The Role of the Price Mechanism in Adjustment

Abstract

Any investigation of the problem of adjustment falls naturally into two parts: an examination in theoretical terms of the forces which may be harnessed to adjust a balance-of-payments disequilibrium; and the policies which countries adopt in seeking adjustment. It is tempting to say or imply that the policies adopted act in accordance with the principles, embodying them in working systems, but this is not always the case. It is only since the First World War that the discussion of what we now call adjustment theory has been taken up by economists — and it was only after the Second World War that, with the wider understanding of national income behaviour made possible by Keynesian economics, adjustment theory came to be widely discussed and related to the practical policy problem of choosing and working an actual adjustment system. Up to that time, policies to secure adjustment of balance-of-payments disequilibria were a hotchpotch of ad hoc measures pursued by monetary authorities. Sometimes, as in the late nineteenth century and the period up to 1914, these measures followed a discernible pattern, as they did under the international gold standard; sometimes, as in the interwar period, they were diverse, contrary to theory as we now know it, and often chaotic.