The monetary theory of the balance of payments, also known as international monetarism, emphasises the fi nancial aspect of the balance of payments, as its name implies. Every transaction is fi nanced in some way or other, usually by the use of money. Hence one might analyse either the fi nancial aspect or the real aspect. Take a primitive tribe whose only transactions with the outside world are the sale of skins for money and the purchase of salt. A balance of payments defi cit means that it is receiving a greater value of salt than the skins it is selling. This is the real or goods market aspect of the defi cit which is analysed by Keynesian models. Alternatively one might analyse the monetary aspect; it is paying out more money than it is receiving. This is analysed by the monetary theory. A complete analysis must take account of both real and fi nancial factors, so neither Keynesian nor monetary analyses can be complete in themselves. The Keynesian analysis, moreover, is an analysis of fl ows-fl ows of goods that are traded, and of income. The monetary analysis is an analysis of stocks, especially the money stock. Again, as a complete analysis needs to look at both stocks and fl ows, Keynesian and monetary analyses are complementary as much as competitive. Indeed modern theorists, whether self-styled monetarists or Keynesians, use models which are hybrids of the original international monetarist and Keynesian models. A fi nal preliminary is to note that the monetary theory seeks to explain the overall balance of payments whereas absorption sought to explain the current account. It is possible, therefore, that both are right. This is especially so as the monetary theory puts great emphasis on the capital account-as one of its advocates, Minford, once put it: ‘the capital account is King’ (when acting as a discussant at the 1978 Money Study Group).