Introduction

The impact of Keynesian Economics on the theory of international monetary relations has been powerful. Keynes himself, though he was well aware of the international policy implications of his doctrines, did very little to apply his General Theory to the analysis of international equilibrium. But he provided a theoretical framework which subsequent writers had no trouble in adapting to the special case of international relations. From this work of adaptation there emerged a whole system of international economics, set up in terms of the money income and expenditure analysis.

The income approach to international trade was not by any means entirely new. For over a century, writers on international trade had referred occasionally to shifts of purchasing power or changes in relative demand. The Keynesian approach, however, seemed to yield a more comprehensive and consistent account of international monetary relations than had ever been given before. It furnished at one and the same time an explanation of two related matters: (a) the adjustment process of the balance of payments and (b) the international transmission of fluctuations in economic activity and employment. The result has been a fruitful marriage of two subjects that previously led quite separate existences under the conventional names of international-trade theory and business-cycle theory.