Short-Run Equilibrium in the Balance of Payments

Abstract

The field of foreign exchange, of all the branches of economics, has probably been most radically transformed by the events of the past two years. Not only have blocking restrictions and other limitations on capital movements become almost universal but the whole mechanism of exchange rates has been changed by the institution of an official monopoly of exchange dealings in most countries of the world. Thus, for example, the international movement of gold has ceased to be associated primarily with gold-shippingpoint arbitrage. Forward exchange premiums and discounts have lost their customary significance, and their fluctuation no longer induces a flow of interest-arbitrage or swap funds. Finally, the negotiation of bilateral payments agreements and the institution of other discriminatory policies have divided what was once a global balance-of-payments problem into a number of individual segments, broken down on a basis of more or less independent geographical and currency areas. These manifold institutional changes would in themselves indicate the advisability of reconsidering the theoretical and technical aspects of international financial relationships, with particular reference to the interpretation of balance-of-payments estimates. It might be remembered in this connection that the last general discussion of the subject was inspired by the great controversies over the transfer of large unilateral payments, at first in connection with long-term investments (e.g., Hobson, Williams, Viner), later with respect to the specific problem of German reparations (Keynes, Ohlin, et al.). Today these controversies have an archaic and academic ring, although they explain the preoccupation with capital movements as a whole which has characterized most presentations of the balance of payments during the past -5 years. The practical problems of foreign exchange at present, however, are