A Giant Step Toward Free Trade

IN the past two years the financial strength of the free nations of the world has grown remarkably. Europe is now strong enough for the biggest and riskiest financial step since the end of World War II: free convertibility of currencies.

Convertibility is a jawbreaker with a simple meaning. With convertible currency a man who earns money in foreign trade can change it into any other currency, spend it where he likes, without any restrictions. Convertibility would do far more than profit individual traders. Freeing currency and commerce from controls and restrictions would be the greatest spur to world trade and prosperity since World War II. The prospects are so hopeful that last week an eight-nation committee of European and U.S. officials decided to meet in Paris next month to discuss convertibility.

One reason for this swift trend is the success of the European Payments Union, set up to stabilize European currencies and encourage freer exchange. Another reason is the strength and stability of British sterling, the exchange used in 40% of the world's foreign trade. As sterling has become stabilized, so has Britain prospered.

Last month her gold and dollar reserves rose $165 million, to a total of $3 billion. Her additional surplus in EPU for May is -L-10.9 million.

Britain's industrial production index (on which 1948 equals 100) was 124 for April, up six points from the year before. Such signs of better times have already led Britain to reopen London's gold and commodity markets, end rationing on everything but meat, and lift restrictions on about half of all imports.

Nor is Britain alone in its prosperity. Booming Western Germany has also been pressing for convertibility.

In three years Germany's EPU balance had rocketed from a deficit of $450 million to the present credit of $1 billion, and her gold and dollar reserves have climbed from $190 million to $1.4 billion. Belgium, with $201 million credit in EPU, and The Netherlands, with a $209 million credit, are already freely exchanging their francs and guilders for dollars, although each retains nominal controls.

Portugal, Austria and Denmark have stopped inflation, ended shortages and are eager to sell abroad. Even still-ailing France and Italy are ready to go along with the trend and free their traders and citizens from the old currency controls.

But Britain, who must lead Western Europe into convertibility, is understandably cautious; she was once badly burned. In 1946 Britain borrowed $3.75 billion from the U.S. on the Treasury's condition that she would make sterling fully convertible a year later. This premature attempt was a disaster because the pound, officially pegged at $4.03, was far overvalued.

Therefore foreigners with balances in England turned overvalued pounds into dollars so fast that in one month Britain was almost out of dollars, and convertibility was hastily suspended.

When the British devalued the pound to $2.80 in 1949, the first great step was taken toward convertibility.

The specific timetable for convertibility will probably be written in September, when the directors of the International Monetary Fund meet in Washington. It is almost certain that it will begin in a limited form. Only the wildest economic dreamers advocate full, worldwide convertibility in the near future. Britain wants first to make her nonresident, current-account sterling fully changeable into any currency. This simply means that a non-sterling country, such as France, that earned money in Britain on current sales could take its profit in dollars if it wished. The -L-280 million in sterling balances piled up in past transactions and frozen in dozens of countries by exchange restrictions would be thawed gradually, probably over months or years.

Some experts, such as Thomas H.

McKittrick, retired vice president of the Chase National Bank, who conducted a survey on convertibility for the International Chamber of Commerce, argue that convertibility will have to be underwritten by the U.S.

with a huge fund of gold reserves, possibly $10 billion. But there is scant support in Washington for such a plan.

The major U.S. contributions will be to support (through present investments in the International Monetary Fund) the value of foreign currencies and to maintain its own prosperity.

All bets on convertibility would be off if the U.S. should have a serious slump, because U.S. prosperity is the key to world prosperity, and world prosperity is essential to convertibility.

In some European capitals the casual attitude of the U.S. toward convertibility is criticized as lack of a policy.

But Washington is deliberately keeping hands off, thereby encouraging Western Europe to work out its own problems, make its own decisions and set its own pace.

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