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Pascal Salin

A devaluation is a change of the exchange rate decided by monetary authorities in an exchange rate system in which the exchange rate ought to be fixed. The consequences of a devaluation are different according to the initial situation when it is decided. If there is initially a monetary equilibrium, the devaluation creates a disequilibrium and an adjustment takes place mainly thanks to international monetary flows. If there is an initial disequilibrium, it is generally because monetary authorities in a country have not been respectful of the normal ‘rules of the game’ of a fixed exchange rate system, according to which the central bank should adjust its monetary policy to changes in its reserves of foreign currency (or gold, in a gold standard). In such a case a devaluation is intended to cure the disequilibrium, at least if the new exchange rate can be considered as an equilibrium exchange rate.
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Pascal Salin

The history of the evolution of monetary systems in this chapter is, more or less, a rebuilding of history in a logical and theoretical way. But it appears that, quite often, this ‘invented’ history is close to the real one. Starting from the case of a barter economy, it describes several steps in the evolution of monetary systems: invention of a commodity currency (for instance, gold), issue of banknotes with 100 per cent reserves, fractional reserves, creation of hierarchical systems with a central bank, monopoly of the central bank in the production of banknotes, and so on.
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Pascal Salin

Under a gold standard the producers of money give a convertibility guarantee at a fixed price in terms of gold. In modern monetary sytems such an international reference money no longer exists, so that convertibility guarantees are given in terms of one specific ‘national’ currency (for instance, the dollar in a dollar standard). In such systems there can be conflicting monetary and exchange rate policies. These problems and the ways to solve them are studied, first, in the case of a two-country model; and second, in the case of n countries and n currencies. In this latter case, there is what is called the ‘n_1 problem’, that is, the fact that all the monetary policies of the countries which belong to a system of fixed rates are dependent, except the monetary policy of one of them (there are n_1 dependent monetary policies).
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Pascal Salin

Monetary policy must aim at curing possible monetary problems, but it is an illusion to believe that real problems (for instance, a low rate of real growth) can be solved by the use of monetary policy. Business cycles nowadays are mainly of monetary origin, as it has been stressed by the so-called ‘Austrian theory of the business cycle’. This theory explains how an excess of money creation and the corresponding excess of credit distribution by banks is creating distorsions in the structure of prices and the structure of production. Therefore, the harmful effects of an excess of money creation are not only inflation (implying costs which are studied in previous chapters), but economic distortions.
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Pascal Salin

Monetary integration is usually viewed as implying the replacement of several national currencies by one single currency controlled by an international central bank (as is the case with the euro and the European Central Bank). However, a definition and evaluation of monetary integration cannot be made without referring to the roles of money which have been studied previously. It then appears that there are possible routes towards monetary integration other than the substitution of an international monetary system for national systems, namely competition betwen existing currencies, or even competition with newly invented private currencies (such as those which are appearing nowadays).
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Pascal Salin

It is quite often claimed that a reform of the international monetary system is necessary, but many different reforms can be considered, among which are accepting currency competition.
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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.