International Equilibrium and National Sovereignty Under Full Employment

Abstract

T tHE question whether national sovereignty is compatible with order or, indeed, with the survival of civilization at all, is one which has become rapidly more urgent in the economic field in the last two generations. Fifty years ago anyone discussing this question would probably have been content to confine himself to a discussion of tariff policy. The working of the international gold standard mechanism was at that time regarded as an established and satisfactory means of maintaining international equilibrium, and governments tended to regard the adjustments of discount rate, or other monetary measures which were taken in connexion with the gold reserve position of their countries, as lying largely outside their spheres of activity. The question whether their sovereignty was limited by the conventions of the system hardly arose; how far sovereignty is limited depends on what governments want to do; and governments were content to leave the adjustment of international payments to the markets and the bankers. At all events the international gold standard was taken for granted and, as is usually the case when things are taken for granted, was not understood. Subsequent studies by Professor P. Barrett Whale and others have demonstrated the.manner in which the old 'automatic' mechanism worked and have shown also why governments were content to leave it as 'automatic' as it was. Although there were considerable fluctuations of both real and money incomes in the advanced countries, these did not give rise to an overwhelming volume of protest, partly because those who suffered most from depression were not politically organized or capable of making their voices heard as clearly as became possible in a later generation. Hence it was possible for the Cunliffe Committee, looking backward in I9I8, to judge that the 'automatic' mechanism of international equilibrium before I9I4 had worked on the whole satisfactorily,_ and to agree also with the accepted view that adjustments in balances of international payments were brought about primarily through variations in relative costs of production in response to the inflationary and deflationary influences produced by international gold movements. In fact, not only would the pre-i9I4 fluctuations of economic activity in the main countries of the world most probably not have appeared tolerable to a later generation, but the attack which Keynes launched in his Treatise on Money (1930) on the accepted theory that adjustment 434