The European Approach versus Sterling-Dollar Diplomacy

On 12 January 1967, before Wilson travelled to France and Belgium, Kaldor jotted down an interesting note on the subject of a European reserve currency. The background to this was a close approximation to the deadlock in Britain’s negotiations for EEC entry: the second try raised a further difficulty with the question of sterling. France played a major role in creating this difficulty: the French would ‘maintain the line that the continuance of sterling as a reserve currency is incompatible with Common Market membership’.1 In this stalemate, Kaldor argued that Britain’s entry into the EEC would stand a good chance of achieving a long-term solution to the problem of sterling by linking it as a reserve currency with the EEC’s project for a common European currency. He raised two hypotheses: ‘the creation of a purely reserve currency — a kind of European bancor — with the pooling of reserves of member countries’ and ‘a complete merger of currencies and the transfer of all assets and liabilities of individual Central Banks to a new European Central Bank’.2 The former was close to a parallel currency approach to EMU. In this approach, while member countries would deposit their own reserves with the newly created central bank and thereby acquire the European bancor against these reserves, the bancor and each individual currency would coexist and the individual national central banks would be retained.3 The bancor, like the European Currency Unit (ECU) in the EMS, would serve as an international unit of account, a reserve asset, and as a means of settlement among the central banks.