The United States enacted the European Recovery Program (the Marshall Plan) to speed postwar recovery and stabilize European economies. A major obstacle was that many European currencies were not easily usable for international trade, so countries relied on tight controls and limited dollars. This problem pushed European governments toward cooperative payment arrangements to keep trade moving.
European recipients of Marshall Plan aid organized through the Organisation for European Economic Co-operation (OEEC). The OEEC became the main European forum for coordinating recovery policies and reducing barriers to trade. It later provided the institutional home for multilateral payment and settlement schemes.
OEEC members adopted the Intra-European Payments Agreement (IEPA) to support trade by clearing some payments multilaterally rather than settling every transaction with scarce dollars. It was an early attempt to move away from strict bilateral balancing of trade. Limits in the system—especially persistent deficits for some countries—soon led policymakers to seek a stronger multilateral arrangement.
As Europe’s payments problems continued, OEEC members revised the intra-European payments plan for the 1949–1950 period. The revision aimed to make clearing more workable while still using Marshall Plan support to finance imbalances tied to intra-European trade. These ongoing adjustments set the stage for a more comprehensive union.
By mid-1950, OEEC governments agreed that bilateral payments agreements were holding back trade because they required tight controls and constant balancing. They chose to shift toward a multilateral system that could offset ("net") countries’ claims and debts against each other. This decision directly led to the European Payments Union framework.
OEEC members concluded the agreement establishing the European Payments Union (EPU). Although signed on 19 September 1950, it applied retroactively from 1 July 1950 to align with the intended start of operations. The EPU was designed to boost trade by reducing the need for immediate dollar settlement between European countries.
The Bank for International Settlements (BIS) served as the EPU’s financial agent, providing the practical accounting and settlement infrastructure. Member countries reported their net positions, and offsetting claims were canceled so only the remaining net balances mattered. This monthly netting helped countries trade more with each other even when their dollar reserves were limited.
Through the early 1950s, the EPU helped “multilateralize” trade by making it less important which country a debtor owed, since balances were pooled through the union. Debts could be financed partly through EPU credit, but larger imbalances ultimately required settlement in gold or dollars, linking European cooperation to the wider Bretton Woods system. The arrangement encouraged gradual movement toward currency convertibility for current-account transactions (trade in goods and services).
OEEC members signed the European Monetary Agreement (EMA) to serve as the successor framework once full convertibility became feasible. Policymakers anticipated that the EPU was transitional and that Europe would eventually operate with fewer payments restrictions. The EMA was designed to take effect when that transition occurred.
Six countries signed the Treaty of Rome, creating the European Economic Community (EEC). While the EEC focused on deeper economic integration, the EPU continued to provide a practical mechanism for settling cross-border payments among a wider set of European countries. Together, these efforts reflected a broader shift from emergency postwar controls toward more open trade.
In December 1958, multiple West European countries announced major steps toward removing restrictions on the use of their currencies for current transactions. This marked a turning point because convertibility reduced the need for an EPU-style clearing system designed to manage scarce dollars and controls. It also signaled that Bretton Woods convertibility goals were becoming operational in Western Europe.
The EPU was formally terminated on 27 December 1958, closing the main postwar system for multilateral clearing among OEEC members. Governments moved from the EPU to the European Monetary Agreement, which had been negotiated earlier for exactly this moment of rising convertibility. The shift marked the end of a transitional settlement mechanism and a step toward more normal monetary relations in Western Europe.
European Payments Union and multilateral settlement under Bretton Woods (1947–1958)