The Methods of Adjustment: Policy

Abstract

The process of adjusting a country’s balance-of-payments deficit either by purposive policies or by an internationally agreed system is the most important problem in international monetary economics. A perfect policy system were it possible and were it implemented with complete understanding would end a century-long search, reduce to vanishing point the discussion of international monetary policy, and remove from international politics a whole dimension which has existed since the First World War. Realisation by economists of this central role for balance-of-payments adjustment has produced a considerable literature over the past twenty years, but in the world of affairs we are still in a state of hesitancy, of tentative moves to improve situations rather than soundly based policies carried through to completion. In this chapter we shall examine some of the practical issues raised by the theory of adjustment as we now find it and, in particular, by those aspects of it which we have sketched in the previous chapter. To do this we shall divide policies into two groups: those which are expenditure-reducing, which seek to operate upon the foreign balance by curtailing the level of domestic absorption; and those which switch expenditures through the medium of changing the exchange rate. In particular, for this latter group, we are concerned with the question: what are the merits and demerits of the several possible systems of exchange-rate operations which may be adopted?