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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.

Conventional theories of international relations assume, implicitly, the model of an "inter-state system." According to this model, individually states possess a set of characteristics which differ fundamentally from the characteristics of a system of those states interacting with each other. On this basis we can construct theories about the behavior of component states in the system, and more general propositions about the nature of the inter-state system viewed as a whole. Some of the difficulties of this model will be noted here, and an alternative model proposed.Before pointing to these difficulties, however, we need a clear image of the inter-state model. A classic formulation is contained in a speech given by former Secretary of State John Foster Dulles at a meeting of the American Society for International Law. In it Mr. Dulles identified six characteristics of the nation-state: (1) laws which "reflect the moral judgment of the community"; (2) political machinery to revise these laws as needed; (3) an executive body able to administer the laws; (4) judicial machinery to settle disputes in accord with the laws; (5) superior force to deter violence by enforcing the law upon those who defy it; and (6) sufficient well-being so that people are not driven by desperation to ways of violence. The international system, Mr. Dulles pointed out, in large part lacks these characteristics. He went on to assess the limited success of attempts, ranging from the League of Nations and Kellogg-Briand Pact through the United Nations, to create such a "state system" or "order" at the international level. Mr. Dulles sadly reported that, despite notable progress in the development of international law and judicial machinery, the desired international order does not, as yet, exist.