The monetary traditions and institutions of the nineteenth century provided a remarkably efficient mechanism of mutual adjustment of national monetary and credit policies to one another, essential to the long-term maintenance of exchange-rate stability between national currencies.
The reasons for this success, and for the breakdown of the system after World War I, are very imperfectly reflected in most of our textbooks. Most of all, however, over-concentration on the mechanism of intercountry adjustments fails to bring out the broader forces influencing the overall pace of monetary expansion on which individual countries were forced to align themselves.
Starting from an initial position of balance-of-payments equilibrium, the emergence of a fundamental deficit is generally described in terms of divergent movements of exports-downward-and imports-upward-
* Our International Monetary System: Yesterday, Today and Tomorrow, New York, Random House, 1968, ch. 1. Also appears in The Evolution of the International Monetary System: Historical Reappraisal and Future Perspectives, Princeton, Princeton University Press, 1964, pp. 2-20.