Restoration of European Currency Convertibility and Securing International Liquidity: The IMF and Key Currencies

Abstract

The end of 1958 saw an attempt to restore convertibility of major Western European currencies by shifting from the managed economic system of the war years and the postwar period to a market economic system. Until then, in the world of international finance the free movement of capital had been impeded by strong trade and foreign-exchange controls in each country. These controls had been centered on the closed pound and the Sterling bloc. Despite the fact that the pound shared with the dollar the status of a key currency worldwide, it could not be exchanged freely for dollars outside the bloc of nations using the pound as currency. The restoration of convertibility between the pound and the dollar marks the end of the postwar transitional period. However, the postwar pound was not strong enough to restore convertibility on its own. The obstacle was the large amount of pounds confined within the pound bloc. There were fears of a massive liquidation and outflow of those pounds accompanying the restoration of convertibility. The success or failure of restoration of convertibility depended on whether or not it would be possible to prepare sufficient foreign reserves or liquidity in preparation for currency speculation. Any shortages in these needed to be addressed by relying on international cooperation. This chapter will describe in detail the process of restoration of convertibility of major Western European currencies, particularly the pound, during the 1950s, from the standpoint of securing foreign reserves.