European Payments Union Is Formed Summary

  • Last updated on November 10, 2022

Sixteen European nations formed the European Payments Union, an organization designed to coordinate Marshall Plan expenditures and aid the rebuilding of European infrastructure damaged or destroyed in World War II. Formally created on July 1, 1950, the union was intended to be temporary, and it dissolved in 1958. It was succeeded by the European Monetary Agreement.

Summary of Event

With victory over Nazi Germany assured but still distant in early 1945, the United States and the United Kingdom began to envision the postwar era. Critical to their designs of winning the peace were programs such as the Bretton Woods system, which locked the value of the U.S. dollar to an ounce of gold, and the International Monetary Fund, which aimed to assist countries with balance-of-payment difficulties. Both plans sought to encourage and facilitate trade liberalization on an international scale. This was deemed all the more necessary after 1947, when relations soured with former wartime ally the Soviet Union. The United States then looked to shore up “democratic,” “free-market economies” in Western Europe to win a budding Cold War. An instrumental part of this new U.S. strategic endeavor was the European Recovery Program (ERP), known more commonly as the Marshall Plan. European Payments Union Marshall Plan World War II (1939-1945)[World War 02];reconstruction Capitalism Economic systems;capitalism [kw]European Payments Union Is Formed (July 1, 1950) [kw]Payments Union Is Formed, European (July 1, 1950) [kw]Union Is Formed, European Payments (July 1, 1950) European Payments Union Marshall Plan World War II (1939-1945)[World War 02];reconstruction Capitalism Economic systems;capitalism [g]Europe;July 1, 1950: European Payments Union Is Formed[03220] [g]Austria;July 1, 1950: European Payments Union Is Formed[03220] [g]Belgium;July 1, 1950: European Payments Union Is Formed[03220] [g]Luxembourg;July 1, 1950: European Payments Union Is Formed[03220] [g]Denmark;July 1, 1950: European Payments Union Is Formed[03220] [g]France;July 1, 1950: European Payments Union Is Formed[03220] [g]Greece;July 1, 1950: European Payments Union Is Formed[03220] [g]Iceland;July 1, 1950: European Payments Union Is Formed[03220] [g]Italy;July 1, 1950: European Payments Union Is Formed[03220] [g]Netherlands;July 1, 1950: European Payments Union Is Formed[03220] [g]Norway;July 1, 1950: European Payments Union Is Formed[03220] [g]Portugal;July 1, 1950: European Payments Union Is Formed[03220] [g]Sweden;July 1, 1950: European Payments Union Is Formed[03220] [g]Switzerland;July 1, 1950: European Payments Union Is Formed[03220] [g]Turkey;July 1, 1950: European Payments Union Is Formed[03220] [g]United Kingdom;July 1, 1950: European Payments Union IsFormed[03220] [g]Germany;July 1, 1950: European Payments Union Is Formed[03220] [c]Banking and finance;July 1, 1950: European Payments Union Is Formed[03220] [c]Diplomacy and international relations;July 1, 1950: European Payments Union Is Formed[03220] [c]Trade and commerce;July 1, 1950: European Payments Union Is Formed[03220] [c]ColdWar;July 1, 1950: European Payments Union Is Formed[03220] Adenauer, Konrad Bevin, Ernest Attlee, Clement Churchill, Winston [p]Churchill, Winston;postwar diplomacy Truman, Harry S. [p]Truman, Harry S.;Marshall Plan Marshall, George C. [p]Marshall, George C.;European Recovery Program

The ERP had been inaugurated in 1948 but proposed as early as 1947 by U.S. secretary of state George C. Marshall, working for the administration of President Harry S. Truman. The ERP established two entities of great importance: the European Cooperation Administration European Cooperation Administration (ECA) in Washington, and its subsidiary, Organization for European Economic Cooperation Organization for European Economic Cooperation (OEEC), located in Paris. Though Western economies were already well on their way to recovery, with many having already reached and in some cases surpassed their pre-1938 production levels, the $12.4 billion that the ERP pumped into Europe certainly did not hurt. Though not as well known as either the Marshall Plan or the North Atlantic Treaty Organization (NATO)—which constituted the military arm of the larger Cold War project while the ERP addressed the economic—the European Payments Union (EPU) was designed to tip the balance in favor of capitalism. It also sought to regulate Germany and to prevent the spread of Soviet influence.

Before turning to consider the demands and interests of each of the more significant countries participating in this economic entity, itself a masterstroke of diplomatic bargaining, it is necessary to examine how the EPU functioned. The basic principle behind the EPU was the facilitation of European trade. A member-state created a line of credit with the group (multilaterally) rather than with another individual country (bilaterally). A credit limit or “quota” was established, based on a nation’s annual economic output. That nation was then allowed to use that credit to “purchase” a given commodity or service from another state. Though a country might be a “debtor” to a particular trading partner, that debt would be cancelled by a “credit” held with still another party or parties. Credits and debts were thus mutually offsetting among member-states. Incentives were built into the system such that debtors were not overly penalized, and creditors not unduly rewarded.

Nonetheless, once a country exhausted its credit, a sliding scale of interest rates encouraged the correction of the imbalance. Trade liberalization smoothed the process of general exchange, but it also was an equally important goal of the EPU. Trade liberalization encouraged and, in some cases, required the reduction of import and export restrictions, doing for Europe what the International Monetary Fund sought globally. The purpose here was to promote competition, which would in turn boost productivity and efficiency and eliminate overlap, thereby ensuring European integration through economic interdependency and planning.

Each participating country brought its own agendas to the bargaining table over the formation of the EPU. Some nations were more important than others in sheer economic terms. Their participation or exclusion thus threatened to change the dynamic of the entire group. Perhaps most important was Great Britain, which, just before the collapse of Nazi Germany, had witnessed the ouster of its Conservative leader Winston Churchill. Into the breach had stepped Prime Minister Clement Attlee. His new Labour Party Labour Party, British government promptly set about instituting a welfare state derived from the principles and successes of war planning if not socialism.

In addition to protecting national sovereignty, British foreign secretary Ernest Bevin, in 1950, also sought to protect five years of Labour restructuring and nationalizations. In this case, the perceived threat was the challenge an EPU might represent for a Great Britain exposed to the financial volatility of other European powers. Equally important was the protection of the British Commonwealth British Commonwealth Postcolonialism;British Commonwealth , an economic bloc forged with former crown colonies. There, the pound sterling reigned supreme. Bevin hardly wished to see English prerogatives eroded here, any further than they already had been by the power of the U.S. dollar in the post-1945 world. Such forthrightness was referred to as “British exceptionalism.” This exceptionalism was tacitly but grudgingly accepted by the United States, which had the interests of other continental powers to attend to.

France wanted Great Britain to join the EPU, but not because of any innate trans-Channel fondness. In the eyes of the Fourth Republic, the English necessarily counterbalanced the might of the Federal Republic of Germany (West Germany). Germany—though reduced to rubble and divided into two halves (West and East) independently overseen by the “superpowers” of the United States and the Soviet Union, respectively—was still more than capable of dominating the continent economically. West German chancellor Konrad Adenauer, a Christian Democrat, felt that only through cooperation and integration with the rest of Western Europe could his country atone internationally for Nazi atrocities. This especially motivated his desires to smooth Franco-German relations throughout his tenure of office, which lasted until 1963. The United States sought nothing less. Postwar programs such as the Marshall Plan and the EPU aimed to root the Federal Republic to a continent looking west across the Atlantic, and not east to the orbit of Moscow.

Diplomatic wrangling—begun in late 1949 and not truly finished until the de facto establishment of the EPU in July, 1950—somehow managed to please or at least appease all parties. It even protected Great Britain’s Commonwealth interests, reaffirming the status of sterling as an international currency and even, perhaps, foreshadowing Britain’s abstinence from participation in using the euro.

Significance

The EPU was a true diplomatic success. Just one year before its formation, a number of setbacks had seemed to indicate that power might be shifting eastward. In 1949, the Soviet Union, for instance, broke the nuclear monopoly of the United States. Also, communists led by Mao Zedong seized power in China. Southeast Asia was astir with “Red” partisans, leading, ultimately, to the Korean War (1950-1953). The United States itself was aflame with McCarthyism, intent on rooting out communist sympathizers on its own soil.

As was the case with the establishment of NATO in 1949, the EPU was formed to recapture the forward momentum Western Europe had possessed but then feared it had lost. Neither the EPU nor the Marshall Plan were solely responsible for what would be known as the European “economic miracle,” running, roughly, from the war’s 1945 conclusion to the oil crisis of 1973. Nevertheless, both programs contributed at the outset to the staggeringly successful economic booms the Western powers would register across the period. Ultimately, the European Coal and Steel Community, also established in 1950 under the Schuman Plan, would best represent the Europe of the future. Until its abandonment with the Rome Treaties of 1958, however, the EPU was instrumental in promoting liberalization and integration, laying a basis for a cooperation that would endure. This was perhaps necessary in the transition from war-torn continent to economic and political union. European Payments Union Marshall Plan World War II (1939-1945)[World War 02];reconstruction Capitalism Economic systems;capitalism

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Dinan, Desmond. Europe Recast: A History of European Union. Boulder, Colo.: Lynne Rienner, 2004. A rigorous yet rewarding examination of the long road to the Maastricht Treaty of the early 1990’s and beyond.
  • citation-type="booksimple"

    xlink:type="simple">Eichengreen, Barry. Globalizing Capital: A History of the International Monetary System. Princeton, N.J.: Princeton University Press, 1996. A detailed appraisal of the links between international economics and global politics from 1870 to the close of the twentieth century.
  • citation-type="booksimple"

    xlink:type="simple">Gillingham, John. European Integration, 1950-2003: Superstate or New Market Economy? New York: Cambridge University Press, 2003. Assesses the EPU within the broader context of growing European economic and political union.
  • citation-type="booksimple"

    xlink:type="simple">Hogan, Michael J. The Marshall Plan: America, Britain, and the Reconstruction of Western Europe, 1947-1952. New York: Cambridge University Press, 1987. A sophisticated analysis of the larger European Recovery Program of which the EPU was a part.
  • citation-type="booksimple"

    xlink:type="simple">Kaplan, Jacob J., and Günther Schleiminger. The European Payments Union: Financial Diplomacy in the 1950’s. Oxford, England: Clarendon Press, 1989. An essential monograph exploring the EPU in all of its nuances.
  • citation-type="booksimple"

    xlink:type="simple">Maier, Charles S. “The Two Postwar Eras and the Conditions for Stability in Twentieth-Century Western Europe.” American Historical Review 86 (April, 1981). An interpretive essay that argues that the Marshall Plan did not “save” Europe but merely contributed to furthering its economic recovery.

Marshall Plan Provides Aid to Europe

Soviet Bloc States Establish Council for Mutual Economic Assistance

European Coal and Steel Community Is Established

Value-Added Taxes Begin in Europe

Western European Union Is Established

Organization for Economic Cooperation and Development Forms

Agency for International Development Is Established

Johnson Restricts Direct Foreign Investment

Birth of the European Monetary Union Project

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