Enquiry into Clearing Agreements
In April 1935, the League of Nations published a document titled Enquiry into Clearing Agreements1. It ran to 153 pages of questionnaire responses, trade statistics, and operational descriptions submitted by the governments of Europe. The League had asked twenty-eight countries to describe their bilateral clearing agreements — how they worked, what problems they caused, and whether they could be extended into a multilateral system.
Argentina, Brazil, and Turkey didn’t respond. Neither did Germany, which at that point ran the largest bilateral clearing network on the continent.
Germany’s silence wasn’t surprising. By 1935, bilateral clearing was Germany’s economic lifeline. The country had defaulted on its international debts, lost access to credit markets, and had no meaningful foreign exchange reserves2. Under Hjalmar Schacht’s New Plan of September 19343, every German import needed permission from the authorities. Trade with the outside world ran almost entirely through bilateral clearing agreements — managed accounts, fixed exchange rates, no gold, no free currency. By 1938, Germany had roughly twenty-five of these arrangements covering about half of all its foreign trade4. The system worked because it had to — without it, the German economy couldn’t function.
The League’s inquiry documented the system that was keeping Germany alive, and asked whether it should be extended. Germany refused to take part; multilateralising the system under League oversight would mean the architecture Germany depended on being run from Geneva or London — not Berlin. Germany had left the League in 19335, and any multilateral clearing system built through the institution Germany had walked away from would put its lifeline under Anglo-French control.
What Italy saw
The most significant responses came from Italy. Across three answers, the Italian government described what it had already built, what multilateral clearing would need to work, and why it couldn’t.
On Question 10, which dealt with how clearing balances got settled, Italy mentioned a detail that appeared nowhere else in the document. The agreement between Italy and Germany, Italy stated, was ‘the only one which provides, by means of a ‘sundry transfers’ account, for a periodical determination of the clearing balance, to be settled by special agreement between the two Governments’. Every other clearing agreement in Europe either settled when the parties got around to it or just carried balances forward indefinitely. Only the Italy-Germany agreement had a mechanism for periodic netting — regularly working out what each side owed and settling the difference through intergovernmental agreement.
That mechanism is the blueprint for what became the European Payments Union in 1950. The EPU did the same thing on a larger scale: every month, the Bank for International Settlements would net out all the bilateral clearing balances across its member countries and settle the remaining positions in dollars and gold. Italy and Germany had been running a two-country version of this since the early 1930s.
On Question 25, which asked whether multilateral clearing was possible and desirable, Italy gave three answers that would each come true.
‘There does not seem any justification for regarding it as possible to make clearing agreements multilateral’. The EPU multilateralised them fifteen years later.
‘Only by stabilising currencies and reducing them to a fixed and universally accepted standard, such as gold, will it be possible to conclude multilateral compensation agreements’. That’s the Bretton Woods system described nine years before the conference — the dollar anchored to gold at $35 per ounce, every other currency pegged to the dollar. Italy named gold specifically.
It might be possible as an experiment to adopt eventually a super-compensation system for clearing balances. The debts and credits resulting from the clearing balances concluded between the various countries might periodically be compensated when occasion offered.
In one sentence, Italy described exactly how the EPU would work — periodic multilateral netting of bilateral clearing balances — and framed it as a speculative experiment, despite already running the bilateral version with Germany.
Italy wrote the specification, declared it impossible, named the precondition, and suggested it as an experiment — all in the same passage. Every element was in place within fifteen years. The specification became the EPU, while the precondition — a fixed and universally accepted standard — was supplied by the United States through the dollar-gold anchor at Bretton Woods.
That experiment became the foundation of European monetary integration.
On Question 26, drawing conclusions from clearing experience, Italy put it in terms that could just as easily justify creating the EPU:
In the world economic situation, which has been aggravated, if not created, by the collapse and the instability of so many currencies, clearing agreements are a necessary evil which experience shows can hardly be dispensed with if trade is to be kept up within certain limits.
A necessary evil. Indispensable for trade. Impossible to multilateralise without a gold-anchored standard. Already prototyped between Italy and Germany.
Fifteen years before the EPU existed, its operational logic, its precondition, and its political justification were all laid out in a single League of Nations document — by the people already running its prototype: Italy and Germany.
The three bids
Between 1936 and 1938, the question the League had studied — who would build and run the multilateral clearing system — turned into an open contest between three parties, each with a different answer.
The first move was the Tripartite Agreement of September 19366. The United States, the United Kingdom, and France set up informal coordination between their treasuries and central banks, agreeing to avoid competitive devaluation and to consult each other before changing currency parities.
The effect was to create a currency axis. The dollar was anchored to gold. Sterling and the franc were informally pegged to the dollar through the Agreement, thus indirectly creating a gold tie. Any country pegging to any of these three currencies was inside the Anglo-French-American system, while any country outside it — Germany above all — was cut off from the anchor currency bloc.
The Tripartite Agreement didn’t propose a multilateral clearing system, but it built the monetary foundation that would make an Anglo-French-American one possible.
The second bid came in January 1938. The former Belgian Prime Minister Paul van Zeeland submitted a report to the British and French governments proposing a comprehensive programme of international economic reconstruction7.
The report rolled monetary clearing and trade liberalisation into a single blueprint: fixed but adjustable exchange rates, a common fund, development lending, tariff reduction, and — crucially — the Bank for International Settlements as the managing body.
Van Zeeland’s proposal was the institutional next step that the League’s 1935 inquiry had pointed towards, proposing to assemble these pieces into a functioning multilateral system under Anglo-French management, with the BIS at the centre.
The third bid came five weeks later. On 6 March 1938, Walther Funk — Schacht’s successor as Reichsbank President and Reich Economics Minister — opened the Leipzig Fair with a speech that the New York Times reported the next day under the headline ‘Nazi Minister Bids for U.S. Trade; Suggests World Clearing System’8. It was a direct counterbid to Van Zeeland’s, aimed squarely at Washington.
Funk claimed operational authority: ‘It is by no means an absurd idea to look for a basis of international currency stabilisation in a sensible clearing system in which we more than anybody else in the world have had the best experience’. Germany had been running twenty-five bilateral clearing arrangements for four years; nobody else had that kind of operational depth. Funk’s argument was that experience, not gold reserves, should decide who ran the international system.
He then rejected gold as the anchor — and with it, the entire Tripartite framework Van Zeeland had proposed:
Work is more solid than gold and money is merely an auxiliary medium in the distribution of goods. A return to the former so-called currency ‘automaticism’ on a basis of the old gold standard is rejected by the authoritarian States because of the international dependence that it involves.
The logic was clear. Gold as anchor meant dependence on the Tripartite nations, which held the most of it. Germany had almost none; accepting gold meant accepting permanent subordination to the Tripartite bloc. Anchoring to work — productive capacity, labour, industrial output — reversed the power relationship. Germany, as an industrial powerhouse, would become the natural centre.
The New York Times correspondent Otto D. Tolischus realised the implication straight away: ‘Such a system, of course, is possible only in a closed economy with money based on government fiat’. A work-anchored clearing system required closure, because an open economy with convertible currency would drain towards gold, the universally accepted standard. The closed system wasn’t a flaw in Funk’s proposal — it was the precondition. Germany could only anchor to work if it stopped its participants from choosing gold instead.
In October 1938, the bid became concrete9. Helmut Wohlthat submitted a memorandum to the State Department through intermediaries, and Ministerialrat Brinkmann drafted the America-Mark — a proposed Reichsmark credit balance at a fixed rate of 4.20 RM per dollar, designed to sit alongside dollar convertibility. This wasn’t an alternative to the dollar — it was a parallel rail. Germany was telling Washington: keep your gold convertibility, and plug into our clearing network as well. You don’t have to choose between us and them.
The cleverness of the offer — and the reason it had to be taken seriously — was that Germany was proposing a clearing mechanism that left American gold sovereignty untouched. Van Zeeland’s proposal put the BIS at the centre, an institution the United States had no official founding role in, co-created by the Bank of England and the Reichsbank in 1930. Funk’s proposal offered the US a bilateral clearing channel with Germany that didn’t subordinate American monetary independence to a European managing body.
Washington wasn't interested in either.
The unconditional problem
While the three bids were being made, a quieter problem was becoming visible in the one major bilateral clearing relationship that the League document had described as satisfactory: the Anglo-German Payments Agreement1011.
Signed on 1 November 1934, the Agreement had been negotiated after Britain threatened to impose a unilateral clearing on Anglo-German trade. Under its terms, 55 per cent of the foreign exchange revenues from German exports to the United Kingdom went towards financing British exports to Germany, with another 10 per cent set aside for paying down outstanding commercial debts.
The Agreement was renewed unchanged from year to year, and Leith-Ross described it in 1968 as having ‘worked so well’ that it continued ‘until the outbreak of war in 1939’.
It did work — in the sense that trade between Britain and Germany kept flowing and debts got serviced. But the Agreement also showed a structural limitation that the League’s inquiry had documented without fully grasping: bilateral clearing was unconditional.
The clearing mechanism settled whatever the trade policy layer allowed through. It only asked if the balances netted. It didn’t ask what was being traded, why, or whether the transaction served any policy objective. Scrap iron for making tanks cleared through the same mechanism as food imports. Coal for steel production cleared the same way as consumer goods.
Zara Steiner and John Magowan documented the consequences at the time. The Agreement, Steiner observed, was ‘providing the credits and the raw materials — coal, steel, scrap-iron, copper — needed for Germany’s war industries’12. Magowan argued both before and after the Munich Agreement13 that letting Germany get hold of more foreign currency would help it buy raw materials for rearmament. German military spending rose from 1.5 billion Reichsmarks in 1934 to over 18 billion by 1938 — 17 per cent of GNP — while the Anglo-German Payments Agreement stayed in force and was even loosened14.
Britain was simultaneously using the clearing relationship as a diplomatic tool — economic appeasement1516 — and funding the military buildup that would ultimately sever the diplomatic relationship. The clearing form made both possible and neither distinguishable from the other.
The contrast with Germany was striking. Schacht’s New Plan17 had already solved the conditionality problem on the German side by combining state-controlled import permits with bilateral clearing settlement — two layers, both under state authority. No German company could buy foreign goods without a permit. The permit was the condition, while the bilateral clearing account was the settlement mechanism.
Together they gave Germany exactly the conditional clearing that Britain lacked: the state decided what got traded, and the clearinghouse settled what the state permitted. Howard Ellis described the result as ‘exchange control as a totalitarian institution’18. Every transaction visible, every import permitted or denied, every settlement tracked.
Germany governed through its clearing architecture because it controlled both layers. Britain couldn’t, because it controlled neither.
The alternative available to Britain — restricting German trade through the political layer — meant legislative action. Import licences, export bans, quota revisions, embargo legislation. Each was visible, debatable, and contestable in Parliament. Each required political will that the appeasement-era climate wouldn’t supply19. Neville Chamberlain’s government saw the Payments Agreement as a stabilising force, and Frank Ashton-Gwatkin of the Foreign Office argued that the 1938 revision would ‘strengthen the peace party’ and advance ‘economic appeasement’20.
Denmark’s response to the League inquiry captures the same dynamic from the other side. The Danish-German clearing agreement, Denmark reported in 1935, ‘has yielded satisfactory results. It has helped to keep trade between the two countries at a level which it would probably have been difficult to maintain in the absence of such an agreement’. Five years later, that same relationship was running under German occupation through the Deutsche Verrechnungskasse21 — the DVK — with the Reichsmark overvalued, balances frozen, and conditions set by the occupying power.
Denmark endorsed the form in 1935 because the conditions were fair. The form didn’t protect Denmark when the conditions turned extractive.
The clearing form was useful and uncontrollable at the same time. Britain couldn’t use the clearing layer to control trade because it didn’t check conditions. Germany couldn’t use the political layer to get favourable terms abroad because that required consent from other nations’ parliaments. Both sides found, independently, that the layer they controlled couldn’t do what they needed it to.
The resolution
What diplomacy couldn’t settle, the war did. The contest over who would build and run the multilateral clearing system was decided on the battlefield and formalised at Bretton Woods in July 1944.
Harry Dexter White’s plan gave the United States what neither European proposal had offered: outright monetary hegemony. The dollar was anchored to gold at $35 per ounce22 — the fixed and universally accepted standard that Italy had named as the precondition for multilateral clearing nine years earlier. Every other currency was pegged to it.
The IMF and the World Bank were American-designed institutions with weighted voting that gave the US effective control. Resolution V of the Bretton Woods conference23 recommended liquidating the BIS — the institution Van Zeeland had proposed as the managing body and that Germany had helped found in 1930.
The BIS wasn’t liquidated. It survived Resolution V and carried on operating from Basel. By 1950, it was administering the European Payments Union24 — running the multilateral netting mechanism that Italy had prototyped bilaterally with Germany, using the precondition Italy had identified, at the scale Italy had floated as a speculative experiment.
The EPU ran monthly multilateral netting of bilateral clearing balances among eighteen countries, with net positions settled in dollars and gold, funded by Marshall Plan dollars, and administered by the institution that had been marked for liquidation six years earlier25.
The EPU’s architecture wasn’t a postwar invention. It was the multilateralisation of a mechanism prototyped bilaterally under Axis arrangements, documented in a League of Nations publication, proposed for multilateral extension by the Nazi Reichsbank president, endorsed in structural terms by Keynes, and administered by an institution that had served both sides during the war.
Bretton Woods was America’s answer to a battle that had been ongoing since 1935. The League had asked the question: should bilateral clearing be multilateralised?
Van Zeeland proposed the institutional answer: the BIS as manager, Tripartite currencies as anchor, indirect gold anchor.
Funk proposed the German counter-answer: Berlin as centre, America as partner, work as anchor.
The United States rejected both and built a third option, giving Washington control of the gold-backed anchor currency, control of the managing institutions, and structural hegemony over the clearing architecture that every trading nation would depend on.
The contest was never about whether the clearing architecture would be built. It was about who would control it. Three parties bid, but only one could win. The architecture carried on — under new management, with a new anchor, through an institution that should have been liquidated but wasn’t, running a mechanism prototyped by the losing side and documented by an organisation that no longer existed.
What the contest reveals
The usual story of the interwar period goes like this: Versailles, the reparations crisis, the Depression, the rise of fascism, appeasement, war, Allied victory, and then Bretton Woods builds a new order from the wreckage. The ideological battle between democracy and totalitarianism is resolved by military force, and the postwar institutions are a fresh start.
From the perspective of clearing, however, the narrative runs differently. Julius Wolf specified the architecture in 1892. The BIS put it into practice in 1930, and bilateral clearing spread across Europe from 1932 regardless of political system, and the League documented it in 1935. Three parties then bid for who would run the multilateral version, and what diplomacy couldn’t settle, war eventually would. The winner built the multilateral system in Bretton Woods in 1944.
The Axis prototype was scaled up by the winning side’s institution in 1950 — the European Payments Union26. The architecture was never in dispute — the question was always who would control it.
The period between 1930 and 1944 played out in three phases. From 1930 to 1935, bilateral clearing spread, the League documented it, and the question of multilateralisation came into view. From 1936 to 1938, three competing bids emerged for who would build and run the multilateral system — the Tripartite currency axis, Van Zeeland’s BIS proposal, and Funk’s Berlin counterbid. From 1939 to 1944, the contest was resolved by military force, and the winner built the architecture it wanted all along.
The war didn’t interrupt the architectural question — it resolved it. The ideological framing — democracy versus fascism — was real at the political level but hid the architectural battle underneath. Germany wasn’t proposing a different architecture. It was proposing itself as the operator of the same architecture.
The postwar order is the winning bid in a battle that predated the war by a decade. The Marshall Plan27, the EPU, the European project — all downstream implementations of the winning bid’s architecture. The Cold War then becomes the enforcement mechanism that stops the battle from resuming — a binary framework that makes it unsayable that the Allies and the Axis were competing for the same architectural position rather than proposing fundamentally different systems.
The League of Nations published the document that makes all of this visible in 1935. Italy’s testimony described the prototype, identified the precondition, and proposed the mechanism. Germany refused to take part in the study because participating would have meant submitting to an inquiry into an architecture it depended on, run by an institution it had already left.
The League was dissolved, and the document went with it. But the connection between what Italy described in 1935 and what the EPU implemented in 1950 hasn’t been drawn in the existing literature. It’s all there, though.
You just have to look.
Architecture of European Unity
The Marshall Plan is remembered as America's generous gift to rebuild war-torn Europe. This narrative obscures a somewhat more complex reality: the European Recovery Program wasn't charity — it was institutional engineering.
Find my Telegram channel over here28.
Control of the world's money is Control of the world. Thank you Esc.
Remarkably thorough research! I suppose it goes to show that rats are rats throughout the ages. Except this time, I believe, the ship will definitely go under BRICS and all.