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THE GLOBAL CAPITAL MARKET: Capital Mobility 5

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Article VIII of the IMF agreement did demand that countries’ currencies eventually be made convertible — in effect, freely saleable to the issuing central bank, at the official exchange parity, for dollars or gold. But this privilege was to be extended only to nonresidents (not a country’s own citizens), and mainly if the country’s currency had been earned through sales of goods and services. (Convertibility for currency acquired through financial trades was not viewed as mandatory, or even as desirable.) But even this limited convertibility took years to achieve, and in the interim, countries resorted to bilateral trade deals that required balanced or nearly balanced trade between every pair of trading partners. If France had an export surplus with Britain, and Britain a surplus with Italy, Britain could not use its excess lire earnings to obtain dollars with which to pay France. Italy had very few dollars and guarded them jealously for critical imports from the Americas. Instead, each country would try to divert import demand toward countries with high demand for its goods, and to direct its exports toward countries whose goods were favored domestically.

Convertibility gridlock in Europe and its dependencies was eventually ended through a regional multilateral clearing scheme, the European Payments Union (EPU). The clearing scheme was set up in 1950 and some countries reached de facto convertibility by mid-decade. But it was not until December 27, 1958, that Europe officially embraced convertibility and ended the EPU.
The return to convertibility was important in promoting growth in multilateral trade. However, most European countries still chose to retain extensive capital controls, with Germany being the main exception. As trade increased, however, so did opportunities for disguised capital movements. These might take the form, for example, of misinvoicing, and then accelerated or delayed merchandise payments. Buoyant economic growth encouraged some countries in further financial liberalization, although the United States, worried about its gold losses, raised progressively higher barriers to capital outflow over the 1960s.