The International Adjustment Mechanism:Origin and Development of Doctrine

Leonard Gomes
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Leonard Gomes: University of Middlesex

Chapter 2 in The International Adjustment Mechanism, 1993, pp 46-102 from Palgrave Macmillan

Abstract: Abstract The discovery of the monetary mechanism of adjustment in international finance was an outstanding intellectual achievement on a parwith the Ricardo-Torrens formulation of the principle of comparative advantage in the static barter theory of trade. Upon these two pillars, classical and neoclassical economists erected the whole elaborate structure of economic thought we now call international economics.1 The name of David Hume is usually linked to the discovery of a form of the international monetary mechanism known as the price-specie flow analysis (Hume, 1752 [1955]), taken to be the classical (ororthodox) theory of international payments adjustment, and hence(or allegedly), a direct antecedent of the modern monetary approach to balance of payments theory (MABP). In truth, however, Hume’s approach to international monetary equilibrium which relies upon adjustments in relative price levels of countries experiencing balance of payments disequilibrium was not a particularly classical one. It certainly formed part of the classical tradition, in so far as it stressed the monetary implications of payments disequilibria and the need for the application of the general principle of adjustment to monetary changes - which implies that the money stock adjusts automatically to restore equilibrium in a country’s balance of payments. But a mechanical application of the quantity theory of money (under all institutional circumstances) to the problem of payments disequilibrium, involving price movements as the vehicle of adjustment, had no great appeal for classical writers - particularly the example used by Hume of an exogenous increase in the money stock.

Keywords: Exchange Rate; Real Exchange Rate; Money Supply; Foreign Exchange Market; Nominal Exchange Rate (search for similar items in EconPapers)
Date: 1993
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DOI: 10.1057/9780230375420_2

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