Friday, December 21, 2012

The Potential of a Caterpillar: or The Origins of European Monetary Integration

The Potential of a Caterpillar: or The Origins of European Monetary Integration
Harold James, Princeton
Paper for Yale Economic History Seminar, March 28, 2011

...There was inevitably an anti-American edge to the European reform debate at this moment. At the same meeting of the EEC Monetary Committee, van Lennep also proposed a European scheme to deal with the liquidity issues of the international monetary system. Since the influential articles of Robert Triffin in the late 1950s, policy-makers had worried about a dilemma in which on one side, there might be insufficient liquidity and a deflationary drag in the world, and on the other the U.S. might over-supply liquidity to the extent that there was a risk that dollar claims would be far greater than the gold and other liquid assets the U.S. had to cover them. 28 Triffin’s approach had always involved a call to European action. Van Lennep was acting in the spirit of Triffin when he proposed that the EEC Six should evolve their own system as an alternative to the further creation of dollars in the international system “in case the dollar can no longer fulfil its functions or if there is deflationary pressure.” But the suggestion divided the Committee, and de Lattre spoke very emphatically in favour of European rather than U.S. reserve creation, which “must not depend on the needs of an individual country but must be agreed collectively.” Otmar Emminger from the Bundesbank and Rinaldo Ossola from the Banca d’Italia were quite critical of the French suggestion, and Emminger reasoned that there was no need to replace the dollar with another reserve unit, and that if assistance was required, an expansion of the General Arrangements to Borrow (GAB) was the most appropriate mechanism. The GAB had been established by ten major countries in 1961, with the objective of providing credit of up to $6 bn., additional to the resources of the IMF. The fundamental eventuality that the G-10 might have to cope with lay in the increasing strains facing the major reserve centers: the United States and the United Kingdom. Switzerland joined this group in October 1963, although it continued to be known as the Group of Ten. A proposal for a collective reserve unit had already been made by the former head of the IMF’s Research Department, Edward Bernstein in 1963, and in October 1963 a G-10 Deputies’ Study Group began work on “the functioning of the international monetary system and its probable future needs for liquidity”. But it was only when the U.S. Treasury Secretary in July 1965 came round to an appreciation of the Triffin concerns and called for a major new international monetary conference that the intense negotiations began that eventually produced a very circumscribed possible new reserve asset, the SDR or Special Drawing Right..."

"...A dramatic move by the CCBG to an active lending policy occurred in July 1968. It was now the French turn to proffer the begging bowl. Given the harsh anti-American tone in the aftermath of de Gaulle’s press conference of February 4, 1965, and the persistent French criticisms of the American “exorbitant privilege” of imposing the dollar as the world’s leading currency, it is not surprising that French policy-makers did not want to crawl to Washington for additional credit. The Governor of the Banque de France, Jacques Brunet, explained that French reserve losses had required a drawing of $745 m. from the IMF, as well as gold sales to the Federal Reserve, the SNB and EEC central banks. By the beginning of July, the French reserves were nevertheless exhausted, and the Banque de France embarked on swaps of $600 with the Federal Reserve and with the EEC central banks. At Basel, the central bank governors resolved that the French situation met the mutual assistance conditions stipulated by Article 108 of the EEC Treaty. They agreed on a three month $600 m. credit, with half coming from the Bundesbank, $200 m. from the Banca d’Italia and the remainder shared by the Banque Nationale de Belgique ad the Nederlandsche Bank.46 The deal was linked with an agreement of the Banque de France to sell $300 m. gold to the participating central banks.47 At the next meeting, the Bundesbank explained that it was prepared to extend further credit lines to the Banque de France, in order to deal with speculative pressure against the franc, and in expectation of a Mark revaluation.48 These negotiations took place, in the European setting, in parallel with global (G-10) discussions of a parallel arrangement of up to $2,000 m. in support of Britain. The big move of the CCBG into financial support operations came not because the IMF was unable to provide a greater amount of resources, by because France was worried about the political implications of further drawing on the IMF..."


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