This paper was presented on April 14, 1956, at the Conference on International Economics arranged by the National Bureau of Economic Research. Mr. Bernstein, formerly Professor of Economics in the University of North Carolina and Assistant to the Secretary in the U. S. Treasury, is the Director of the Research and Statistics Department of the International Monetary Fund. He is the author of Money and the Economic System and of numerous articles in economic journals.
The emphasis is placed on ordinary capital movements as relevant to the longer-run concept of a proper balance of payments and in order to exclude capital flight, which may be caused by political factors, and extraordinary capital inflows, which may be for the purpose of meeting balance of payments difficulties.
Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (edited by Edwin Cannan, London), Book II, Chap. II, p. 283.
The analysis is based on the assumption that all countries have fixed exchange rates and that there is full employment. It also assumes that prices rise in precise proportion to the excessive increase in the quantity of money. These simplifying assumptions are almost always applicable to underdeveloped countries. Even in the great industrial countries, where the behavior of the monetary system is more complex, the effects of excessive credit will approximate those set forth in the analysis above. This brief statement is in part based on studies in progress by J. J. Pelak and Marcus Fleming of the Fund staff.
See, for example, Sir William Beveridge, Tariffs: The Case Examined (London, New York, Toronto, 1932), pp. 52–74; J. A. Hobson, The Economics of Unemployment, Appendix; and A. C. Pigou, A Study in Public Finance’ (London, 1949), pp. 218–27.
Sidney S. Alexander, “Effects of a Devaluation on a Trade Balance,” Staff Papers, Vol. II, No. 2 (April 1952), pp. 263–78.
This discussion is directed toward the behavior of prices when a single country-devalues its currency, its proportion of world trade being relatively small. For a discussion of the behavior of raw material prices when a whole region, say the sterling area, representing a sizable proportion of world trade in these commodities, devalues its currencies, see Barend A. de Vries, “Immediate Effects of Devaluation on Prices of Raw Materials,” Staff Papers, Vol. I, No. 2 (September 1950), pp. 238–53. In perfect markets, where dollar and sterling prices will be equivalent at the new rate of exchange, the fall in the dollar price of each commodity will be such as to induce a decrease in the supply from the dollar area plus an increase in the demand of the dollar area equal to the increase in the supply from the sterling area plus the decrease in the demand of the sterling area induced by the associated rise in sterling prices.
Taking the market value of imports at the predevaluation date, real income will rise whenever P/Pʹ is less than (e – 1)/e, where P is the landed cost, Pʹ the real market value, and e the elasticity of demand for a country’s exports.