(2 of 2)
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¢) 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.