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This paper explores the relationship between debt, growth, and
poverty and the international monetary system. With a well-functioning
international monetary system, economic policy works well, instruments
are assigned to targets appropriately, and discipline is maintained. The
fixed exchange rate is contrasted with alternative monetary rules. The
monetary rule is the weakest system; monetary targeting has failed in
every country in which it has been tried. An advantage of the fixed
exchange rate is the clue it provides to the price level, interest rate,
and future monetary policy. Other things being equal, the use of a
currencies basket is inferior to a single currency peg, while a freely
floating exchange rate system puts itself at the mercy of speculators.
The paper points out the conditions for a successful currency area as a
consensus on a common inflation rate; a common basket of goods with
which to measure inflation; exchange rate that must be locked; member
countries must adopt a common monetary policy; and a formula must be
devised for distributing and using the seigniorage profits from monetary
expansion. There is a need to study the possibility of an Asian currency
area and the links between the APEC and the SAARC. Regular and mutual
surveillance on monetary, fiscal, and exchange rate convergence, and
policies that minimise exchange rate uncertainty and work towards a
currency club area based on a common anchor— initially the dollar—are
needed. Setting up of an Asian Monetary Fund is also suggested, one that
is closely modelled on the original IMF articles of agreement and will
provide an anchored fixed exchange rate system.

The theory of employment that grew out of the Great Depression was not long in influencing government policy-makers and revolutionizing older concepts of fiscal policy. The most important of Keynes's practical lessons, that policies which promote investment and exports and inhibit saving and imports increase employment and output, has now hardened into a dogma and filtered down into almost all the elementary textbooks. The lesson, by and large, was a good one, but the dogma presents the danger that the lesson might be uncritically applied in situations where other government policies render it invalid. This paper is concerned with the most important exception to the rule.The mercantilist element in Keynesian policies is definitely inapplicable to countries whose central banks do not peg the price of foreign exchange or gold. Tariffs, trade controls, and export subsidies are likely to worsen employment and output in all those situations in which, with a fixed exchange rate, they would improve employment and output. Moreover, if exchange rates are flexible, an increase in investment or government spending, and a reduction in saving or taxation, will have a substantially different effect on employment than that predicted by the traditional foreign trade multiplier. The reason lies in the fact that equilibrium in the balance of payments is automatically maintained by variations in the price of foreign exchange.

SUMMARYMost of the important generalizations of international trade theory that owe their origin to the classical school are long‐run and static in nature, implicitly assuming that disequilibrium is a transitory state and that passage between equilibria is untroubled. Yet past experience seems to indicate that external disequilibria can remain for extended periods of time, and that the modern system is a disequilibrium system.The nature of the international disequilibrium system has sometimes been attributed, erroneously, to the Keynesian foreign‐trade‐multiplier theorem that an increase in exports will induce an increase in imports which is smaller than the initial increase in exports, and this has been the origin of the belief that "HUME'S law" is invalid in the case of saving and unemployment. However, HUME'S law is valid even in this case if gold flows are allowed to have their natural effect on the internal money supply and hence on interest rates, investment and incomes. HUME'S law is therefore valid in the case of Keynesian unemployment, although the price‐specie‐flow mechanism is replaced by an income‐specie‐flow process.The true nature of the international disequilibrium system derives from the fact that central banks do not allow externally‐induced gold flows to affect the internal supply of money since that would conflict with the new primary goal of monetary policy; full employmentwithout inflation. The new function of monetary policy leaves a policy vacuum with respect to the balance of payments, except insofar as ad hoc policies are designed to suit special circumstances. Gold flows are therefore automatically neutralized by open market operations in some countries, while in other countries monetary policy in effect cancels or reinforces the monetary effect of gold flows in the pursuit of internal stability.At critical times, when foreign exchange reserves become dangerously low and subject to speculation, or when they become burdensomely high, action by the authorities must be introduced even if this is at the expense of internal stability. Even in these cases, however, the system need not become an equilibrium system since the objective might be to recoup reserves or allow them to run down.