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Pascal Salin

The international monetary system, and the disparate systems that make it up, are complex and there are many fallacies surrounding the ways in which they work. This book provides a clear and rigorous understanding of these systems and their possible consequences.
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Pascal Salin

Studying an international system implies having a definition of a nation, in order to assess to what extent the analysis of an international phenomenon can be different from an analysis which does not take into consideration the existence of nations. This chapter stresses that several definitions of a nation can be given, but what is important is defining a nation from the point of view of monetary problems. By comparison with the traditional definition of a nation in trade theory, a monetary area – or a monetary nation – can be defined as an area of circulation of a currency. The chapter also discusses whether or not a monetary area should coincide, for instance, with a political area.
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Pascal Salin

The theory of international trade is an application of the more general theory of exchange, so it is important to recall the main lessons which can be drawn from this latter theory. Whenever a transaction takes place freely between two individuals, the market (measurable) value of a purchase is equal to the market value of the corresponding sale. But for each individual the subjective (non-measurable) value of what he buys is higher than the subjective value of what he sells. If exchange is possible, each individual decides to specialize in the production in which he is relatively more efficient. Thus exchange brings (subjective) gains and, moreover, it induces people to specialize. This remains true whenever trade takes place between individuals located in different nations.
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Pascal Salin

The terms ‘equilibrium’ and ‘disequilibrium’ are quite often used in economics (for instance, when speaking of a balance of payments equilibrium or disequilibrium), but they need to be clarified. In fact, there are frequent ambiguities or errors in relation to these concepts. In various scientific fields, such as physics, ‘equilibrium’ normally refers to situations in which variables are not changing (stable equilibrium). An economic equilibrium cannot be defined in this way since it concerns the thoughts, decisions and actions of individuals who react to one another. This chapter explains why the term ‘equilibrium’ in economics should be defined as a situation in which individuals are satisfied.
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Pascal Salin

In order to evaluate the working of a monetary system – which is one of the aims of this book – it is necessary to have evaluation criteria. It can be said that a ‘good’ monetary system is a system which is providing ‘good’ money; which, in turn requires a definition of ‘good’ money (or ‘sound money’). A currency can be considered as sound if it provides to money-holders the services they desire from money. Thus, the chapter explains the roles of money as an intermediary in exchange, as a means to do exchange over time, and – less importantly – as a standard of value. In general terms money can be defined as a ‘generalized purchasing power’. Because it provides these services, money is a useful economic good and it is desired. Therefore the chapter explains the main determinants of the demand for money, in particular the interest rate – which is the price of time – and inflation expectations (or expectations about possible changes in the purchasing power of money).
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Pascal Salin

As any economic good, money has to be created. This is particularly obvious when a currency consists of a real commodity, such as gold, and the usual principles about the behaviour of producers make it possible to understand how such a currency is produced. Nowadays, currencies are generally fiduciary currencies, that is, claims on firms which are called banks. Money is created as a counterpart of the distribution of credits. It is stressed that banks are mainly financial intermediaries, but they also play a monetary role which is analysed in this chapter. This chapter also introduces a core principle of monetary problems: the ‘real cash balance effect’, according to which changes in nominal prices allow people to obtain the quantity of money which they desire.
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Pascal Salin

The exchange rate is the price of a currency in terms of another one. According to what has been explained in Chapter 3, the equilibrium exchange rate is the exchange rate the value of which is such that suppliers and demanders of a currency against another currency are satisfied. The determination of an equilibrium exchange rate is studied in other chapters. Monetary authorities can influence an exchange rate by various means – which are also studied later on – for instance by implementing fixed exchange rates.
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Pascal Salin

The precise and detailed analysis of monetary systems and exchange regimes is one of the main aims of this book, and is developed in many of the subsequent chapters. But it is useful at the outset to provide a general overview of the various systems which may exist. A basic classification of monetary systems and exchange regimes is thus provided in this chapter.
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Pascal Salin

Traditional accounting principles are used in order to describe the characteristics of a balance of payments. Some examples are given to illustrate these principles.