Secular Inflation and the International Monetary System

Abstract

The present international monetary system, which has prevailed since the end of the second world war with the brief exception of the crisis period from August 15, to December 18, 1971, is a system of exchange rates fixed in principle, though the par values of the individual national currencies and hence the exchange rates among them are fixed subject to alteration by international agreement in cases of fundamental disequilibrium. As is well known from the theory of money for a closed economy with a single common currency, and hence absolute rigidity of the exchange rates among the moneys used in its various regions, rigidity of exchange rates means that any monetary impulse, whether inflationary or deflationary, will propagate itself throughout the whole area of the national economy. It should be kept in mind, though, that in the case of either deflation, or of inflation occurring in a situation of less than full employment, the response of the economy for the period relevant to economic policy-making may be predominantly an adjustment of quantities of production and employment rather than of money prices and wages. To operate satisfactorily from the point of view of the policy objectives of its member countries with respect to achieving some combination of reasonable stability of prices and reasonably low unemployment, therefore, such a system, to be generally tolerable, must include provision for a reasonably steady expansion of international liquidity at a rate consistent with world price stability, or at least a close enough approximation to world price stability. Under the theory of the