ABSTRACT
The theory of the balance of payments is concerned with the economic determinants of the balance of payments, and specifically with the analysis of policies for preserving balance-of-payments equilibrium. So defined, the theory of the balance of payments is essentially a post-war development. Prior to the Keynesian Revolution, problems of international disequilibrium were discussed within the classical conceptual framework of ‘the mechanism of adjustment’—the way in which the balance of payments adjusts to equilibrium under alternative systems of international monetary relations—the actions of the monetary and other policy-making authorities being subsumed in the system under consideration. While the Keynesian Revolution introduced the notion of chronic disequilibrium into the analysis of international adjustment, early Keynesian writing on the subject tended to remain within the classical framework of analysis in terms of international monetary systems—the gold standard, the inconvertible paper standard—and to be concerned with the role and adequacy in the adjustment process of automatic variations in income and employment through the foreign trade multiplier. Moreover, the applicability of the analysis to policy problems was severely restricted by its assumption of general under-employment, which implied an elastic supply of aggregate output, and allowed the domestic-currency wage or price level to be treated as given, independently of the balance of payments and variations in it.
