Introduction: Preliminaries, Concepts and Definitions

The international adjustment mechanism refers to the forces which come into play to preserve balance in the international accounts of individual countries engaged in international trade and investment or to restore equilibrium in the over all balance of payments of countries by eliminating surpluses or deficits when such an equilibrium is disturbed. The process of adjustment to any disequilibrium situation involves monetary, price-level, exchange-rate or income changes which lead toan alteration in the behaviour of economic agents and thus to the restoration of international monetary equilibrium.1 Precisely how the adjustment process works, i.e. which elements of the mechanism comeprominently into play, depends critically upon (1) the type of international monetary arrangement under discussion; in effect, whether one is considering a fixed exchange rate system or one which allows exchange rates to fluctuate freely under the influence of market forces; and (2) the strength or weakness of the linkages among national economies, i.e. the extent of international financial intermediation and the force of arbitrage in world commodity and financial markets (e.g.the significance of purchasing-power parity, the law of one price and interest-rate parity). If the links between economies are sufficiently powerful, so that the national entities exhibit the features of an integrated world economy, then there is a presumption that there will be no long-lasting payments disequilibria. We would be within the realm of interregional economics. International monetary arrangements come into being to serve the needs of traders and investors who have to make payments to or receive payments from residents across national boundaries. The existence of different national currencies calls for some arrangement to ensure the convertibility of such currencies so that people can freely make payments for all transactions, regardless of currency denomination. At the theoretical level, the convertibility of different national.