After world war two, economic relation among countries in the world encountered with some bottlenecks. European countries severely bothered from disasters of war. During this time the United States could replace the Dollar as the convertible currency for foreign transactions. However, the Marshal Plan played in important role in economic situation of Europe. In 1960s the European countries made an arrangements named " European Payments Union " , in this system, at the end of each settlement period the balance ( the amount which has not been cleared in the system) settled by US Dollar. Success of EPU encouraged developing countries to set up similar Clearing Unions in Africa, Latin America as well as in Asia and Pacific region.

Clearing Union: Definition and Reasons for Existence

A clearing union can be defined as a multilateral payments arrangement that periodically offsets the debits and credits accumulated by each member against the other members in the process of trade and other transactions. Multilateral clearing or payments arrangements facilitate the use of national currencies, and thus serve to relax the foreign exchange constraints of the members.

Among the basic reasons for the formation of a clearing union, the following can be mentioned.

• (i) Exports and imports among members can expand relatively faster because of conservation of foreign exchange in intra-group transactions, at least until the settlement date.
• (ii) Trade liberalization can be promoted initially among the members.
• (iii) Exploitation of scale economies would be made possible by enlarged trade.
• (iv) An adjustment process can be promoted that would raise the international competitiveness of the members which have similar distortions in trade and production.
• (v) Measures and surveillance by the union can help to secure a more balanced current account which in turn contributes to the creation of conditions for the future convertibility of each of the currencies of member countries.
• (vi) Ground can be prepared for regional economic co-operation in general and for monetary and financial co-operation in particular.

A Brief History of Clearing Unions

The need for the formation of clearing unions was felt as early as in the 1930s. Foreign exchange shortages, the breakdown of the gold standard and the collapse of the international capital markets forced the governments of the time to introduce controls on foreign exchange and foreign trade on the one hand and to sign bilateral trade and payments agreements on the other. It was recognized after a while, however, that bilateral clearing arrangements had a repressive effect on trade and that they led to inefficient use of resources. In the early 1940s J. M. Keynes proposed a kind of an international clearing union that would operate on a multilateral basis but the United States opposed the idea on the grounds that it rested on automatic credits and controlled trade.