VI European Monetary Cooperation and Integration

VI European Monetary Cooperation ana Integration Two Steps Toward Cooperation. The first major step on the road toward socialism is the extension of government control over the national monetary system. In order to finance policies of "fair prices/* "fair distribution/' and nationalization programs, planners cannot do without the most desirable instrument of government planning—power over the currency system. Through credit expansion and inflation the government purse is made inexhaustible for vast projects of spending for public and social works. Once government control over money and credit has been established, a policy of "abundance" and "fair distribution" can be conducted. The gold standard, whose very eminence consists in limiting government spending and leaving the monetary purchasing power independent from government measures, is the first victim of the central planner. As soon as the gold standard has fallen, a slow but incessant destruction of the monetary order begins. That is to say, the monetary system is increasingly shattered through inflation and credit expansion. The inevitable rise in prices then is followed by price controls, rationing, exchange controls, and import restrictions because of "unfavorable" balances of foreign trade. All these measures finally result in a thorough dissolution of the international system of monetary settlements. Once this stage has been reached, the same planners who advocated abundance through credit expansion and inflation now begin to demand international monetary cooperation—so they may be allowed to continue with their old plans and policies of ample spending, unperturbed by the inevitable effects of their monetary policies.

During two world wars and the great economic crisis of the inter196 MONETARY COOPERATION AND INTEGRATION 197 war period, nearly all national monetary systems were shattered by governments conducting interventionist policies. When the disorganization of international trade and payment was almost complete during the years preceding and especially during World War II, the clamor for monetary stabilization and reconstruction of an international settlement system through international action and cooperation became louder. It finally found expression in two major international efforts which were made to bring about monetary cooperation. The first of these efforts was made during the Second World War when, at Bretton Woods, New Hampshire, in July 1944, all free governments of the Allied nations agreed upon a policy of cooperation through the operation of a new organization, the International Monetary Fund. These international agreements on the establishment of the Fund are of a fundamental nature and reveal most clearly the underlying ideas on contemporary money and credit policies. Although the agreements are "international," an analysis of them is essential for the understanding of purely European cooperation and "monetary integration/' The second of these attempts was made through the establishment of a European Payments Union whose objective is to reconstruct the monetary organization of Europe. The root idea of this Union is the notion that continuous expansion of credit and easy money policies can be maintained through cooperation of all European governments. This Union also merges into the broader movement of political and economic integration of Europe, the subject of our inquiry. For the problem of European unification, the Payments Union is of utmost importance, since it allegedly can be developed into a single monetary area with one Central Bank of Europe, thereby providing the first step towards European monetary integration. These two attempts at international cooperation are briefly analyzed in the following.

A. THE AGREEMENTS OF BRETTON WOODS AND THE INTERNATIONAL MONETARY FUND In April 1943, the American "New Deal" government and the British socialist government * advanced a plan for "monetary stabilization" in the postwar period. Newspapers and periodicals in the Allied countries praised it as a "new and fine example of the democratic processes and far-sighted planning of democratic govern1A socialist government is a government conducting socialist policies such as the Churchill government during the war.

198 STEPS TOWARD UNION ments" now moving toward the adoption of the kind of economic program necessary for world stability and prosperity.2 About a year later, in July 1944, representatives of 44 nations met at Bretton Woods, New Hampshire, to deliberate on the proposals submitted by the American and British treasuries. Weeks later, the bulk of experts and representatives approved the proposals and recommended their acceptance. The Congress of the United States accepted the bill on the Agreements on June 7, 1945, and the President approved the Act a few weeks later. The law authorized the President to accept membership in the International Bank for Reconstruction and Development and the International Fund as agreed upon at Bretton Woods. Objectives of the Fund. In Article I of the Agreements, the purposes of the Fund are listed as follows:3 1. To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.

2. To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy. 3. To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation. 4. To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade. 5. To give confidence to members by making the Fund's resources available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.

6. In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balance of payments of members. Further Provisions of the Fund. Member governments may make use of the facilities of the Fund according to assigned quotas, which 2 See J. H. Williams, "Currency Stabilization: The Keynes and White Plans," in Foreign Affairs, An American Quarterly Review, July, 1943, p. 645 et seq. 3 Yearbook of the United Nations, 1946/47, p. 772 et seq. Also International Monetary Fund, Articles of Agreement of the International Monetary Fund, Washington, D.C., 1952.

MONETARY COOPERATION AND INTEGRATION 199 may be changed by a four-fifths majority of the total voting power of the Fund together with the consent of the member government concerned (Art. Ill, Sect. 2). Art. IV, Sect. 3 defines the provisions on foreign exchange dealing as follows: "The maximum and the minimum rates for exchange transactions between the currencies of members taking place within their territories shall not differ from parity, (1) in the case of spot transactions, by more than one percent; and (2) in the case of other transactions, by a margin which exceeds the margin for spot exchange transactions by more than the Fund considers reasonable." Sect. 4b of the same Article provides that "each member undertakes, through appropriate measures consistent with this Agreement, to permit within its territories exchange transactions between its currencies of other members only within the limits prescribed under Section 3 of this Article. . . ."

The problem of interest is solved in Art. V, Sect. 8c which reads: The Fund shall levy charges uniform for all members which shall be payable by any member on the average daily balances of its currency held by the Fund in excess of its quota. These charges shall be at the following rates: 1. On amounts not more than twenty-five percent in excess of the quota: no charge for the first three months; onehalf percent per annum for the next nine months; and thereafter an increase in the charge of onehalf percent for each subsequent year. 2. On amounts more than twenty-five percent and not more than fifty percent in excess of the quota: an additional onehalf percent for the first year; an additional onehalf percent for each subsequent year. 3. On each additional bracket of twenty-five percent in excess of the quota: an additional onehalf percent for the first year; and an additional onehalf percent for each subsequent year.

Article VI, Sect. I, requires the members to employ controls in capital transfers. "A member may not make net use of the Fund's resources to meet a large or sustained outflow of capital, and the Fund may request to exercise controls to prevent such use of the resources of the Fund. If, after receiving such a request, a member fails to exercise appropriate controls, the Fund may declare the member ineligible to use the resources of the Fund." And Sect. 3 of the same Article provides that "members may exercise such controls as are necessary to regulate international capital movements." Further employment of government controls is required by Art. VII, Sect. 3a, which reads: "If it becomes evident to the Fund that the demand for member's currency seriously threatens the Fund's 200 STEPS TOWARD UNION ability to supply that currency, the Fund . . . shall formally declare such currency scarce and shall thenceforth apportion its existing and accruing supply of the scarce currency with due regard to the relative needs of members, the general international economic situation, and any other pertinent considerations."

Section 3b adds that "a formal declaration under (a) shall operate as an authorization to any member, after consultation with the Fund, temporarily to impose limitations on the freedom of exchange operations in the scarce currency. . . . The member shall have complete jurisdiction in determining the nature of such limitations, but they shall be no more restrictive than is necessary to limit the demand for the scarce currency to the supply held by, or accruing to, the member in question; and they shall be relaxed and removed as rapidly as conditions permit." Section 4, finally provides that "any member imposing restrictions in respect of the currency of any other member . . . shall give sympathetic consideration to any representations by the other member regarding the administration of such restrictions." Article VIII, Sect. 2b, provides for cooperation of governments in the execution of exchange controls. It is defined as follows: "Members may, by mutual accord, cooperate in measures for the purpose of making the exchange control regulations of either member more effective, provided that such measures and regulations are consistent with this Agreement."

Article XI speaks of the relations of member states with nonmember states and gives member states the express right to impose restrictions on exchange transactions with nonmembers. Section I (iii) says: "Each member undertakes: To cooperate with the Fund with a view to the application in its territories of appropriate measures to prevent transactions with nonmembers or with persons in their territories which would be contrary to the provisions of this Agreement or the purposes of the Fund." Section 2: "Nothing in this Agreement shall affect the right of any member to impose restrictions on exchange transactions with nonmembers or with persons in their territories unless the Fund finds that such restrictions prejudice the interests of members and are contrary to the purposes of the Fund." Article XIV, Sect. 2, provides for maintenance and introduction of exchange restrictions during a transitional period. "In the postwar transitional period," it says, "members may, notwithstanding the provisions of any other articles of this Agreement, maintain and adopt to changing circumstances (and, in the case of members MONETARY COOPERATION AND INTEGRATION 201 whose territories have been occupied by the enemy, introduce where necessary) restrictions on payments and transfers for current international transactions."

These agreements on the establishment of the Fund were hailed as the adoption of the kind of economic plan and program necessary for world stability and prosperity. Henry Morgenthau, Jr., then Secretary of the Treasury and president of the Bretton Woods Conference, called the agreements a "new beginning." According to him, the great objective of the Fund was to provide the monetary and financial foundation for agreements in all other fields of economic planning and cooperation by governments. Since the monetary foundation had been laid, other needed agreements in the sphere of commercial policy, controls of cartels, the supply of primary commodities, and labor standards could follow.4 The monetary cooperation was secured, the external monetary pressure which threatened internal government controls and planning was removed, and the real and pure government planning could begin. SOME CRITICISM The Background. The fundamental idea of the Agreements of Bretton Woods is the notion that the policy of credit expansion and inflation can be permanently maintained by cooperation of all governments.

When in the nineteenth century and in the decade preceding World War I, individual governments increased the quantity of domestic credit money, the exchange ratio between domestic currency and foreign currencies immediately reflected the new money relation. Before the prices of other commodities were affected by domestic inflation, the foreign exchange dealers anticipated the future rise of domestic prices, and the price of foreign exchange tended to rise to the height corresponding to future domestic prices. Thus, the new exchange rate reflected the future purchasing-power parity of domestic and foreign currencies. During the nineteenth century and the first decade of the twentieth century the money markets of the world were international. Funds flowed freely from one country to another, and fractions of one per cent of higher interest were often sufficient to induce capitalists and bankers to deposit their funds with the banks in another country. Funds were freely convertible and callable at any time.

When an individual government or bank embarked upon credit ex4 H. Morgenthau, Jr., "Bretton Woods International Cooperation" published in Foreign Affairs, January, 1945, p. 183 et seq.

202 STEPS TOWARD UNION pansion, the foreign exchange relation immediately reflected their undertaking. The foreign bankers and capitalists who had deposits in the credit-expanding country became frightened by the aspect of decreasing value of deposits and began to withdraw their funds. But through the operation of the gold standard, the fluctuations of exchange ratios were exceedingly small as compared with the depreciations of today. Fluctuations merely moved between the gold export and import points. But the aspect of decreasing deposit and investment value within these narrow limits and the added fear of an eventual suspension of the gold standard were sufficient reasons for withdrawal. A sudden withdrawal of considerable funds naturally forced the banks to recall their loans and restrict their lending and expansionary activities. Interest rates were raised again and a general tightness of capital resulted.

The advocates of easy money schemes saw the sudden withdrawal of foreign funds and explained it simply and convincingly. "Foreign capitalists and speculators," they said, "have selfishly raided the capital resources of the nation and by an unfounded and deliberate withdrawal have plunged the nation into depression and misery." In order to bring a halt to these "wicked speculation activities," i.e., the recalling of capital funds by the owner, two measures—one domestic, the other international—were advocated. First, speculation should be prohibited or rendered impossible through taxation or controls and "freezing" of the accounts of foreigners. Second, at the same time, all national governments should agree on simultaneous devaluations and depreciations so that the flight of capital from one country to another would be rendered unprofitable. It is evident that capital ceases to flee from one country to another if all countries offer equally unfavorable conditions to the presence of capital. This goal of the advocates of easy money schemes is clearly reflected in the international agreements concluded at Bretton Woods.

Some Misstatements. The stated purposes of the Bretton Woods Agreements seem praiseworthy at first glance like every other government plan and directive "for the common good." At second glance, however, the Agreements reveal inevitable consequences that were neither desired nor foreseen by the planners. Concomitant effects, as, for example, the loss of freedom of the individual and growing authority of state officials over the individual, render the policies agreed upon at Bretton Woods undesirable. Furthermore, as shall be shown in the following, the means employed under MONETARY COOPERATION AND INTEGRATION 203 the terms of the Fund and Bank do not bring about the results which were the objectives of the Agreements. Clarity and precision of expression are the first prerequisites of every contract or agreement. In this respect, however, the plans of Bretton Woods reveal serious shortcomings that willfully or negligently misrepresent the objectives of agreement. While the stated objectives are "to promote international monetary cooperation," a more revealing and enlightening description of the objectives would be: promotion of international government cooperation in matters of money management. While it is agreed "to promote international trade, expand employment, and raise incomes" the correct setting of agreement should read: to promote foreign trade by more numerous and efficient controls or government enterprise, to expand employment, and to raise wages by more government spending and investment.

The concluding parties of Bretton Woods are governments entering into obligations binding themselves or their citizens. The promotion of "exchange stability," for instance, is an obligation into which governments entered for the individual. His government is to declare an arbitrary exchange rate and he is to sell his media of foreign exchange to his government at the official rate. And he will be prosecuted by his government if he trades at a different rate. This clause is well disguised and erroneously represented as a means to "free" international transactions. That governments should refrain from monetary management and inflationary measures, which alone bring about exchange instability, can neither be inferred from the agreements nor is it congruent with the ideas of Bretton Woods. Finally, the "assistance in reconstruction and development" is stated as an objective of the agreement. Such purpose is logically based upon the assumption that individual reconstruction and development need government assistance. The means for this assistance would be raised by taxation, inflation, or loans; there are no other means at the government's disposal. When the means are spent as officials see fit, they are logically spent for purposes different from those the individual would have pursued in the absence of taxation or inflation. It is obvious, therefore, that a less ambiguous and more precise definition of agreement would have the following setting: spending for purposes which government officials conceive as reconstruction and development, and which the individual would not have pursued in the absence of taxation and inflation. The objective of "assistance" is not only misleading but downright incorrect!

204 STEPS TOWARD UNION Agreement versus Freedom of the Individual. The fallacies of the Bretton Woods agreements are numerous and far-reaching. The underlying principle of agreement is the notion that governments, through a privileged and controlled bank and stabilization institution must manage money and banking and directly handle this part of economic life. This notion is the product of the vast popularity of policies of credit expansion. Public opinion is convinced that good governments lower the rate of interest and that expansion of credit is the suitable means for the attainment of prosperity. It cannot be the task of this work to refute those notions in detail, but a review of the history of the twentieth century thus far cannot fail to impress upon us the disastrous effects of the tremendous inflations that government-controlled banks have brought about. Government interference with the present state of monetary and banking affairs could be justified if it meant the liquidation of the unsatisfactory conditions which former intervention has brought about. This, however, is not the objective of the contract of Bretton Woods.

The government agreements of Bretton Woods sanction and aggravate the loss of freedom of the individual. It is obvious that the authority for economic actions cannot rest in two places simultaneously. Either the individual is free to plan and act as he sees fit, in which case government authority does not exist—or the authority for directing economic actions lies with his government. The freedom of the individual thus is limited in direct proportion to the amount of government authority. The Problem of Allotment Insoluble. The International Fund must be rejected on another important ground: the problem of allotment of the means of the Fund to various governments is not and cannot be solved. Quotas are not based on need—for they are given to countries which need them, and to others which do not; they are not based on the presence of sound monetary policies—for they are given to countries with relatively sound fiscal policies as well as to countries with rapidly deteriorating currencies. The measuring stick of profitability of investment is not considered. Instead, the height of quota is arbitrarily fixed by officials whose judgment is difficult to fathom. They may base the quotas on the amount of contribution which obviously favors the industrially advanced and economically stronger nations; or they may base the quotas on the size of population—a mode which would favor the industrially backward nations of the East. It is evident that quotas must be arbitrary.

After long and weary negotiations the member quotas actually MONETARY COOPERATION AND INTEGRATION 205 were fixed according to population figures, national income, foreign trade, and other factors. The ability to repay, however, was scarcely considered. International loans, in the final analysis, are repaid through export of commodities. Countries without mentionable export industries and without active foreign trade were given quotas that were obviously beyond their ability to repay. China, for instance, was given a quota which is nearly 40 per cent larger than that of India, although her foreign trade before World War II was only onehalf as large; and her quota is double that of Belgium, although her foreign trade and ability to repay are considerably smaller.5 If we compare the quotas with "lines of credit" in private enterprise, we can immediately see the enormous differences between private and government lending. A bank does not grant credit on the basis of certain groups of industry, but on a specific evaluation of the ability and individual position of a specific borrower. If the borrower's financial position changes essentially, the line of credit may be cancelled.

Quotas a Reward for Inflationary Practices. The quotas of the Fund are rigidly fixed and constitute a reward for inflationary practices. For the most part, central bank and stabilization funds are used in the transactions of the Fund—neither investor's nor taxpayer's money is generally employed. But this means that the more central bank or reserve money a government was willing to "create" and contribute, the higher could be its quota. The system of quotas thus constitutes a clever trick to swap self-created and deteriorating currency for foreign exchange—especially United States dollars. Under the terms of agreement, each member government of the Fund contributes in gold 25 per cent of its subscription or 10 per cent of its "net gold holdings and United States dollars"—whichever is smaller. (Art. Ill, Sect. 3b.) Only onehalf of the gold subscription need be delivered to the Fund; the other half must be "earmarked." The remaining 75 per cent of each subscription is to consist of paper currencies and nonnegotiable, non-interest bearing notes.

It can easily be assumed that most of the member governments chose to submit to the second term of subscription, i.e., to the contribution of 10 per cent of their "net gold holdings and United States dollars." Let us assume, for the sake of illustration, that a government has subscribed to the equivalent of one billion dollars. 5 See V. O. Watts, The Bretton Woods Agreements, in The Economic Sentinel, Vol. 3, No. 1, March 1945, p. 7.

206 STEPS TOWARD UNION Because of its inflationary policies, confiscatory taxation, nationalization and control policies, the total gold and dollar holdings of her central bank amount to only one hundred million dollars. This is a fair assumption since very few central banks actually hold more than this amount. Under the terms of the Fund, this government is to contribute 10 per cent of gold or dollar holdings, i.e., ten million dollars or one per cent of the subscription, of which five million dollars or onehalf per cent must be delivered. Ninety-nine per cent of the total subscription may consist of paper currency and nonnegotiable, non-interest bearing government notes fresh from the treasury. The Interest Rate Insures Cheap Money. The rate of interest charged for advances from the Fund insures an inflationary "cheap money" policy. According to Art. V, Sect. 8, a service charge of % per cent is to be levied on a member's exchanges of foreign currencies. No interest is to be charged on advances up to 25 per cent of a member's quota. All of a nation's gold subscription, including the gold earmarked at home—and in many cases more than this— may be borrowed back without charge of interest. Double the amount of gold and dollars may be borrowed, interest-free, for a period of three months. Onehalf per cent interest is paid for each additional 25 per cent of a nation's quota.6 In the clauses on interest we find no reference whatever to the fact that the rate of interest is a market phenomenon which is subject to the laws of the market. Gross rates of interest encountered on the market are neither uniform nor unchanging. They depend on the constantly changing magnitudes of originary interest, of the risk component of each specific transaction, and of a price premium which is the outcome of an understanding of present and future money relations. These fundamental principles of the market phenomenon of interest are either ignored or denied by the Agreements of Brett on Woods. But if market laws of interest do not exist, why do the Fund and Bank charge any interest at all? Even the smallest rate conceivable would then be unfounded.

Debtors in Control of Lending. The Bretton Woods Agreements provide no proper restraints upon the use of funds. Under the system of free enterprise the creditor does the lending, which seems natural. But the International Fund puts the debtors in control of the lending. It is true there are provisions for restricting or withholding credits within the quotas, but they are inadequate and vague. The Board of Governors, a majority of which necessarily 6 See also V. O. Watts, Ibid., p. 5 et seq.

MONETARY COOPERATION AND INTEGRATION 207 represents borrowing governments, does the lending. A representative of a borrowing government cannot be expected to cast his vote against another government similarly situated, unless he is prepared to meet retaliation when his own government is concerned. Thus, the borrowing governments will always act in concert and counteract any restraint that representatives of lending governments should endeavor to impose.7 The United States actually appoints only one out of the 44 members of the Board of Governors and only one out of the 12 Executive Directors of the Fund. In addition to being outnumbered 12 to 1, one must remember that the American appointees were usually advocates of free money, easy spending, or some other brand of "Fair-Dealing" and did not necessarily assume the normal role of a representative of a creditor.8 "Scarce Currencies'' Rationed by Governments. Another clause with even worse effects is the authorization of the Fund to declare a currency scarce and of member governments to ration and control the scarce currency (Art. VII). Rationing currency means the control and distribution of foreign means of payment by government officials as they see fit. They select purposes of payments for which scarce currencies are rationed; they select the individuals who may receive the foreign currency and with whom it may be exchanged. That such authority for arbitrary judgments must ultimately result in corruption, oppression, loss of freedom of the individual, and disruption of foreign trade relations is evident. The businessman and investor must constantly be on guard for a declaration of scarce currency and the resulting blockage of his funds. It is absurd to assume that the flight of capital may be avoided, or that confidence may be increased and foreign investments encouraged.

Cooperation in Exchange Controls. The Fund sanctions and brings about exchange restrictions. Under the Bretton Woods Agreements each member government undertakes to force its citizens to exchange foreign currency at a rate fixed in collaboration with the Fund. "Appropriate measures" of coercion are to be taken to prevent any individual from exchanging at any other price (Art. IV, Sect. 4). An execution of this provision, of course, is very difficult as long as individuals are free to trade and exchange foreign 7 See Benjamin M. Anderson, Economics and the Public Welfare, D. Van Nostrand Co., New York, 1949, p. 585. 8 The American key appointee, H. D. White, was not only a "Fair-Dealer" but proved to be a traitor to his country and in the service of the government of Soviet Russia.

208 STEPS TOWARD UNION currency with each other. How is a government to enforce its arbitrary official price of foreign exchange? Even the most rigorous measures of coercion will hardly induce the citizen to exchange his foreign funds at an arbitrary price. In order, therefore, to enforce its official exchange rates, a government is bound to monopolize foreign exchange dealings. That is to say, only government institutions and their representatives are authorized to buy from and sell to individuals. Only through government monopolization of foreign exchange dealings can this provision of the Agreement be realized. The Agreement also provides for a pledge of cooperation among the governments in the execution of exchange controls. That is to say, governments will cooperate in prosecuting individuals who may dare to attempt to avoid the monopoly and deal with other individuals in their own or in a foreign country. They also agreed that they would cooperate "to control international capital movements." The objective of this article is the avoidance of the flight of liquid capital from countries with deteriorating currencies, confiscatory taxation, or policies leading towards nationalization or economic controls. In the nineteenth century, when the central banks were losing their deposits of gold and foreign exchange, they raised the interest rate onehalf to one per cent, and deposits began to flow back. Naturally, in modern times when the total capital is in danger of being devalued, nationalized, or blocked, a one per cent rise in the interest rate becomes insignificant—only direct controls and direct government compulsion may still hinder an extensive outflow of liquid capital. The member nations of the Fund agreed to cooperate in this control of the movement of capital. Thus, the effects of unsound monetary and fiscal policies are sheltered under a series of new and more stringent controls by all member governments.9 Foreign Exchange Control Leads to Tyranny. Several provisions of the Agreement requiring the member states to apply government controls and restrictions have an enormous significance for industries that largely depend on imports of raw materials and other vital materials from abroad. A government that fixes the parity of its domestic money against gold or foreign exchange and continues to depreciate its own money through policies of inflation and credit expansion will bring about the effects described by Gresham's Law.

9 Confusion of modern economic thought is such that the Fund is often represented as "eliminating foreign exchange restrictions/' Neither the underlying ideas of Bretton Woods based on Keynesian economics, nor their actual effects as they appear to us, can justify such a statement. As shall be shown below, foreign exchange restrictions and regulations have actually increased and the monetary chaos has grown.

MONETARY COOPERATION AND INTEGRATION 209 That is to say, people will prefer to use the bad domestic money and hoard the better foreign money or ship it abroad. Thus a "scarcity" of foreign exchange will result. According to the Bretton Woods Agreement, this government-created "scarcity" entitles the member states to ration and allocate the scarce supply of foreign exchange. But this control over the media of foreign exchange by government officials invites government arbitrariness and tyranny. Many important industries in Europe depend entirely on the importation of raw materials, capital goods, and other vital materials from abroad. Their operation and their prosperity or depression depend on the prompt allocation of media of foreign exchange for their vital imports. If, for any reason, the foreign exchange official should fail to allocate the desired supply of foreign exchange, the industry must curtail its operation to the level of foreign exchange allocation. Inasmuch as foreign exchange is inevitably scarce in case of government inflation of domestic currency and arbitrary government-enforced exchange rates, the foreign exchange official always thereby curtails the operation of industries dependent on imports. But what does he use as his yardstick for this curtailment?

It is called "essentiality" and "national interest." But how is this yardstick applied? Which is more important—the textile industry or the truck manufacturing industry, the news or hosiery business, the manufacture of bicycles or airplanes, typewriters, washing machines, textbooks, or thousands of other commodities? Of course, the foreign exchange official pretends to know, and his wisdom spells prosperity or doom to the multiplicity of importing industries. He also pretends to know how each single industry is to be "fairly" curtailed, whether or not the enterprises are to be curtailed equally according to the "scarcity" of the media of foreign exchange or whether only certain "unessential" enterprises are to be curtailed while other enterprises of the same industry are to receive the desired quantity of foreign exchange supply. It is obvious that each single decision of the foreign exchange official must be arbitrary.

Consider the following example. Many European textile industries vitally depend upon the import of cotton since there is no cotton grown in Western Europe; and they depend on allocations of foreign exchange for these purchases from their respective foreign exchange authorities. The same is true of the gasoline, kerosene, and paraffin industries which, because little petroleum is found in Western Europe, are largely dependent upon imports of petroleum from abroad. Let us assume that the Central Bank of Italy, because 210 STEPS TOWARD UNION of its monetary policies, suffers from foreign exchange shortage. Now, which industry is the Italian foreign exchange official to curtail, the textile industry or petroleum industry? To what extent? We do not know. But let us assume he decides to curtail the textile industry because of "its lesser importance/' Which enterprise within the industry is to be curtailed? An old and established company or a young and growing enterprise? Should he curtail them equally?

Or should he distinguish between enterprises in unemployment and fullemployment areas? What should be the yardstick for curtailment? The lack of such a yardstick and the tragic importance of foreign exchange allocation invite arbitrariness, bribery, and tyranny of public officials. In the name of "national interest" a public official may refuse to allocate foreign exchange to a businessman who failed to "pay him off." The businessman may belong to a different party, nationality, religion, social group, etc. He or his employees may have failed to contribute sufficiently to the election fund of the foreign exchange official or his party. He or his employees may have voted for or advocated the "wrong" party ticket. His plant may be located in an area whose greater part of population may be opposed to the policies of the party in power which appointed the foreign exchange official. Or, in the case of publication industries, a businessman may want to import newsprint, magazines, periodicals, and books in order to explode the fallacies of the doctrines and policies of the party in power. Will he obtain the necessary supply of foreign exchange from the foreign exchange official in power?

A businessman may want to import books that explode the fallacy of foreign exchange control. Will the foreign exchange official allocate media of foreign exchange for this purpose, i.e., the abolition of his own office? If he does not, he is curtailing the freedom of publications and the press. At any rate, he will decide on the "essentiality" of each book, magazine, and newspaper imported. As small countries largely depend on imported textbooks and other information, the foreign exchange official may decide what the nation may read, what may be published, printed, and what information may be distributed. The individual is no longer free to inform himself and to study what he himself sees fit. The foreign exchange official insures his information and education. These are the effects of the foreign exchange provisions of the International Fund. To whatever extent they are applied by the governments of member states, to that extent do they curtail the libMONETARY COOPERATION AND INTEGRATION 211 erty of the individual and subjugate him to the tyranny of foreign exchange officials.10 Policies of Devaluation Permissible. According to the Agreements of Bretton Woods, a devaluation of a currency as to its gold content is permissible. The member governments may devalue their currencies 10 per cent without interference, and another 10 per cent to which the Fund may object within 72 hours. Of course, there is no reason to expect that further devaluations, under "extraordinary conditions of grave national emergency," may meet effective resistance by the Fund. As Anderson pointed out, the permanent threat of future devaluation sanctioned by the Fund "will create liot' money which would not otherwise exist." n Investors must be ready at all times to shift their funds to safer places where they need not fear the loss of 20 per cent or more of their capital. It is obvious that every investor gladly foregoes a moderately higher interest rate obtainable abroad, to avoid risking the loss of 20 per cent or more of his capital without notice.

Black Markets Created. If presentday conditions were proof to assertions won by reasoning, we could cite the chaotic state of foreign exchange of the major currencies as proof that the ideas expressed in the Bretton Woods Agreements are fallacious. Although one objective allegedly is "monetary stability," currencies have steadily depreciated; whereas another goal allegedly is to avoid discriminatory exchange practices, competitive currency depreciation, and exchange control, these practices have been condoned or even brought about by Bretton Woods policies. Wherever a law fixes a ratio of exchange at a height other than the market rate, or attempts to prescribe values which are fictional and do not exist, "illegal" transactions always spring into existence. In 1952, for instance, more than 12 billion dollars' worth of trading in currency and precious metals took place on the "black" markets of the world.12 Of the total transactions in gold amounting to approximately 1.17 billion dollars in 1952, more than 75 per cent were illegal—legal offenses or crimes on the part of either the buyer or the seller, or both.13 Depreciation of Currencies Continues. Sanctioned by the provisions of the Bretton Woods Agreements, the depreciation of cur10 For attempts to justify the provisions and their effects, see International Monetary Fund Publications: Annual Reports, Reports on Exchange Restrictions, International Financial Statistics, Staff Papers, Balance of Payments Yearbooks, International Financial News Survey, all published in Washington, D.C.

11 B. Anderson, Ibid., p. 585. 12 Franz Pick, Black Market Year Book, N. Y., 1953, p. 3. 13 Ibid., p. 107.

212 STEPS TOWARD UNION rencies due to governmental inflationary and expansionary measures continued. "During the last 27 months," says F. Pick, "under the increasing pressure of international rearmament, at least 55 currencies have undergone legal devaluation." 14 If 55 currencies have been legally devaluated, it is permissible to assume that even more have depreciated de facto, although the fictional official values have remained. The 55 legal devaluations naturally do not represent changes from a fictional level to the true ratio of free exchange and purchasing power. Such devaluations would be contrary to the ideas expressed in the Bretton Woods Agreements. They are mere changes from one fictional official level to another. It is not surprising, then, that 69 kinds of pound sterling with 69 ratios of exchange and foreign prices are traded all over the world.15 Some of these transactions are legal and sanctioned by the law, but a significant number are illegal.

Wherever official rates of exchange become more and more fictional and less enforceable, the government exchange market dwindles and finally ceases to exist altogether. Modern government itself then embarks upon vast black market operations reaffirming the validity of the market laws of exchange. But the individual is not allowed to trade on the free market under penalty of crime. Government Control Over Capital Movements Includes Control Over All Foreign Transactions. The Agreements of Bretton Woods make a distinction between "current transactions," the freedom of which is an alleged objective, and "capital movements," which are to be controlled. Such a distinction, however, is impossible in practice. The devices developed for transferring funds from one country to another without exchange transactions are many. Goods can be shipped out of the country and the proceeds left abroad. A businessman or a company may do business in two or more countries and slowly shift funds by lending and borrowing from one country to another. Thus, control of capital movements must not only include control of all foreign exchange transactions, but also "control of all borrowing and lending transactions by companies doing business in several countries and of all export and import movements, not to mention the searching of pockets and traveling bags of every traveler, and censorship of the mails." 16 It is obvious that there is no room for freedom, either in "capital movements" or in "current transactions."

14 tbUL, 1951 edition, p. 4. !5 Ibid., 1953 edition, p. 15. 16 B. M. Anderson, Ibid., p. 586.

MONETARY COOPERATION AND INTEGRATION 213 A Misrepresentation of History. Those responsible for and in favor of the Agreements often point to the period of wild currency disorder after World War I as a justification for their agreements. We have learned the lesson, they say, that external monetary stability means sacrificing internal stability. We have the choice between stable exchanges or stable internal prices, incomes, and employment, without the tyrannical interference of the gold standard and its strait-jacket. Inasmuch as historical phenomena in their complexity can never constitute proof for a reasonable and logical assertion, the following is offered, not as proof for or against any previous statements, but as an elucidation of economic laws and principles applied to recent history. After World War I there was much waste and misuse of loans granted to stabilize exchange rates which were not accompanied by a stabilization of currencies. From the Armistice in November 1918 through September 1920, the United States government provided 3 billion dollars in direct loans to European governments to stabilize and support the exchange rates of Europe. Private investors financed another 3% billion. Within less than two years, these funds were spent on imports from the United States and other parts of the world.17 The European governments, with the exception of Great Britain, did nothing to return to sounder principles of government financing, balancing the budget, or refraining from inflationary measures. It was so convenient—politically and socially—to spend and not to tax or borrow from their own people. Besides, speculating businessmen, who anticipated the deterioration of currencies by government inflation, could be blamed for the rising prices.18 Under those conditions the exchange rates could not be stabilized regardless of how many billions of dollars the United States government spent.

In the fall of 1920, America had learned its lesson. If exchange rates were to be stabilized, European currencies would have to be stabilized first. During the next two years the problem of stabilization was approached quite differently. Small loans were given to 17 B. M. Anderson, Ibid., p. 582 et seq. 18 The notion that it is the speculator who, by buying and selling currencies, wrecks one currency after another is as popular as it is fallacious. Governments, at all times, have needed individuals on whom they could lay the blame for their own misdeeds or for situations which they did not understand. In medieval Europe it was the witch, in Hitler-Germany the Jew, in communist Russia the capitalist, and to the progressive Western government the speculator, whose misfortune consists mostly of his ability to foresee and anticipate future government actions and their effects.

214 STEPS TOWARD UNION European governments with the express condition that internal government finances were to be stabilized. In 1923, Austria, whose crown had dropped to 14,000 to 1 in terms of gold, under the auspices of the League of Nations, received a loan of about $113,000,000. The conditions accompanying the loan were drastic curtailments of government expenditures, increases in taxes, a balancing of the budget and a stabilization of the currency on a gold basis. Thus, the conditions requested for the attainment of the loan, and not the loan itself, really did the stabilizing. The same thing was done for Hungary in 1924. The conditions of a loan of about $50,000,000 effected a drastic reform in government policies, and the stabilization succeeded. In 1924, America did the same thing for Germany. A loan of $200,000,000 was provided under the condition that expenses be curtailed, the budget be balanced, there be a definite stabilization of currency on gold, and that there be a foreign representative in the Reichsbank and a foreign commissioner in Germany for the purpose of supervising certain taxes. These controls over the policies of an etatist government brought about the stabilization. The enormous difference between this approach and that of Bretton Woods lies in this control over the government instead of by the government.

Poland, too, received a loan of $72,000,000, the conditions of which brought about an improvement in monetary and fiscal practices in the Polish government. The stabilization of foreign exchange rates inevitably followed. Great Britain, Belgium, France, and Italy also had experienced a deterioration of their currencies by inflationary spending under wartime conditions. Great Britain went back to the gold standard and brought the pound back to the prewar par in April 1925. The actual purchasing power of the pound, as prevailing in 1925, however, lay at about 90 per cent of the old par. To avoid the ill effects of a deflation, a stabilization at about 90 per cent of the old par would have been suitable. But the government of Great Britain decided to embark upon the necessary readjustment of prices and costs of about 10 per cent in order to achieve the prewar par. Under the conditions of free enterprise such as prevailed in the nineteenth century this readjustment would have been taken in stride. But under the twentieth-century conditions of nation-wide union bargaining, rigidity of labor costs, and price-fixing combinations of industries organized behind highly protective walls of tariffs, such a readjustment was impossible. Many marginal enterprises were closed and BritMONETARY COOPERATION AND INTEGRATION 215 ain's unemployment soared and remained high until the beginning of World War II.

In July 1926, the deterioration of the French franc had progressed to a new low of less than 2^ in foreign exchange markets. Within a few weeks during the spring of 1926 alone, the franc had dropped from 5^ to 2#. Prices were rising continuously. When nearly all the European governments had completed their drastic reforms and had stabilized their currencies, sentiment among French politicians and statesmen finally demanded financial reforms also. In the fall of 1926, under Poincare, the French government embarked upon a policy of cutting expenditures, cutting pensions, dismissing needless civil servants, raising taxes, and even creating a fiscal surplus.19 The franc rallied dramatically. Within a short time the French franc rose from 2^ to approximately 4^ on the foreign exchanges. France then stabilized the franc at nearly 4^ de facto at the end of 1926 and de jure in 1928. In all the above-mentioned cases exchange stabilization was brought about through stabilization of the currency, which was brought about by curtailing government expenditures, balancing the budget, and refraining from inflationary government measures. An International Fund and an International Bank were not necessary, nor could they have yielded those results.

Funds Resources Spent. Since the establishment of the Fund in 1946, several years have elapsed. Its inevitable failure has become evident even to the most ardent defenders of the Agreements and the institution. Within a few months after operations began, the convertible currencies—mainly the American contributions—had been spent for the stabilization of currencies which the respective governments were busily depreciating through credit expansion, inflation, deficit spending, etc. After the first flurry of operations in 1947, the Fund practically had to suspend its exchange transactions because of lack of exchangeable currencies. Although the Fund was established to stabilize the exchange rates of the national currencies, the member countries continued freely to manage their rates of exchange, flouting the Fund's advices and proceeding with their own plans of exchange restrictions and devaluations which the Fund was supposed to eliminate. Only five members, out of more than 40 member governments, did not invoke Article XIV which denies the Fund's jurisdiction over exchange relations during the "transition period." Their national currencies are still in a "state of transition,"

19 See B. M. Anderson, Ibid., p. 156.

216 STEPS TOWARD UNION that is to say, in the transition to further depreciation and planned monetary chaos. Proposals for Revision. Nevertheless, it would be erroneous to assume that the advocates of easy money schemes and international monetary cooperation have learned the lesson. On the contrary, numerous plans for a revision of the Fund statutes have been brought forward. The Monetary Fund is supposed to have more and broader responsibilities and, above all, new American contributions. It lies in the nature of omnipotent governments and their institutions to extend continuously their sphere of authority. Once it has been accepted by popular belief that government or its institutions know how to manage the affairs of the individual better than he does, limitation of authority becomes vague and arbitrary. No valid reason remains, for instance, why government should not regulate the domestic exchange of goods if it is to manage the field of foreign exchange. There is no reason whatever stated for the defense of foreign exchange regulation which could not be cited for the advocation of domestic government regulations.

The Fund is a government institution born and provided with power and authority that tend to expand. It is growing in its usefulness as a tool of an ideology aiming at and bringing about the destruction of freedom and free enterprise, in the soil of which Western civilization has grown and without which this civilization must vanish. B. THE EUROPEAN PAYMENTS UNION The Economic Background. At the end of World War II, Europe suffered from acute shortages of all sorts—food, clothing, raw materials, machinery, equipment, etc. In many cases these things could not be produced within the boundaries of a state and so had to be imported. But imports require media of foreign payment which can be obtained only through foreign trade or through grants and loans from foreign lenders. Since foreign businessmen could hardly be expected to loan their funds to Europeans in countries having exchange restrictions and practicing monetary depreciations and government blocking of accounts, the European governments applied for and received large grants and loans from the country which was willing to supply them—the United States of America. Attempts were also made to revive foreign trade in order to acquire the media of foreign exchange so urgently needed for the payment of essential imports.

In accordance with modern ideas on government and its transMONETARY COOPERATION AND INTEGRATION 217 actions, these attempts at revival of foreign trade were handled in the following way: strict foreign exchange controls by governments over exchange transactions of the individual were introduced; the media of foreign exchange were carefully rationed as to purpose of use and recipient country; and foreign trade transactions of the individual were carefully scrutinized by government officials as to their importance and congruence with the over-all government planning. In general, the fundamental policy was such that exports to countries with "convertible" currencies20 were encouraged through numerous government measures in order to earn "hard currencies." Imports from these countries, however, were either prohibited or rendered difficult if they did not concur with the government's plan of essential imports. On the other hand, imports of essential goods from countries with weaker and more rapidly depreciating currencies—whose supply was often abundant—were allowed. But exportation of goods to these countries was disapproved because the central bank would hesitate to accept the weaker currencies of doubtful convertibility. At the same time, governments with still weaker currencies would prohibit the importation on grounds of "unessentially" or scarcity of the necessary media of exchange which were "hard currencies" for them.

The inevitable consequence of this careful planning for trade revival by European governments was a marked decline in interEuropean trade. The government planners deliberated and inferred. Our exchange plans and foreign trade controls do not work satisfactorily, they said, because an InterEuropean system of settlement is needed which would keep account of the foreign trade of the nations. Foreign exchange controls lack an international supplement, that it to say, an international institution of control over the national systems of control over the foreign transactions of individual. And so this institution was set up. An IntraEuropean Payments Agreement. In October 1948, the First IntraEuropean Payments Agreement21 was concluded by the European countries which participated in and benefited from the American program for European Recovery. This payment agreement linked intraEuropean trade with American aid. Through bilateral negotiations between governments the volume of trade between the citizens of the various ERP countries was to be deter20 A "convertible" currency, in this connection, is a currency which can freely be converted into other currencies. Convertibility into gold is another matter.

21 See also William Diebold, Jr., Trade and Payments in Western Europe, Harper & Brothers, New York, 1952, p. 34 et seq.

218 STEPS TOWARD UNION mined. The anticipated balance of payments between national central banks was to be calculated and determined in advance. In cases where a government anticipated that exports of its citizens to a certain country would exceed their imports from it, thus causing the incoming payments to exceed those going to the foreign country, the governments agreed that the difference should constitute a gift, called "drawing right," to the central bank owing the balance. In return, the central bank providing the gift, in order to pay its own citizens for the surplus exports, was to be compensated generously out of dollar aid funds provided by the United States. Drawing Rights Illustrated. To illustrate, let us assume that the total export volume of German businessmen to French buyers is expected to amount to one billion dollars during the coming year. At the same time, let us assume that the French businessmen are expected to export only 750 million dollars' worth of goods to German customers. Thus it is anticipated that the payment agent for the French businessmen—the Bank of France—will pay one billion dollars to the payment agent of the exporters in Germany—the Bank Deutscher Lander. And the latter central bank will pay the Bank of France $750 million for exports of goods to Germany. The difference of $250 million represents an amount in German currency, or gold, or acceptable currency which the Bank of France probably does not have, even though it receives full payment in French francs from French importers.

The modern solution to this problem is government prohibition of the excess of imports over exports. But the First IntraEuropean Payments Agreement was designed to discontinue this curtailment of foreign trade. In our example, the German government, as the manager of the Bank Deutscher Lander, would now renounce its claim against the Bank of France, that is to say, it would grant 250 million dollars' worth of "drawing rights." Of course, the Bank of France would collect the full indebtedness from the French importers. It would even encourage them to import fully one billion dollars' worth of goods, since the last $250 million would constitute a clear profit. Of course, since the Bank of France is a "non-profit" government-owned and regulated institution, it would then lend these funds out at low interest rates—preferably to the government to cover deficits or to nationalized industries with deficits. The Bank Deutscher Lander, on the other hand, would pay the full amount to the German exporters, but would be compensated generously out of aid funds provided by the United States. Thus the interpayment relations of citizens of different countries could be MONETARY COOPERATION AND INTEGRATION 219 settled via two central banks and one superbank without resort to gold or other "hard" currencies based on gold. Government exchange control supplemented by an international institution of settlement could thus be substituted for individual freedom of payment relations.

Agreement Promotes Disequilibrium. The sad part of this intergovernmental agreement was that it did not work. Some governments complained about the interference of the agreement with foreign trade and exchange control programs of their own; others complained about errors of anticipation of deficits on which the drawing rights were based—some had granted too many and received too little and complained that others had granted so little and received so many; others even complained about their own businessmen leaving drawing rights unused. In June 1949, at the expiration of the agreement, 15 per cent of the rights were unused,22 which means that the central banks had foregone 15 per cent of the total profits because importers, who had to pay their central banks for foreign purchases in full, simply abstained from importing. Governments thereupon began encouraging imports. They even discouraged exports because the amount of drawing right aid was based on the amount of prospective surplus of imports over exports.

The larger the export deficit, the larger the amount of aid which constituted lucrative profit to the central bank. But this government trade policy was diametrically opposed to the objective of agreement, which was balance and equilibrium of interEuropean economic relations. Finally, many European governments concurred in the complaint that American compensation out of aid funds was insufficient. A Revised Payments Agreement. Another system of interEuropean payment control and settlement had to be designed and established. In September 1949, the European governments signed a Revised Payments Agreement. In its essentials, this new agreement constituted a development of the preceding agreement. But again the governments endeavored to forecast the next year's balance of payments between the national central banks. The anticipated "creditor" central banks then granted drawing rights to the "debtor" central banks in the amount of expected excess payments.

But the major shortcoming of the drawing rights, as granted under the preceding agreement, was corrected—that is to say, the central banks were assured of better utilization of the drawing rights in that 25 per cent of them were made "multilateral." 22 W. Diebold, Ibid., p. 49.

220 STEPS TOWARD UNION In order to illustrate this new feature, let us return to our preceding example. Let us assume that French businessmen imported goods from Germany in the amount of $750 million and that the Bank of France received drawing rights for an additional 250 million dollars' worth of imports from Germany. If no additional imports are made by French businessmen, the drawing rights obviously are worthless and no drawing right profit can be made. The transferability of 25 per cent of drawing rights granted was supposed to correct this shortcoming. The new agreement provided therefore that the multilateral drawing rights could be used to cover the recipients' payment obligations with any country signing the agreement. Let us assume that our French importers preferred to import goods from Italy instead of from Germany. They paid the purchase price in French francs to the Bank of France in full. The Bank of France, which may have more payment obligations towards the Banco dltalia than it has claims for French exports against it, may now use its multilateral drawing rights granted by the German central bank or any other bank to discharge its Italian obligation. The Banco dltalia is obliged to accept "payment" for its claims by honoring these rights and in return it is to be compensated generously out of American aid funds.

Its Failure. But this revised system of interEuropean payment control and settlement did not bring about the desired result—the revival of interEuropean trade. Foreign trade by thousands of European businessmen simply did not conform to the careful forecasts of the government planners. But the whole system rested upon the correct anticipation of future trade. The interEuropean flow of goods was changing constantly and rapidly in direction, quantity, and composition. A central bank which had anticipated being a "creditor" bank and granted drawing right aid might become a "debtor" bank during the current year, and vice versa. In no case did the actual volume of trade conform with the anticipated volume —a fact which resulted in numerous "injustices" and undesired effects. A central bank which had granted a certain amount of drawing rights may have found that more drawing rights were used against it than it had established. The central bank of Portugal, for example, established only $800,000 in rights, but it was obliged to honor $8.3 million.23 Or, the drawing rights which a central bank provided were not sufficient to cover the actual surplus in export trade. This resulted in new trade barriers which other European governments erected against goods from this "creditor" country.

23 W. Diebold, Ibid., p. 74 et seq.

MONETARY COOPERATION AND INTEGRATION 221 Belgium, for instance, whose government did not indulge in excessively inflationary practices, experienced an export surplus throughout the postwar period. The drawing right aid which the Belgian central bank granted was not sufficient to cover the deficits which other European central banks had with the former. The Belgian government therefore agreed to establish further drawing rights and lend out the anticipated balance in the form of inter-central bank loans. The Belgian central bank, on the other hand, received dollar aid from the United States by an equal amount. None of these measures of national exchange control and international settlement had the desired effects. The interEuropean trade, during this period, increased only slightly and for reasons other than the Payments Agreement. European governments, therefore, came to the conclusion that a new approach to the problem of interEuropean payment settlement had to be found. This new approach was the European Payments Union the agreement of which was formally signed by the OEEC governments in September 1950.

The Payments Union. Under the terms of the Union, each central bank's foreign exchange surplus or deficit with every other member central bank are set off against one another.24 The balances are reduced to a single net surplus or deficit with the Payments Union. Foreign exchange deficits up to a certain amount are automatically covered by a grant of credit by the Union to the debtor central bank. If the deficits exceed the automatic credit, part of this deficit is covered by further credits and part by payment of gold or other convertible currencies. A central bank's position is thus determined by its debt to or from all the other member central banks in the Union. The clearing agent for the EPU is the Bank for International Settlements in Basle, Switzerland. It calculates and determines each central bank's position with the other banks every month. During the periods between settlement, the central banks grant the necessary credits for the continuation of foreign trade.

Quotas Assigned. Each central bank was assigned a "quota" which is equal to about 15 per cent of the foreign trade of a country's citizenry with those of other member countries during the year 24 OEEC, A European Payments Union and Use Rules of Commercial Policy to be followed by Member Countries, Paris, 1950. See also OEEC, "Agreement for the Establishment of a European Payments Union," in ECA, 9th Report, Supplement, 634; R. F. Kahn, "The European Payments Union," Economica, August, 1950, pp. 306316; R. Triffin, Monetary Reconstruction in Europe, Carnegie Endowment for International Peace, New York, p. 282 et seq.; W. Diebold, Jr., Ibid., p. 87 et seq.

222 STEPS TOWARD UNION 1949. The British quota was based on and is used to facilitate foreign trade between European exporters and importers and businessmen in the whole sterling area, with the exception of Iceland. If the net debt of a central bank amounts to only one-fifth of its quota, or less, the EPU will grant it credit for the full amount. If a central bank's credit position amounts to one-fifth of its quota, or less, the EPU receives credit from this bank for the full amount. If the credit or debit position of a central bank exceeds one-fifth of its quota, some part of the balance is settled by further extension of credit and the rest is covered by gold or other convertible currencies. Creditor central banks receive half the sum due them by the EPU in gold once the first 20 per cent of the quota is exceeded. Debtor national banks pay gold for debit balances at an accelerating rate of percentage (20 per cent gold from 20 to 40 per cent of the quota, 40 per cent gold between 40 and 60 per cent of the quota, 60 per cent gold between 60 and 80 per cent of the quota, 80 per cent gold between 80 and 100 per cent of the quota). Since the divergence between the ratio of gold payment by debtor banks to the Union and that of gold payment by the Union to creditor banks could cause the Union to pay out more gold than it would take in, the United States of America supplied a EPU working fund in the amount of $350 million.25 The Payments Union Does Not Affect the Individual. The individual businessman still needs his license to operate his export or import business. He still must deal with a buyer or seller abroad. If he wants to conclude a transaction, he must apply for an export or import license for the specific transaction planned. He must apply for an allocation of the necessary media of foreign exchange. He must comply with his government's foreign exchange control rules and with the government's bilateral trade agreements on volume and essentiality of imports. He must conform with his government's general regulation of imports and tariff duties. And, finally, he must comply with the rules and restrictions of the government in which his foreign buyer or seller resides. Having succeeded in fulfilling all requirements and having received all government licenses, for which he naturally is charged, the buyer must deposit the purchase price with his commercial bank well in advance. The commerical bank then transfers the deposit to the central bank which reports it to the Bank for International Settlements. At the same time, if and when the foreign contract party is equally successful in fulfilling all requirements and has received all licenses from its government, the 25 R. Triffin, Ibid., p. 287. See also W. Diebold, Ibid., p. 87 et seq.

MONETARY COOPERATION AND INTEGRATION 223 import or export transaction may proceed. Naturally, when goods cross borders, they are thoroughly checked by other government officials of both countries as to value and conformance with declaration papers and licenses. If everything is found in full agreement with the latest government requirements, the tariff duties may be paid. Equilibrium Through Restrictions and Inflation. The European Payments Union Agreement, in anticipation of difficulties in case a central bank's quota becomes exhausted, included special provisions. If a central bank's credit position exceeds 75 per cent of its quota, a change in government policy should be considered to restore the balance of trade with the Union. If the position is about to reach the member bank's quota, definite arrangements should be made for the restoration of the balance. Four means for attaining this objective, the first three of which have been successfully used, are as follows: 1. A central bank may extend additional credits to the Union.

These may be temporary or constitute an enlargement of its quota. 2. Other member governments may be permitted to restrict importation from the country whose central bank has exhausted its quota. 3. A member government may inflate its currency to such an extent that the depreciation of currency exceeds the rate of depreciation of the other European currencies. The depreciation then results in an increase of imports and a decrease of exports. 4. A government is free to withdraw from the Union once its central bank has exhausted its quota. In order to relieve the payments position of an extreme debtor, a government is allowed to limit importation of goods from certain countries or unilaterally from all other countries. Furthermore, the debtor country may ask for a recommendation for more American aid in the form of grants or loans. Sterling Area Included. The inclusion of the Sterling Area in the European Payments Union created many difficulties. Prior to the Union, in numerous bilateral agreements between Great Britain and a number of Continental countries, the pound sterling was used as the calculating unit and the generally accepted medium of intergovernmental payments. Consequently, British officials fearing that the automatic settlement of interEuropean payments in the EPU unit of account would curtail the demand for and threaten the po224 STEPS TOWARD UNION sition of sterling in international trade, asked that a provision be inserted in the agreement which made it possible for the member central banks to use sterling payments whenever it seems desirable to them.

Amortization of Unfunded Debts. Another major difficulty in the conclusion of the Payments Union Agreement was the risk that the Union would drain gold and convertible currencies from central banks with large bilateral debit balances. Continental banks, for example, were holding large sterling balances which—as the British government feared—they would throw into the Union clearing. As the total amount would probably exceed the automatic credit of the British quota, the Bank of England would be called upon to pay the balance in gold or convertible currencies. But this had to be avoided. Another special provision was therefore inserted into the Agreement, providing for amortization of the unfunded debts between the member central banks in case the debtor and creditor banks might not agree on the terms of repayment. Other Provisions. These were the basic provisions of the European Payments Union Agreement which was first concluded for an initial period of two years and successively extended annually after long and laborious discussions. A great deal of effort was required for the simple objective of settling payments between European central banks. Governments often balked at the suggestion of allowing an automatic procedure in international transactions to replace the numerous government controls as employed in bilateral settlement. The gold standard had been abolished for this very reason, for it kept governments from controlling money and credit and international trade. Similarly, "automatic" provisions of the Union Agreement ran counter to the very nature of government control. They were accepted, nevertheless, because of the great pressure for "cooperation" which the United States government exerted on the European governments. Of course, the fact that the United States put up the necessary working capital and that it pledged to assist weak debtor banks made the agreement acceptable to European governments. And the final bit of persuasion was the addition of the clauses on an easy termination and liquidation of the Union.

SOME CRITICISM Government and Foreign Exchange Control. It is one of the fundamental theorems of economic theory that an artificial scarcity is created wherever a government fixes a price at a point lower than that determined by the market. Whenever a government fixes the MONETARY COOPERATION AND INTEGRATION 225 parity of gold or foreign exchange against its own money at a point lower than the free market, i.e. whenever it undervalues gold or foreign exchange, a state of affairs results which can be described by Gresham's law. The demand for foreign exchange at the price arbitrarily fixed by the government exceeds supply. The foreign money disappears and the domestic money remains. In order to remove this undesirable state of affairs, interventionist governments then nationalize all foreign exchange transactions. Buying and selling of foreign exchange thus become the privilege of government authorities. Finally, when the discrepancies of official foreign exchange rates and market rates result in complete destruction of foreign trade, governments resort to barter and bilateral clearing agreements with foreign governments. When also these agreements fail because the domestic currency loses its usefulness as a calculating unit in international trade, governments endeavor to conclude multilateral payment and settlement agreements which are to eliminate the shortcomings of preceding price and foreign exchange policies. The European Payments Union is the work of such an agreement and is the logical outcome of government endeavors to eliminate the price laws of the market and establish government supremacy in the field of foreign exchange.

E.P.U. Analyzed. Our following critique is based on this fundamental concept of government activity in the field of foreign trade and exchange. It hinges upon the following contentions which we shall endeavor to prove: 1. The European Payments Union is a supplement to national policies of inflation and exchange controls and endeavors to make exchange controls work. 2. The fundamental provisions of the European Payments Union further credit expansion and perpetuate European imbalance of trade and payment. 3. The Payments Union condones and advocates inflationary policies by member governments and exerts pressure on creditor banks to inflate their currencies. 4. The Payments Union condones and advocates exchange and trade restrictions. It perpetuates controls inasmuch as it depends on controls. A sound money policy by any member state of the Union would cause its collapse. 5. The Payments Union reverses all principles of credit by granting credit to central banks which are inflating their currencies and 226 STEPS TOWARD UNION to governments which are running large budget deficits. Such extension of credit tends to encourage and perpetuate such policies.

6. The European Payments Union is financed and upheld by the United States of America and would collapse without American financial aid. 7. The European Payments Union is an institution organized by governments in disregard of the individual, of his freedom, planning and choices. EPU a Supplement to National Controls. The European Payments Union is a supplement to national policies of inflation and exchange control and seeks to make exchange controls work. Wherever individuals are free to base their economic relations on gold, they will do so without hesitation and shun the media of exchange that are subject to large-scale depreciation by governments. Inasmuch as the purchasing power of gold is independent of government wishes and plans, in order to be able to regulate the monetary affairs of the individual, governments nationalize the trade in gold and "retire" the individual's gold holdings. Government paper money, provided with a court-enforced property of legal tender, then replaces the kind of money which the individual preferred in his payment relations. Having succeeded in destroying the gold standard, governments may now embark upon a manipulation of prices and wage rates. Credit may be expanded at a vast rate, and governments may spend lavishly on public works and social programs.

A policy of inflation and credit expansion, however, brings about an external drain of the media of exchange which finally results in "unfavorable" balances of payment. The increasing depreciation of domestic money, together with the inevitable phenomenon of rising prices, induces importers to import more goods than they would have otherwise. Exporters, on the other hand, find it increasingly difficult to sell to countries where prices did not rise. This process continues until the reserves in gold and foreign exchange of the central bank—the only institution endowed by law to trade in gold and foreign exchange—are exhausted. At this stage governments resort to foreign exchange controls, i.e., controls over purpose of spending, allocation, and regulation of prices of foreign currencies.26 In the meantime, however, the policy of inflation, credit expansion, and government spending continues, and the purchasing power 26 On foreign exchange control see also L. von Mises, Human Action, Yale University Press, 1949, pp. 795 et seq.

MONETARY COOPERATION AND INTEGRATION 227 of the domestic money against gold and foreign exchange continues to fall. No control and no government coercion can alter the fact that the purchasing power of the inflated currency is bound to decline as long as other officials are busily employed in increasing its quantity. The external drain of gold and foreign exchange reserves of the central bank continues at an accelerated rate. As the discrepancy between foreign exchange control prices and market prices increases, the profit of those importers who obtain allocations of foreign exchange against inflated domestic money increases accordingly. Governments then resort to further makeshifts which are to encourage exports and discourage imports. The final attempt at making the increasing number of government controls over the actions of individuals work is the resort to international monetary cooperation—a kind of concerted government action for the continuation of a policy of inflation and credit expansion. It is based on the belief that it is the external drain of foreign exchange that frustrates domestic policies. There is no need to bring again to the reader's attention the fallacy of this notion.

Differences in Monetary Depreciation Must Destroy the Union. The European Payments Union is an institution of international monetary cooperation whose aim is not to check but to facilitate inflation and credit expansion policies. But monetary depreciation and imbalanced trade and payment are inseparable phenomena. Since the sovereignty for national monetary policies has not been limited and member governments are free to inflate according to their own plans and liking, the differences in degree of national monetary depreciation must sooner or later destroy the Union and its "cooperation" and "integration." Even if we were to assume a uniformity of action on the part of member governments, the Payments Union would still be plagued by the problems of European unfavorable balances of payment and decreasing purchasing power of the European media of exchange against gold and outerEuropean media of exchange. Only a complete autarky of the European Union would eliminate the inflation-created problems of international payment and foreign exchange.

EPU Based on Credit Expansion by Member Banks. The fundamental provisions of the Payments Union facilitate continuous credit expansion by the central banks. Under the terms of the Union each central bank's foreign exchange surplus or deficit is set off against every other central bank. Each bank thus remains with one credit or debit balance with the Union. Interbank deficits, amounting to less than a certain percentage of a bank's quota, are covered by a 228 STEPS TOWARD UNION grant of credit from the Union to the debtor central bank. If the debit balance exceeds this amount, further credits up to a bank's quota are granted. On the other hand, if a central bank is a "creditor bank," it is obliged to grant credit to the Union up to its quota. This credit to the Union or by the Union, under presentday government policies, is extended through credit expansion. The creditor banks of the Union grant credit to the Union and, in order to facilitate the foreign trade of their citizens, pay their exporters for the goods exported in full. This payment to exporters, in addition to the extension of credit to the Payments Union, is achieved through credit expansion. Of course, it is conceivable that a creditor central bank refrains from expanding credit by not paying its exporters or, provided it chooses to pay exporters, through contraction of loans to others. Contemporary credit policies, however, do not conform with this sound money principle which constitutes the essence of the gold standard and is the very reason for its destruction by governments all over the world.27 We may illustrate the expansionist policies of the central banks as follows. Let us assume that the central bank of Germany, the Bank Deutscher Lander, has a claim of onehalf billion dollars against the Payments Union for exports by German businessmen to other countries in the Union. According to the provisions of the Payments Union Agreement, the Bank Deutscher Lander grants full credit to the Union which then extends it to debtor central banks (let us say, the Bank of France) for approximately the same amount.

The Bank of France then, in spite of its credit from the Union, continues to collect the full purchase price for goods imported. When all imports have been paid for by the French businessmen, the Bank of France has on hand onehalf billion dollars more funds than it had before the extension of credit by the Union. On the other hand, the Bank Deutscher Lander, having given credit to the Union in an amount of onehalf billion dollars, proceeds to pay German exporters for goods exported in full, or onehalf billion dollars. Credit in this amount has thus been created by the Bank Deutscher Lander and granted to the Union which extended it to the Bank of France. The Bank of France is thus enabled to lend funds in the amount of onehalf billion dollars, which undoubtedly will be utilized to cover government deficits or assist nationalized industries. The inescapa27 It is also conceivable that a central bank may extend credit, without expanding, out of original deposits by commercial and savings banks or individuals having accounts with the former. All central bank credit exceeding these deposit funds is "created" and constitutes credit expansion.

MONETARY COOPERATION AND INTEGRATION 229 ble consequence of this new lending is a further enhancing of prices in France. A rise of prices, however, makes it profitable for French businessmen to import from foreign countries. And, again, the Bank of France faces the danger of an increasing external drain upon its gold and foreign exchange reserves. Consequently it stays a "debtor bank" and depends upon further extension of credit by the Union. It is in this respect that the European Payments Union is an institution for the perpetuation of the imbalance of European trade and payment. EPU Compared with the Gold Standard. The significance of the European Payments Union is most clearly illustrated in a contrast with the functioning of the gold standard. Under the operation of the gold standard, the French importers of our example would have had to pay for goods in gold and foreign exchange. This means that an equivalent amount of gold and foreign exchange would leave the country, and immediately the money markets in Germany as well as in France would reflect the new supply situation. In Germany the inflow of funds would tend to lower the money rates; in France interest rates would tend to rise. The difference in rates on French and German money markets would immediately induce some German bankers to deposit funds in the French money market in order to profit from the higher money rate. Or, they would begin to buy French commercial paper. Also French bankers would tend to recall funds deposited in Germany and invest them at a higher rate in France. That is to say, an outflow of gold or foreign exchange would, within a matter of hours, bring about effects that cause a return of funds. Only if the outflow would exceed this return, the volume of money in France would contract. This contraction then would tend to lower prices in France, which in turn would decrease the profitability of imports. On the other hand, the inflow of money and foreign exchange in the exporting country would tend to enhance prices which would constitute a check on further exports and an incentive for more imports. Thus, through the operation of the gold standard, exports and imports would always be in balance and the contemporary phenomenon of "unfavorable" or "favorable" balances of trade and payment would cease to exist.

EPU Advocates Inflation. It is our contention that the Payments Union condones and advocates inflationary policies by the governments of the member nations and that it exerts pressure on creditor banks to inflate their currencies. It is one of the provisions of the agreement that a change in policy is to be considered as soon as a bank's surplus exceeds 75 per cent of its quota. If the surplus is 230 STEPS TOWARD UNION about to exhaust the central bank's quota, definite arrangements are to be made for the restoration of the balance of the creditor bank to all other central banks. To work off a surplus position with the Union, a central bank must aim at a temporarily unfavorable balance of payment—that is to say, at an external drain of gold and foreign exchange. Such an objective can be achieved only through a monetary policy which is relatively more inflationary than that of the other central banks of the Union. The central bank which inflates its currency most quickly and expands its credit most widely cannot fail to bring about an outflow of foreign exchange. Another makeshift solution to this problem is for the creditor government to apply stringent export controls and the importing country to apply stringent import controls against the country having the surplus position. Through the combined efforts of the border police forces of both countries a temporary change in the payment position may be enforced. A permanent change in the payment position, however, can be brought about only through government policies affecting money and credit.

The member governments of the European Payments Union have successfully employed both means to change a payment position. Towards the end of 1950, the Portuguese central bank, for example, was about to exhaust its quota of 70 million dollars as creditor bank when the Managing Board of the OEEC began to reprimand the Portuguese government for its "tight credit policies" and lack of measures to check the inflow of capital seeking refuge from depreciation.28 It is obvious that the criticism of "tight credit policies" is identical with advocation of credit expansion policies. When the Portuguese government then embarked upon "easier" money and credit policies while other central banks of the Union temporarily refrained from expanding and inflating at an even greater degree, the Portuguese central bank began to run deficits with the Union. The balance of trade and payment between Portugal and the European Union was thus restored through credit expansion on the part of Portugal and the attainment of an approximate uniformity of expansion by all member governments of the Union.

Also, the Belgian central bank's surplus repeatedly reached its quota limit because the Belgian government frequently refrained from policies of inflation and credit expansion while other European governments indulged in easy money policies. The Belgian government was then coerced to extend further credit to the Union by reason of the provision which permits debtor member banks to re28 W. Diebold, Jr., Ibid., p. 134.

MONETARY COOPERATION AND INTEGRATION 231 strict importation of goods from countries having exhausted their quota. The Belgian central bank preferred to expand credit rather than to allow its exporters to be discriminated against by all other governments of the Union. EPU Advocates Exchange and Trade Restrictions. This illustration also leads us to the inference that the European Payments Union condones and advocates exchange and trade restrictions. It perpetuates controls because its existence depends on controls. A sound monetary policy by any member country would cause its collapse. Let us assume that a member central bank would decide, in order to facilitate a monetary and economic reconstruction, to refrain from any further inflation and credit expansion. We may even assume that it decides to go back to the gold standard. Within a few weeks time, this central bank would become a "creditor" bank and would exhaust its quota with the Union. According to certain provisions of the Payments Union Agreement,29 debtor governments are permitted to limit imports from a country whose central bank has exhausted its quota as "creditor bank." Such a country would soon be surrounded by a wall of trade and payment restrictions by the Union members. It would then have the choice of abandoning its sound money policy or withdrawing from what is commonly believed to be the initial step toward European monetary "cooperation" and "European integration." Before all the world this government would assume responsibility for having caused the downfall of the Union and its attempt at European unification. But no democratic government can risk being blamed for this consequence. It is understandable that it rather prefers to continue to inflate its currency in order to be united with other governments in monetary depreciation.

The Union's attitude toward government exchange and trade restrictions is also manifest in its position towards European trade with the dollar area. Not only has it left intact the discriminatory trade policies with respect to American goods, but it has even increased that discrimination. Of course, the policies of the governments of the EPU system are in full agreement with the scarce currency provisions of the Monetary Fund Agreement. The scarcity of the United States dollar which led to additional restrictions of imports from the United States is the inevitable consequence of its relatively stable purchasing power compared with that of European currencies. The fact that the purchasing power of the American dollar decreased by a mere 25 per cent (from 77^ to 52^ of the 29 OEEC, Code of Liberalization, Paris, July, 1951, Art. 3 and 31, pp. 14, 15.

232 STEPS TOWARD UNION 1940 dollar) during postwar years, while the European currencies depreciated at a much faster rate, caused a scarcity of dollar exchange. The inference drawn by contemporary European governments was that additional restrictions and controls over the individual's trade with America were needed. The European Payments Union aids and encourages this belief. EPU Reverses All Principles of Credit. As has been pointed out, the Payments Union also reverses all principles of credit in that it grants immediate credit to central banks which are inflating their currencies. The central banks then extend this credit to governments which are running large budget deficits. Such an extension of credit by the Payments Union naturally tends to encourage deficits and perpetuates inflationary policies. Under provision of the Union Agreement a central bank that inflates its own currency and enforces a fictitious foreign exchange rate—and consequently suffers from foreign currency scarcity—receives immediate credit up to its quota for the amount of foreign exchange it owes to other central banks in the Union.

A government may adopt a policy of inflation for two reasons: to bring about a great business boom, the after-effects of which are recession and depression; or to offset expenditures which it has been unable to pay for through taxation and borrowing. Often a government hesitates to present to its citizens the full and true bill for its spending. It then simply resorts to the old practice of inflation. In order to make its policy of money depreciation as unnoticed as possible, it may even accuse its businessmen of "price violations," "greediness," etc. It was for the latter reason that a policy of inflation was pursued in postwar Europe. Almost every government was running large deficits. They hesitated or were unable to raise an equivalent amount for their spending through taxation and, inasmuch as they were unable to find enough investors for floating loans to cover the deficits, they resorted to printing. But also a new source of funds was welcome that never inquired into the credit status of debtor central banks; this was the European Payments Union. The higher the government deficit and the greater the government inflation, the sooner would it extend credit to the inflator. From an interventionist point of view, it is indeed an ideal institution, supplementing and facilitating policies of easy money and credit.

Union Financed by the United States. The European Payments Union is financed and upheld by the government of the United States, without whose financial aid, we contend, the Union would MONETARY COOPERATION AND INTEGRATION 233 collapse. As has been stated, the initial working fund of $350 million, without which the Union could not have been established, was not put up by the member states of the Union, but by the government of the United States. Furthermore, the United States government is making full or partial payment to the Union on behalf of certain countries whose central banks have exhausted their quota with the Union. If a member government of the Union has depreciated its national currency through easy money and credit operations at a rate faster than the depreciation of the currencies of other member nations, the central bank of this government is bound to suffer a deficit with the Union. As soon as its credit quota is exhausted and further deficits must be met with gold and foreign exchange in full, its government may resort to additional import restrictions. The Payments Union finally loses all significance to the debtor member because it is excluded from the automatic credit operations by the Union. At this moment, however, the United States government steps in and makes full or partial payments on behalf of the debtor central banks that must either leave or be dropped from the Union, thus allowing them to be reinstated as a participating member.

During the operation of the EPU the United States, for example, made full payments for deficits to the Union on behalf of Greece and Iceland and made substantial payments on behalf of Austria and Turkey.30 Altogether it spent several hundred million dollars to uphold the function and organization of the European monetary system. With the United States government standing ready to replenish the quota of a debtor central bank, no matter how great the rate of monetary depreciation, the European Payments Union can and must be temporarily successful in its inflationary objectives. But there cannot be any doubt that one debtor bank after another, de facto and de jure, would drop from the Union if the government of the United States would cease to foot the bills for deficits. And there cannot be any doubt that the European Payments Union would instantly collapse if the American government would proceed to call its loans or the initial working fund without which the Union would never have been constituted.

The European Payments Union is an international institution conceived and organized by governments united in disregard of the 30 R. Triffin, Monetary Reconstruction in Europe, Carnegie Endowment for International Peace, New York 27, New York, p. 289; see also "Unveranderte Tendenzen in der EZU," Deutsche Zeitung und Wirtschaftszeitung, 4/25/53, 8th year, #33, p. 10.

234 STEPS TOWARD UNION individual, of his planning, freedom and purpose. It is the logical outcome of an ideology that advocates the substitution of government planning for individual freedom and private enterprise. The Payments Union is a supplementary instrument of control over the payment relations of individuals. It is no isolated phenomenon, no coincidental realization of an objective of the ideology of planning, but merely one of its numerous aspects. When the fundamental freedom of the individual in his monetary and foreign exchange affairs fell, other economic freedoms could easily be abolished. When economic freedoms fall, all political liberties and bills of individual rights, sooner or later, become empty and meaningless. This is the significance of the European Payments Union in the struggle between the ideology of control and that of individual freedom.

VII The European Coal ana Steel Community Unification As Seen by Robert Schuman. The revolutionary idea of European unification "has taken shape so fast and without the violence that usually accompanies revolution." These are the words of Robert Schuman, father of the European Coal and Steel Community, expressing his feeling of gratification about the conclusion of the Treaty. Previous attempts at European unification have failed, according to Schuman, because "no European country was ready for the concept of a supranational authority." Aristide Briand, who was the first to raise officially the question of unity, had proposed a "European Association" that excluded any infringement upon national sovereignty. He had confined himself mainly "to outlining a legal structure, in particular a system of arbitration." His attempt to settle the Franco-German problem by signing the Locarno Pact in October 1925 also failed, because certain provisions of the Treaty of Versailles held Germany in an inferior status, while France clung to her legal rights of reparation payment for war damages. "German nationalism, nourished by incessant but futile scoldings, grew until its supporters at length felt strong enough to deny that Germany had suffered any military defeat or bore any political responsibility. Banking on the fact that an alliance with Russia was possible, they moved rapidly to split Europe. Hitler completed the break when he came to power in January 1933. ... In such an atmosphere," says Schuman, "there was no possibility of cooperation." 2 After World War II, the situation was different. Germany had 1 Robert Schuman, "France and Europe," in Foreign Affairs, An American Quarterly Review, April 1953, Vol. 31, No. 3, p. 350.

235 236 STEPS TOWARD UNION suffered a crushing military defeat by the Allied armies which occupied the whole country. It was in a state of disorganization, without either an army or a central government. Furthermore, the occupation of the Eastern Zone of Germany by the Russians made the German people thoroughly hostile to the thought of any German-Russian alliance. Now, the political prerequisites for Western European cooperation were present. When, in 1947, the Western Allies became aware of Russia's menace towards the free world, they soon began to counteract Russian moves. In 1948, the first permanent pan-European organization, the Organization for European Economic Cooperation, was set up and entrusted with the task of allocating and putting to work the funds contributed by the United States government under the Marshall Plan. Thus, "under the threat of danger, and prompted and encouraged by generous assistance from America, Europeans began to acquire a consciousness of 'Europe'/' The'basis for European cooperation was broadened by the Brussels Treaty of March 1948 and the London Agreement of June 1948 which inaugurated a constructive policy toward Germany.

In May 1949, because of the initiative of France and Belgium, the governments of twelve European countries signed the Constitution of the Council of Europe, which constitutes a permanent assembly. Its delegates vote individually on recommendations to member governments without being instructed by their own governments. Western Germany joined this organization a few months later. In initiating this move towards integration, the French government, according to Robert Schuman, followed two primary purposes. First, the French government endeavored to "strengthen the European countries, which if left to fend for themselves would be condemned to political and economic dissolution; and second, to bring Germany into the common endeavors so that she would not repeat her former errors."2 Participation in the Council of Europe was the first step in this direction, but it was not enough and France did not hesitate to take another. She envisaged the creation of such strong organic bonds among the European nations—Germany, in particular, included—that no German government could break them, and the establishment of a living and permanent community that would put an end to old antagonisms and usher in an era of profitable collaboration. Such a community must be based on mutual good faith and 2 Ibid., p. 352.

THE EUROPEAN COAL AND STEEL COMMUNITY 237 confidence—and that is possible only if all members find it to their interest to keep faith with the others, recognizing that what promotes the common advantage will promote their individual welfare. "In a solemn declaration on May 9, 1950, France proposed to Germany and the other European countries that they put their production of coal and steel under an authority independent both of governments and private interests. For the first time in history there was to be an agency above national parliaments and private business which would reach its decisions in consultation with producers, workers and political bodies and which would be responsible only to an assembly representing the participating Powers. Thus we hoped that considerations of narrow national interest would be replaced by regard for the common interest, that national antagonisms would be transcended, and that, since none of the partners had control of its own coal and steel, war among them would be unthinkable. The objective was to remove the danger of war between rival nations and to develop a community spirit which would not weaken national attachments but provide a wider basis for new activities and new goals. Such a community would also be able to solve problems which arise from the uneven distribution of natural resources and technical skills." 3 "The unification of Europe is irrevocably under way," says Robert Schuman rejoicingly. The political union, it is true, should have come first. However, the "functional" approach was chosen "for the practical reason that it seemed wiser to begin with integration in a restricted technical sector of national life: the important thing was to go ahead quickly so as to catch the public imagination and win over doubters and scoffers. Also, though the fields in which unification was achieved are of the first importance, they lie somewhat outside the areas of sharpest political controversy. As we have noted, the coal and steel plan has now become a symbol of European political unity. It has created an atmosphere in which integration can develop further and it also represents a concrete and lasting step in the program of Franco-German reconciliation."4 The European faith in the future, according to Schuman, rests "on a cooperation which, since it derives from a fusion of economic interests and the growth of common institutions, ought to be permanent.

The idea of a united Europe will no longer be a theme for poets, a Utopian vision; it will be a living reality, because the conscience 3 Ibid., pp. 352, 353. 4 Ibid., p. 358.

238 STEPS TOWARD UNION of the European people will have recognized it as their chance of salvation/'5 The Objectives of the Coal and Steel Community. The Treaty of the European Coal and Steel Community, concluded by the governments of Germany, Belgium, France, Italy, Luxembourg, and The Netherlands, was signed at Paris on April 18, 1951 and ratified by the respective parliaments of the six countries during the following fourteen months. It went into effect on July 25, 1952. According to Article 2 of the Treaty, it is the mission of the European Coal and Steel Community: "to contribute to economic expansion, the development of employment and the improvement of the standard of living in the participating countries through the institution, in harmony with the general economy of the member States, of a common market as defined in Article 4. The Community must progressively establish conditions which will in themselves assure the most rational distribution of production at the highest possible level of productivity, while safeguarding the continuity of employment of the member states." 6 It is the function of the Community: "(a) to see that the common market is regularly supplied, taking account of the needs of third countries; (b) to assure to all consumers in comparable positions within the common market equal access to the sources of production; (c) to seek the establishment of the lowest prices which are possible without requiring any corresponding rise either in the prices charged by the same enterprises in other transactions or in the price-level as a whole in another period, while at the same time permitting necessary amortization and providing normal possibilities of remuneration for capital invested; (d) to see that conditions are maintained which will encourage enterprises to expand and improve their ability to produce and to promote a policy of rational development of natural resources, avoiding inconsiderate exhaustion of such resources; (e) to promote the improvement of the living and working conditions of the labor force in each of the industries under its jurisdiction so as to make possible the equalization of such conditions in an upward direction; (f) to further the development of international trade and see that equitable limits are observed in prices charged on external markets; (g) to promote the regular expansion and the modernization of production as well as the improvement of its quality, under conditions which preclude any protection against s Ibid., p. 360.

6 This and the following quotes referring to the Treaty constituting the European Coal and Steel Community are taken from its text as distributed by the Press and Information Division of the French Embassy in New York, N. Y.

THE EUROPEAN COAL AND STEEL COMMUNITY 239 competing industries except where justified by illegitimate action on the part of such industries or in their favor/' The Establishment of the Common Market. According to Article 4 of the Treaty, the following policies and practices are conceived to be incompatible with the common market and are, therefore, abolished and prohibited within the Community: "(a) import and export duties, or charges with an equivalent effect, and quantitative restrictions on the movement of coal and steel; (b) measures or practices discriminating among producers, among buyers or among consumers, specifically as concerns prices, delivery terms and transportation rates, as well as measures or practices which hamper the buyer in the free choice of his supplier; (c) subsidies or state assistance, or special charges imposed by the state, in any form whatever; (d) restrictive practices tending towards the division of markets or the exploitation of the consumer."

The Community is to accomplish its mission with limited directed intervention. "To this end, the Community will: enlighten and facilitate the action of the interested parties by collecting information, organizing consultations and defining general objectives; place financial means at the disposal of enterprises for their investments and participate in the expenses of readaptation; assure the establishment, the maintenance and the observance of normal conditions of competition and take direct action with respect to production and the operation of the market only when circumstances make it absolutely necessary; publish the justifications for its action and take the necessary measures to ensure observance of the rules set forth in the present Treaty. The institutions of the Community shall carry out these activities with as little administrative machinery as possible and in close cooperation with the interested parties." (Art. 5) In order to facilitate the exercise of its functions and the attainment of its ends, the Community shall enjoy "the most extensive juridical capacity which is recognized for legal persons of the nationality of the country in question." (Art. 6) The Institutions of the Community. The institutions of the Community, in charge of implementing the plan, are: a High Authority, assisted by a Consultative Committee; a Common Assembly; a Special Council, composed of Ministers; and a Court of Justice.