Developments in Major Fields of Economics
Edited by Gilbert Faccarello and Heinz D. Kurz
Chapter 2: Balance of payments and exchange rates
This entry briefly covers the analysis of the balance of payments and exchange rates from mercantilism to the 1980s’ monetary approach to the balance of payments. The first section is devoted to the emergence in the eighteenth century of the concept of balance of trade equilibrium. The second section presents the distinction and connection between the balance of trade and the balance of payments developed and discussed in the first half of the nineteenth century. The third section studies the 1870–1930 period and the gold standard failure. The last section describes the open macroeconomic approach after the great depression. Because they feared a currency shortage, mercantilists promoted policies – taxes, industrialization, creation of commercial companies, establishment of banks, colonization and wars – intended to achieve a balance of trade surplus. The entry of gold and silver coins was seen both as an accumulation of wealth and power and as the way to provide the economy with money to meet the needs of growing trade. The first break with this approach was made by John Locke, with Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money (1691). In his view, because the levels of monetary prices in neighbouring countries are necessarily close to each other, the international stock of coined money will be distributed among countries in proportion to each country’s level of internal trade. This leads to an equilibrium approach to the international distribution of gold and silver money, which assumes one property of the quantity theory of money previously expounded by Bernardo Davanzati in his Lezione delle Monete: “all these earthly things are, by the consent of nations, worth all the gold (and in this I include silver and copper) that is wrought” (1588: 32) and then by Geminiano Montanari in his Della Moneta: “all the commodities in commerce between men, taken together, are worth as much as the gold, silver, and copper, coined and in circulation” (1683 : 45). However, Locke did not address the problem of the stability of the equilibrium he defined, nor did he expound the quantity theory of money per se.
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