis,44
45

NA: T236/3240, Robert Hall to Edwin Plowden, 22 February, 1952.

Ibid.

NA: T236/3240, Robert Hall to Butler, 25 February, 1952.
NA: T230/263, to Robert Hall, Collective Approach in Relation to EPU and Other
European Institutions, 13th February, 1953.

46
47

17

for the EPU credit facility were effective in the absence of the presupposed IMF credit. If the credit
facility were to be lost, that would make the debtor countries much more difficult than present topromote liberalisation of trade.
Those were the major point as to Robot in regard to the effect in Europe. From the point of theview of the Sterling Area countries and the United States too, Robot was problematical. For the
Sterling Area, the freezing of the sterling balance could not be defended and justified, meaning “thebanker shutting his doors”, and would have devastating effects to the Sterling Area countries likethe aggravation of the starvation in poor countries 48. As to the United States, Robot was, in a way,
an approach to the US objective of the multilateralism and convertibility, but in another way, it wasa divergence from the US objectives, since it insists abandonment of the fixed rate, and re-openingof the London gold-market without asking any US opinion, although under the IMF, only the US
dollar has formal convertibility to the gold on fixed price 49. Taking all these points in mind, inMarch 1952, the Cabinet decided not to adopt Robot plan, and decided to tackle the balance of
payments problems by import reduction, reduction of military budget, housing budget, and to
re-examine investment plan, and it was promised that if the situation would be aggravated again,
the Cabinet would reconsider the Robot 50.
The first trial to persuade ministers to adopt sterling convertibility was ended with failure. But
the fear for another crisis was not disappeared, and the search for the way out continued.
3 Not “Two-world”, but “One-World”
3.1 “Two-world” solutions
While the Budget of March 1952 announced the policy based on the conventional approach, thebudget did not remove the fear for the recurrence of the crisis. In addition, since it had beenpromised at the Commonwealth Conference in January that the British would propose new policy
to get rid of the balance of payments crisis at the Commonwealth Prime Minister Conference inautumn of the year, British policy makers continued to search for new plan.

From February to

March 1952, the plans which formalise the discrimination to the dollar area were proposed by
Bolton of the Bank of England, and an official of the Economic Section. However, these plans were
far from the “one-world” policy proposed by the Chancellor of the Exchequer Cripps in that time
when the country faced the devaluation of the sterling or not in 1949. Rather, both plan – called“two-world” plans – emphasised the necessity of the continuation and strengthening of thediscrimination to the dollar area by establishing sterling system in Europe or creating
discriminatory economic bloc between Sterling Area and Europe.
In February 1952, George Bolton proposed new trade and payments system with European
countries whose trade and payments relations were closely connected with the Sterling Area
countries after the realisation of the sterling convertibility. One of the deficiencies of the Robot was
NA: T236/3240, note to the Chancellor of the Exchequer, External Action, February,1952.
49 NA: T236/3240, Plan for “Overseas Sterling”, no date.
50 NA: CAB128/40, CC(52) 23rd, 24th and 25th conclusions, 23rd and 29th February, 1952.
48

18

the possibility of the down-ward spiral of European trade, by strengthening of the quantitative
restrictions to the UK by soft currency countries after the sterling convertibility. Interestingly,
Bolton’s idea of new sterling system was not the one which tried to avoid the emergence of suchtrade discrimination between European countries, but his idea assumed that the trade discrimination
was unavoidable in the world after the convertibility and tried to establish little sterling systemamong certain European countries 51.
According to the “Payments Club” of Bolton, Europe could be divided into two Groups after theconvertibility. List A (Austria, Germany, Greece, Italy, Spain, Swiss, Turkey) was assumed no to bea participant of the Club since its relations with the Sterling Area or the Commonwealth were notstrong. These countries would not be supplied any special sterling facilities by the UK. To thecountries of the List B (Denmark, Finland, Sweden, Belgian, France, Holland, Portugal) who hadinterests in holding sterling, the UK would provide certain benefits in condition that they would
participate the new sterling system. For example, the UK and the List B countries would: (a) ratify
the trade agreement so as to avoid dollar earning competition each other, leadingto the making of
the preferential trade system in the long run. (b) “External sterling” earned by the List B countries
were conserved so as to prevent excessive devaluation of the participating countries’ currencies.
In return, the B countries who need “External Sterling” would benefit from the relaxation of thecredit restrictions in the London Market. (c) To finance the countries temporary require the sterling,“External Sterling” would be pooled 52.
Under the Plan, the EPU was supposed to be disappeared with the convertibility of sterling. In
that case, (a) the EPU would be cleared on 30th June, the debt of the 15 million pounds by the UK
to the EPU would become “Old Sterling” which could be usable to the payments of the debt to the
UK 53. (b) List B countries holding “Old Sterling” in the EPU was given a special facility to convert
the “Old Sterling” to “External Sterling” to a certain agreed amounts.
This kind of association with the Sterling Area and Europe was also considered in the Economic
Section. An Economic Section official, Robert Nield proposed “Sterling Union” requiring
reformation of the existing Sterling Area system and participation of the EPU into the Sterling Area.
It assumed the continuance of the inconvertibility and fixed exchange rate system, and proposed (a)to abolish the dollar pool system of the Sterling Area, instead, the dollar earnings of theparticipating countries were redistributed among them. (b) to eliminate gold payments, abolishautomatic payments system of the EPU, and the EPU would participate in the Sterling Area in the
future.
By these measures, Nield though that the down-ward spiral of trade could be avoided with aplenty of credit facilities inside the Union 54. Another merit of the plan was that by not just pooling,
but redistributing the dollar, it could give each of the Sterling Area countries responsibility to takemeasures to maintain foreign reserves and dollar import, enhancing the responsibility. However,
51
52
53
54

NA: T236/3241, George Bolton, The Plan and Europe, 27th February, 1952.

Ibid.

NA: T236/3241, Bolton, The Plan, 4th revision, 14th March, 1952.
NA: T236/3243, External Sterling Plan, 4th April, 1952.

19

paradoxically, if responsibility of the balance of payments deficit by the each Sterling Area
countries enhanced, that would be an incentive for the Sterling Area countries to look for new
measures to earn dollars and could finally be brought about shift of exports from UK markets to the
US. As regards the EPU, whereas eliminating gold payments from Europe and redistribute dollars
among the countries could be regarded as an “every advanced form of European integration”, it wasthat the integration of Europe which the Europeans sought for 55. Lastly, to avoid competition withthe dollar area by establishing discriminative economic block did not resolve the problem of thehigh cost structure of the British industries, rather it merely prolong the problem.
To these “two-word” approaches, Clarke showed negative attitudes. As we later will see, if the UK
plays a central role in any “two-world” system between the Sterling Area and Europe rejecting
American involvement, Britain must even more be economically strong enough to support theblock. Thus, Clarke pointed out the unreality of the “two-world” course saying that “I would notmyself agree with the proposals of the Bank, which seek to incorporate Western Europe in thesterling area. I do not believe that we are strong enough to carry the load which is implicit in suchproposals,…”, “we must find a new basis for cooperation with Europe” 56 . He also rejected“Sterling Union” by pointing out that by dividing the western world into two, it brought about
continuance of the high cost structure inside non-dollar block by avoiding competition with dollar
goods 57.
3.2 Atlantic Payments Union
It was not only “two-word” plan which gave more weight to resolve “dollar problem” first rather
than rush to the convertibility. Lord Cherwell and MacDougal also thought that the resolution of the“dollar problem” is the first consideration to early realisation of convertibility, and propose the planof Atlantic Payments Union. The difference of the APU and “two-world” idea of the Economic
Section was that the APU intended to include – not exclude – the USA from the plan.
Their idea of APU originated from World Payments Union by the Secretary-General of theOEEC, Robert Marjolin. on which had asked the British government to consider in May, but had
rejected by the British 58. However, different from many of the policy makers, Cherwell and
MacDougal was impressed by the Plan, and proposed the establishment of the Atlantic
Organisation for Economic Affairs and the Atlantic Payments Union under the AOEA, to the
Cabinet Committee lead by Foreign Secretary Anthony Eden in August 1952. Its participants wereassumed the Commonwealth countries, the OEEC countries, and the USA and Canada.
The proposed APU was modelled on the EPU mechanism in its multilateral clearance, mutual
credit facilities. The difference was that in the APU, settlements with the persistent creditor –evidently the USA – was excluded from the regular settlement in each month, instead, in thesettlement with persistent creditor, a system of “gold tax” – imposed on the excess deficit to
55

Ibid.

NA: T236/3241, Clarke to Rowan, Robot Walks Again, 11 March, 1952.
NA: T236/3243, External Sterling Plan, 4th April, 1952.
58 In detail of Marjolin’s plan, see next Chapter.
56
57

20

persistent creditor – and “gold bonus” – receive when in surplus with persistent creditor – would be
introduced according to its balance of payments position with persistent creditor, which finally leadto the incentive to equilibrate the balance of payment 59。Under the APU, discrimination against the
dollar area was permitted.
Since the APU had a possibility to develop the cooperation with the USA and Canada in the fieldof international economy, Clarke appraised the APU in this regard 60。Robert Hall pointed out that
the APU covered strategically important areas for the Western camp, and assured that the ambitious
plan like this would attract the Americans without fail 61. Nevertheless, APU was technically andpolitically difficult .
Firstly, gold tax and gold bonus system, and authorisation of discrimination against dollar zone
were too heavy obligation to the USA. Secondly, while the participation to the APU could be a
preparation to the currency convertibility resolving the dollar problem, it did not mention each stepto the convertibility – in the EPU, the ratio of gold/credit was central issue to reach theconvertibility 62。Thirdly, contrary to Hall’s appraisal of APU’s importance as a Western Alliance,others pointed out its strategic insufficiency for the APU did not assume participation of the Latin
American countries and Japan- - both were important to America 63.
Thompson-MacCausland, an advisor to the Governor of the Bank of England, in this discussion
with Brittain, expressed his view on it 64。According to Thompson-MacCausland, it is of course very
good idea to establish a framework in which the USA participate, and discuss about the Balance ofPayments regularly, but there do not exist the system of central control of dollars, in addition, theconcept of “control” was something to be regarded as “negative” in the USA 65. From the point of
the Sterling Area, under the APU the Sterling Area would be treated as one unit, causing much of
the feeling of unfairness and discontent among the Sterling Area countries, for if the Area treated asone, a member country’s dollar credit might be used to offset other members’ deficit 66。 Since suchdiscontents already exist under the existing unofficial arrangements, under the stricter rule of the
APU, their dissatisfaction would mount more. On the other hand, if each members of the Sterling
Area would have each account, they had to establish relations with all the central banks of the APU
member countries, reducing the use of sterling by the Sterling Area countries. Those were the

NA: T236/3076, PEC(52)17, 1st September, 1952, Atlantic Payments Union, reportby a group of officials.
60 NA: T236/3076, FEF to Brittain, Armstrong, Atlantic Payments Union, 5th August,1952.
61 NA: T236/3076, Robert Hall to Armstrong, Atlantic Payments Union, EPC(52)7, 6th
August, 1952.
62 NA: T236/3076, FEF to Brittain, Armstrong, Atlantic Payments Union, 5th August,
1952.
59

63

Ibid.

NA: T236/3076, Thompson-MacCausland to Figgures, Paymaster-General’sMemorandum: PEC (529)7, 5th August, 1952.

64
65
66

Ibid.
Ibid.

21

points MacCausland criticised the APU 67.Although, the APU had its attractiveness, it had in many
points unrealistic.
3.3” Collective Approach to the Convertibility”
Thus, in the first half of 1952, various plans to overcome the balance of payments problem wereraised, but each had its deficiency. British policy making was in confusion. For that reason, for the
preparation for the Commonwealth Prime Ministers Conference in autumn 1952, Britain, first of all,have to decide its basic policy line. This task was accomplished by the working party on external
economic policy under the Cabinet Committee on Preparations for Commonwealth Economic
Conference lead by Eden 68. The working party on external economic policy raised multilateralism,
bilateralism, discriminatory block as a possible option, but denied the last two. As regards
bilateralism, it would not contribute to the balance of payments probleme, rather it would makegold and dollar earnings much more difficult, and mean complete retreat from the multilateralism
which was the post-war promise at the Bretton Woods 69.
Creation of the discriminatory block did not seen as advantageous too, especially from the pointof view of the Sterling Area. Although traditionally, the most important trading partner of theSterling Area countries were the UK, and the each of the member countries were also important
trading partner, they were also highly dependent on the imports of primary products from theoutside the Sterling Area. Those products were, wheat, softwood, and metal from Canada, cotton,
grains, tobacco, machine from the USA, oil from Venezuela – all of which were not produced in the
Sterling Area 70. Despite this dependency on outside world, making of the discriminatory block
would not reduce imports from outside the block. Even if they tried to produce those produce inside
the block, it would require huge investment and long time. Therefore, bilateralism anddiscriminatory trading block was refused as a basic policy line, and the multilateralism was chosen
as a future policy line of Britain.
In conclusion of the policy paper, the working party concluded that to bring about
multilateralism to the free world, both side – creditor and debtor – must do effort, and emphasised
the importance of the cooperation with the USA, Commonwealth and Europe.
Having confirmed that the British long-term policy must be based on multilateralism, theworking party submitted the paper to approach the problem multilaterally on the 1st September
1952. In a paper titled “Step Towards Convertibility”, the officials emphasised the necessity toresume sterling convertibility as soon as possible, casting doubts on the APU idea. 71. The paper
67

Ibid.

NA: CAB130/78, Gen412/1st meeting, working party on external economic policy, 1stJuly, 1952.
69 NA: CAB130/78, Gen. 412/4(Final), 16th July, 1952, The problems of External
Economic Policy, memorandum by a Group of Officials.
68

70

Ibid.

NA: T236/3368, PEC(52)18, Cabinet Committee on Preparations for Commonwealth
Economic Conference, Step Towards Convertibility, note by the acting secretary, 1st
September, 1953.
71

22began by describing what kind of damage the UK would suffer if the sterling would remaininconvertible. The central point of the convertibility of sterling as an international currency was that
although, in case of a currency used only domestically not internationally, only freedom of resident
matters, in case of international currency, non-resident must free to use sterling anywhere in theworld, both inside and outside UK 72 . If sterling would continue to be inconvertible, (a)international status of sterling would be lost, (b) Cheap sterling would spread, causing damages tothe British traders 73. To avoid this consequence, the paper set out four measures. (a) To create agroup of core countries consisted of the UK, the US, Canada, France, Germany, Benelux.
Inconvertible countries among the group would establish convertibility on the same footing (b) It isfree to choose flexible rate or fixed rate, but the UK would adopt flexible rate. (c) Abolish all trade
discrimination to all the core countries except persistent creditor, provided that the rule applies only
to quantitative restrictions, and preservation of tariffs and imperial preferences would be admitted.
(d) Establish Exchange Support Fund to which the United State would support financially.
Assuming that all the necessary procedure by the Congress would be completed between summer
and autumn of 1953, the proposed would starts from early 1954 74。These four sets of proposals
came to be called “Collective Approach to the Convertibility”.
“Robot” and “Collective Approach” were in common in that both involve sterling convertibility
and floating rate. However, Why the “Collective Approach” which had similar features with that ofOperation Robot could be passed the Cabinet? When the committee on the external policy submit
the “Collective Approach” to the ministerial committee, some of the deficiencies of the Robot were
overcome, and though the problems of the impact on the domestic economy was left open, theproposal finally achieved supports from the former critics to the Robot - Board of Trade, Foreign
Office, Colonial Office, Commonwealth Office. 75
When Robot was discussed in early 1952, the Foreign Office feared political impact of the
Robot plan to Europe, Board of Trade was anxious about contraction of trade by inconvertible
countries strengthening quantitative restrictions on UK export to accumulate dollar earnings 76. On
the contrary, “Collective Approach” give more weight on the European cooperation , for itemphasise equal footing with major European countries on convertibility, and it also set out
abolition of quantitative restrictions to avoid trade discrimination following the convertibility.
Exchange Support Fund had a purpose to support sterling if the rate of sterling excessively fall after
adopting flexible exchange rate 77.
However, the elements of “European cooperation” were only to British eyes, for Europeans, thiswas nothing but an unilateral British proposition disregarding the importance of the existingliberalisation framework and programmes in the EPU and the OEEC.
72
73

Ibid.
Ibid.

NA: T236/3368, Herbert Brittain to Armstrong, Report of convertibility working
party, 1st September, 1953.

74

Ibid.
Ibid.
77 Ibid.
75
76

23

4. European Reaction to the “Collective Approach”
4.1 Robert Marjolin and World Payments Union
In January 1953 when the “Collective Approach” was formally announced a the OEEC
Council, Hugh Ellis-Rees, a representative of the UK delegation to the OEEC, warned the British
government that the Europeans were anxious about the effects of the sterling convertibility to the
EPU, and to the OEEC trade liberalisation scheme after the collapse of the EPU 78. This warning by
the Ellis-Rees was corresponded to the severe attitude of the chairman of the OEEC, Robert
Marjolin. However, Marjolin at least had same opinion with the UK as regards the ability of the
Bretton Woods system to solve the world dollar problem or balance of payments disequilibrium
problem. In May 1952, when “Collective Approach” was not even formed, he had proposed World
Payments Union to solve the dollar problem.
The World Payments Union reflected the prevailing feeling in the Managing Board of theEuropean Payments Union that the Bretton Woods system was a “failure”, and some measure mustbe found to resume the idea of the Clearing Union proposed by Keynes at the negotiation with the
US on post-war international economic framework 79。However, in 1952, it was regarded as
inappropriate to apply Clearing Union as it was discussed in the 1940’s, instead, the EPU could be
a substitute for Clearing Union.
In May 1952, when Marjolin visited London, he unofficially revealed the Scheme to the
British. He, as a Secretary-General of the OEEC, was interested in “dollar problem” in Europe, andexpect that if the next American President would be Dwight Eisenhower, he would propose ascheme which could be a new departure solving the problem of the balance of payments
disequilibrium between dollar area and non-dollar area 80。In the World Payments Union with EPU
type settlement mechanism, western countries could discuss about balance of payments problems
and dollar aid with the United States 81。
In addition to the disappointment with the Bretton Woods, Marjolin thought there were notmuch room of policy manoeuvre for the British and other European countries, for cutting ofinvestment, housing, defence necessary for the improvement of living standard in Europe weresomething politically difficult to accomplish drastically 82. This was why Marjolin reached theconclusion that the only hope was the financial and economic policy of the United states
enlightened by Europeans 83.

NA: FO371/105851, Draft Submission to Ministers, OEEC and the Collective
Approach to convertibility, attached to 13th January, 1952
79 Historical Archives of the European Union (HAEU), Italy, EPU/EMA33, TFD-232,
convertibility and how to get it., 17th May, 1952.
80 NA: T232/343, Robert Hall, note of discussion, 6th May, 1952.
81 Ibid..
82 NA: T232/343, E. A. Berthoud, Monsieur Marjolin’s visit to London, 10th May, 1952.
78

83

Ibid.

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4.2 Reactions of the European Central Banks and the Governments
In spite of the common thinking on the Bretton woods system, at the informal discussion
between Marjolin, British officials, Foreign Secretary, the Chancellor of Exchequer, he showedstrongly cautious about the impacts on the OEEC and the EPU by the “Collective Approach”. The
reason was not only the effects of the “Collective Approach” to Europe, but the British intention to
go into discussion with the USA on it before consultation with Europe. Nevertheless Bolton belived
that the opposition to the British plan were only fanned by limit circles in Europe 84. Why Cobbold
believed would get support from the Europeans? The reason lies in French experience under the
Bretton Woods, and the positive attitude of the governor of the Bank of France to adoption of
floating rate in May 1952 85.
The most important objective of the France after the Second World War was the modernisationof the French industry which leads to the inflationary economy and monetary instability. Frenchfranc had devalued in January 1948, and established multiple exchange rate system, imposing
different exchange rate for hard currency, breaking the cross rate between sterling and the dollar.
This breaking of the IMF rule was blow to the IMF prestige 86. Further, in 1949 before theestablishment of the EPU, the French seriously discussed the possibility of the economic area
called “Fritalux” or “Finebell” between Benelux countries and Italy under which they intended toadopt liberalisation of capital flows and the floating rate of the exchange. The failure of the plan
attributed to the refusal by the United States who preferred the economic integration among larger
group of countries which finally lead to the establishment of the EPU to “Pétit Europe”. Taking
these historical facts into account, it was not surprising if the French welcomed the “Collective
Approach” which restructure the IMF and allow floating rate of exchange. However, although theGovernor of the Bank of France, Wilfrid Baumgartner, showed interest in successive British
proposal informally, it finally turned out to be that the opinion of the Baumgartner as a central
banker was not share by the government policy-makers.
When the Chancellor visited Paris on 6 and 7 June 192, from the informal discussion among heand the French Prime Minister, Antoine Pinay, Baumgartner, Guillaume Guindy from French
Department of Finance, Cobbold and Rowan of external financial division of the Treasury, hereceived the impression that the French had strong interests in the adoption of the floating rate of
the exchange 87. However, on the next day, when he had a chance to talk with only Guindy, he told
the Chancellor that the possibility of the French suddenly resume the convertibility of franc was
Bank of England Archive (BOE): G1/98, to Deputy Governor, Shiepmann, George
Bolton, February, 1953,
85 NA: T236/3244, Anglo-French Exchange Policy, 30th May, 1952
86 Bordo, op.cit, p.46. France imposed per value of 214.39 franc for basic imports, but
for tourist and financial transactions, adopted a floating rate. For the soft currency,
official rate was employed.
87 NA: T236/3244, Record of an informal discussion after lunch with the Governor of
the Bank of France on Friday, May 6, 1952. According to a paper lightly before this one,from some evidence ensures that this informal discussion was held on 6 June, not 6
May as noted in the document. Fford also pointed out this error, Fford, op.cit, p.458.
Antoine Pinay served as Prime Minister from 8 March 1952 to 8 January 1953.
84

25

scarce, and what was discussed in France was only a floating rate without commitment to theconvertibility 88.
Later in January 1953, after the “Collective Approach” was formally announced to the Europeans,
Prime Minster René Mayer also expressed his view that he personally supported the operation of
the convertibility, but the operation must not sacrifice neither the EPU nor the OEEC, and it must
be important to avoid the collapse in the economic sphere when the Europeans were doing every
efforts to promote the integration of Europe by the European Defence Community. 89 In addition tothe opinion of the Mayer, Paris report to the American State Department also pointed out that the
French were thinking convertibility of the franc only in parallel with the liberalization of trade, andwithout effective substitute to the EPU, the French could not support the any plans which dismantle
the EPU 90. For France who was a debtor in the EPU, the EPU was an important source of the credit
and its existence was vital. Since France was denied access to the IMF resources after the breakingof the IMF rule on cross rate – even though the IMF had not yet played an active role - , the EPU
credit was only reliable external source after the termination of the ERP 91. Therefore, some of thesocialist even regard the British plan as a measure to setback the French plans of the European
integration. 92.But, in anyway, in spite of early and strong support to the floating rate from the Bankof France, at the government level, the “Collective Approach” was regarded only as a setback to the
OEEC liberalisation programme, the EPU, and integration of Europe.
That were the reactions of the debtor country in the EPU, France. Then, what were the view of
the Germans and the Belgians – creditors in the EPU – to the convertibility and the “Collective
Approach”? At the discussion with the Germans in 12 May, 1953, German officials told the Britishthat since 70% of the total German trade was conducted through the EPU, they had a vital interestin the liberalisation of trade inside Europe, and because this problem had a certain link to theeconomic and political integration plans, they wished to have a common convertibility plan under
the EPU framework 93.
Ludwig Erhard, the Economic Minister, was more or less open in mind, and welcomed the
movement to the convertibility by the British and expressed sympathy and interests 94. To thecontrary, Von Mangoldt from the Federal Reserve Bank insisted that the convertibility must be
NA: T236/3244, Record of an informal discussion after lunch with the Governor of
the Bank of France on Friday, May 6, 1952, T236/3244, Record of discussion on
Saturday, June 7th 1952 in Paris.
89 BOE: G1/98, C.F. Cobbold to Chancellor, 12th, January, 1953, FO371/105851, From
Paris to FO, 19th January, 1953. René Mayer served as Prime Minister from 8 January
1953 to 28June 1953.
90 National Archives and Record Administration (NARR): RG469, NND887841, MSA
Paris to Secretary of State, January 16, 1953.
91 Bordo, op.cit., p.46.
92 NARR: RG469, NND887841, MSA Paris to Secretary of State, January 16, 1953.
93 NA: T230/263, UK record of meeting in London between UK and German officials,
12th May, 19523.
94 NA: T230/263, UK record of meeting in London between UK and German ministers,
152h May, 1953.
88

26

approached through the institution of the EPU, and it must not be a dash to the convertibility.
The reactions of the Belgians were similar to those of the Germans. At the discussion on 15 and
16 May, a representative of the Belgium showed his anxiety that with the convertibility and thedistinguish of the EPU, the IMF article 14 became ineffective, and the Europeans must immediately
remove quantitative restrictions to the dollar area 95.And like the Germany, insisted the institutional
approach to the convertibility through the EPU 96. This view was reiterated to the Americans when
they visited the Washington 97.
Thus, in spite of the mounting interests in the convertibility among the certain Europeans, and
the Germans were even welcomed the proposal of the convertibility itself, support for the British
approach to the convertibility was minority. On the part of the British, the disappearance of the
EPU followed by the convertibility was unfortunate but unavoidable consequences, but on the sideof the Europeans, the convertibility must be tackled through the EPU and it should not be a dash to
the liberalisation: it should be gradually approached in parallel with the trade liberalisation.
By the June 1953 discussion of the OEEC council, Marjolin even expressed his displeasure to
discuss the problem of the convertibility at the meeting of the OEEC 98. There was no room for the“Collective Approach” to intervene in the minds of the EPU countries.
Conclusion
The UK was involved in the creation of the post-war international economic framework, but thepractice to the liberalisation was difficult. Facing the balance of payments crises, import control
was often introduced, exchange control was strengthened. Monetary policy was exclusively
directed to reconstruction needs, there are no room to manipulate interest rate for the sake of thestability of balance of payments and sterling. In addition to British problem, the role of IMF waslimited and inactive in this period.
The “embedded liberalism” framework promise at the Bretton Woods was to assure the policy
national autonomy while pursuing external obligation of liberalisation of trade and payments.
However, in the UK, at first multilateralism was regarded as very difficult to achieve from early
period. On the domestic side, reconstruction from the war was gradually proceeded with monetary
policy sacrificed, but the problem of inflationary economy and lack of competitiveness in theindustry remained. The IMF rules which had expected to mediate external liberalisation anddomestic policy management was not effectuated often.
The balance of payments crisis in 1951 gave the room for the policy-makers who attached more
importance to the stability of money, and wanted to revive market mechanism to propose newpolicy, criticising existing policy management and fixed rate regime under the IMF. “Operation
NA: T230/263, UK record of conversations with Belgian expert, 15th and 16th May.
The Belgians had already proposed to raise the ration of gold payments by debtors
from 40% to 50% to the Managing Board of the EPU.
97 NARRA: RG469, NND887841, Belgian Position on British Plans for convertibility,
February 27, 1953.
98 NA: T230/263, UK record of a discussion with M. Marjolin and Cohen, 12th June,
1953.
95
96

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Robot” and “Collective Approach” were both intended to restructure international economic system
and internal economy, relying much on the market mechanism.
On the side of the continental Europe too, there were feelings of disappointment to the Bretton
Woods and Marjolin even thought of the application of the EPU to the Atlantic framework.
However, Even though the Bretton Woods was not reliable, they never supported “Collective
Approach” by the UK. it was not British plan but the OEEC and the EPU framework which could
be practicable to European liberalisation of trade and finance.
Thus, although the UK and the Continentals were never reached the same opinion on “Collective
Approach” and the role of the EPU, in the early 1950’s both in the UK and in the continental
Europe, there has already been a movement to get rid of “embedded liberalism” framework basing
Keynesianism and Bretton Woods.

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