Toward Freedom

Whether they dreamed of it or dreaded it, the statesmen of Western Europe had all come to accept the fact that a new era will dawn on New Year's Day 1959, when the long-planned European Common Market finally begins to forge France, West Germany, Italy and the Benelux nations into a single economic unit. Last week, in dramatic preparation for the new era, ten European nations carried out at one fell swoop the most far-reaching international currency reform since World War II.

Immediate cause of this coordinated shake-up was a portentous rumor that began to buzz through Europe's chancelleries as 1958 waned. To celebrate the inauguration of the Common Market, so the story ran, West Germany planned to make the Deutsche Mark freely convertible currency--a move that might well transfer the banking capital of Europe from London to Bonn.

Brooding over this unsettling report, British Chancellor of the Exchequer Derick Heathcoat Amory two weeks ago took advantage of a routine Paris meeting of the Organization for European Economic Cooperation to discuss some highly private business with West German Economics Minister Ludwig Erhard and French Finance Minister Antoine Pinay. The fruits of that chat were harvested late last week, when the British treasury laconically announced that it had decided to make the pound sterling "externally convertible."

Since British subjects will still be rigidly limited in the amount of sterling they can convert into hard currencies, the British action falls short of true convertibility. But henceforth, foreign businessmen will be able to change pounds freely into dollars (at an official rate ranging between $2.78 and $2.82). The result, so London hoped, would be to maintain the pound's position as Europe's leading medium of exchange--a vital matter to the British, who. with only 4% of the world's money, do 40% of the world's banking.

Given this go-ahead from the world's top trading nation, other European nations followed suit. In rapid succession, West Germany, Italy, the Scandinavian countries and the Benelux nations all proclaimed their currencies externally convertible. (Denmark, responding to the drama of the occasion, revealed that it was following the British example even before the British treasury set the example.)

The Squeeze. All this, despite the fact that Britain has long been contemplating external convertibility, had the effect of putting a painful squeeze on France. Yet Pinay had not opposed the British and Germans; in fact, it was he who proposed advancing the date to Dec. 27. With the franc officially valued at 420 to the dollar but selling in the free market for 470 or worse, General de Gaulle's government was already faced with one harsh fact: unless the official value of the franc were brought into line with its true value, French products would be too highpriced to compete freely--as they must within the six-nation Common Market--against those of Germany, Italy and Benelux. Now, in addition to devaluing the franc, France had also to make it convertible--or else face a capital flight away from the franc to the convertible pound or Deutsche Mark. Unlike Britain, whose gold and dollar reserves are at a seven-year high, France is running a $60 million foreign-trade deficit every month.

In two long and somber Cabinet meetings last week, De Gaulle and his Cabinet wrestled with these awkward realities. At last, hot on the heels of the London announcement, Antoine Pinay proclaimed France's course. Presumably buoyed up by promises of financial underwriting from West Germany, France followed Britain's lead, made the franc, too, externally convertible. At the same time the De Gaulle government devalued the franc by an unexpected 17.5%, established a new rate of 493.7 to the dollar.

And in a final, psychological effort to increase the prestige of France's wavering currency (which has now been devalued seven times since the end of World War II), De Gaulle and his ministers proposed to introduce gradually, between now and 1960, a new "heavy franc," equivalent to 100 present francs and roughly close in value (20-c-) to two of the world's most respected monetary units--the German Deutsche Mark and the Swiss franc. (Frenchmen, said Pinay, will soon get used to dropping two zeros from all their figures.)

The Outward Sign. Europe's brisk plunge into external convertibility had one important side effect. It spelled the end of a useful eight-year-old system, the European Payments Union. Foreseeing such a day, 17 countries of Western Europe pledged themselves, back in 1955, to settle their foreign-trade accounts through a new organization called the European Monetary Agreement. Unlike E.P.U., it will not automatically extend credits to nations that run a deficit in their inter-European trade. Without the cushion of automatic credits, all Western European nations--and especially France, which ran up a $460 million deficit in E.P.U.--will have to keep inter-European payments more closely in balance than before. Along with this consequence of convertibility went another risk --the prospect that any of the ten new "convertible" nations that fails to control its domestic inflation and maintain its exports at a high level will be faced with a deadly run on its gold and dollar reserves.

But in the eyes of most Europeans, the likely gains far outweigh the risks. Return to convertibility, said Per Jacobsson, managing director of the International Monetary Fund, "is an outward and visible sign of the comeback of Europe in world affairs." More important yet, it went a long way toward establishing the climate of economic freedom in which international trade and investment have historically flourished. And it was only by establishing such a climate that mid-20th-century Europe, shorn of its empires, could achieve long-term prosperity and political health.

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