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Financing, Correcting, and Adjustment: Three Ways to Deal with an Imbalance of Payments, Fritz Machlup - Friedrich August von Hayek, Toward Liberty: Essays in Honor of Ludwig von Mises, vol. 2 [1971]

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Toward Liberty: Essays in Honor of Ludwig von Mises on the Occasion of his 90th Birthday, September 29, 1971, vol. 2, ed. F.A. Hayek, Henry Hazlitt, Leonrad R. Read, Gustavo Velasco, and F.A. Harper (Menlo Park: Institute for Humane Studies, 1971).

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Financing, Correcting, and Adjustment: Three Ways to Deal with an Imbalance of Payments
Fritz Machlup

I am going to try again. I did not succeed in convincing all those whom I wanted to convince on my first try.1 The issues require conceptual clarification, since this is a matter on which governments make decisions of great importance.

For years economists have distinguished two ways of dealing with imbalances—surpluses or deficits—of foreign payments: financing and adjusting. I suggested that it would be more helpful to distinguish three ways: financing, correcting, and adjusting. These are not, of course, mutually exclusive alternatives: financing will be required while certain processes of adjustment are going on or while some correctives may be at work. Before I start defending my conceptual scheme, I should like to embark on a preliminary exercise: to find out whether similar conceptual problems exist regarding the payments balance of an individual household or firm.

Payments Problems of an Individual Household or Firm

If the head of a household suffers a decline in receipts or an increase in unavoidable expenditures, he may have a problem of restoring balance in his payments. Perhaps an illness has caused both his loss of income and in increase in his expenditures. As long as he has a cash reserve which he can run down or has enough credit to run up his debts with the doctor, the druggist, and the grocer, he will be able to finance his deficit. And while he finances the deficit, he can think of how he might adjust, either by raising his receipts—perhaps working harder—or by lowering his expenditures—perhaps cutting down on things he and his family might do without. It is revealing to realize that adjustment is a “problem” only so long as he can finance his deficit. When he is completely broke, has not a penny left, and can find no one to give him any credit, he no longer has a deficit and his adjustment is a fait accompli. The family may now be starving, but his previous problem of having to adjust has been transformed into the misery of an unhappily completed adjustment imposed by lack of finance. Obviously a deficit, with all the problems, headaches and stomach ulcers that it causes, would be preferable to the forced adjustment with unfilled stomachs and wretched poverty.

One lesson from this analogy is that adjustment is not necessarily “good,” and postponing adjustment is not necessarily “bad.” If incomes or other receipts cannot be increased, at least not for the time being, but if there is still some money left or some credit available, the household can continue to finance the deficit in the balance of its payments and may try to work out an adjustment of a sort less unbearable than the one that would be forced upon the family by an immediate disappearance of the deficit and of the victuals or medicines which it represented. Of course, the continuance of the deficit may increase problems in the future; to postpone adjustment is to improve the situation for the moment, perhaps for only a short while, at the cost of the future. But many people prefer to have this option—even if they later regret their choice and wish they had adjusted faster and had resorted less to financing prolonged deficits.

Both running down one's cash balances and running up debts have here been regarded as financing a deficit. But should any kind of borrowing be treated as financing a deficit? This would be logically consistent only if any kind of lending were treated as “financing a surplus;” I think it would be rather awkward to adopt such a convention. Many forms of lending are more reasonably regarded as payments that reduce a surplus than as improvements in one's liquidity position that finance a surplus. Conversely, some kinds of borrowing are more reasonably regarded as receipts that increase a surplus or reduce a deficit than as deteriorations in one's liquidity position that finance a deficit. Is there any convenient criterion by which to decide the issue? Tentatively I suggest that we treat the receipt of a loan as a deficit-reducing receipt in the balance of personal payments if it relieves the borrower of pressing worries and anxieties for a number of subsequent “pay periods,” but treat it as temporary finance of a deficit if it leaves the borrower with a feeling of having to repay the loan “tomorrow” or so soon that he incurs sleepless nights with his debts. I realize that some people can sleep well and do not worry even if their debts are overdue. Thus, we cannot really use presence or absence of worries as operational criterion; maturity of the debt will have to be the criterion.

Assume that our broke friend obtains a loan that will mature in more than a year from now; thus we may say his deficit has disappeared for the time being. Would we say that he has adjusted? Assume, alternatively, that he has started to sell some of his possessions—rugs, paintings, furniture—in order to make receipts match his expenditures. Would we regard this disappearance of the deficit an adjustment? It stands to reason that neither the increase in his debts, whatever their terms, nor the sale of his possessions can go on forever; there is a limit to his credit and it may be reached before long; and after a while he will run out of saleable things. I submit that we cannot reasonably speak of completed adjustment if the state of affairs is such that either the deficit will reappear or expenditures will have to be cut in the foreseeable future.

It makes sense to use the designation “adjustment” only if the new situation is sustainable in the long run, that is, as a rule, if there are no items in the receipts or expenditures that must reasonably be expected to change and thereby create an imbalance. Having decided, however, that our friend's borrowings, if not due for quick repayment, or the receipts from selling his possessions, have wiped out his deficit for the time being, our diagnosis of the situation cannot be “financing of a continuing deficit,” but it is not “adjustment” either, since the situation is not sustainable in the long run. This is an instance of an intermediate category or removing (or reducing) an imbalance, and a name is needed to refer to it. I propose to call it a compensatory correction of the imbalance.

Our illustration has been of a household in or near poverty, financing or correcting a deficit, or attaining a forced adjustment with sustained misery. It may be misleading, however, if the theme of the three ways of dealing with a deficit is illustrated only by a sob story. To widen our horizon, we shall now choose an illustration of an affluent household with intentional deficit financing leading to a desired adjustment with increased and sustained affluence.

Assume that, at given stock-market prices and given expectations about future changes in these prices, the head of a wealthy household has stayed 50 per cent invested and 50 per cent liquid; but that he is now persuaded to expect stock prices to rise briskly; and that consequently he decides to reduce his cash balance and to purchase securities. This increase in his portfolio investment constitutes a payments deficit financed by a decline in liquidity. When the portfolio adjustment is completed, the deficit will have disappeared. The outcome is exactly what was desired, and the process comes to a happy ending with prospects of capital gains and increased earnings from investments.

A variant of this case of a deficit through increased investment outlays can be shown by assuming that our rich friend stops financing his deficit by drawing down his cash balance but decides instead to borrow. If the loans are not promptly repayable and fully match his payments for the acquired stocks, he has no deficit: the borrowing corrects the imbalance which his stock purchases would otherwise create. As a third variant, we have our rich friend choose another route of paying for his shares of stock: neither borrowing nor drawing down his cash balance, he may forego his annual safari to Africa and his purchases of the 52 annual models of Dior dresses for his wife and of the mink and ermine coats for his mistresses. In other words, he may adjust his other expenditures to pay for his portfolio investments. If he persists in his new frugality, he can from now on expand his portfolio year after year. This is a real adjustment in the use of his resources.

All three ways of dealing with an imbalance of payments can be found also in the transactions of a business firm. Perhaps we may illustrate the different ways this time for the case of a surplus. Assume a firm has increased sales proceeds, or a reduction in the corporate income tax has reduced the firm's expenditures. If the firm allows its cash balance to go up, it finances its payments surplus; this could conceivably continue forever, but it would be rather unlikely, because the firm could put its funds to better uses. If the firm, instead, repays some bank loans or prematurely retires some of its outstanding bonds, it removes its surplus of receipts by increasing its payments of debt; this could not go on after all debts are repaid, and may therefore be regarded as a compensatory correction of the surplus. If the firm, instead of piling up cash or retiring debts, increases its payments of bonuses to management or dividends to stockholders, the surplus disappears through adjustment.

I am not suggesting that the terminology of international finance should be applied to discussions of private finance. It would be clumsy and unhelpful. The exercise in using a taxonomy that is possibly useful in international finance for descriptions of transactions in private finance had merely the purpose of finding out whether similar problems exist in both universes of discourse. We have satisfied ourselves that this is the case. Now we shall retire from the field of private finance with many good wishes, especially that the cultivators of that field may be spared the countless misunderstandings that go with the various concepts of a balance of payments. There is, unfortunately, no hope that these concepts can be expelled from international finance.

Payments Problems of a Province or Sector

A more patient exposition of the argument would not go from the individual household or firm immediately to the nation as a whole; it would instead stop on the way and take a good look at the interprovincial or some intersectoral balance of payments. Such an intermediate stop and sightseeing tour could serve to ascertain that the triad—financing, correcting, and adjustment—is fully applicable to interprovincial and intersectoral relations. Satisfied and strengthened in his convictions, the expositor and his readers could then go on to international payments.

I am not sufficiently patient to spend time on the intermediate stop. The curious reader may be invited to do his reconnoitering alone, if he wants to see for himself, perhaps by returning to the province (or the sector) later, after we have together investigated the case for the nation as a whole.

Payments Problems of a Nation: Statistics and Theory

One of the most troublesome tasks in the analysis of problems of international finance is to reconcile balance-of-payments theory with balance-of-payments statistics. Both have changed and continue to change their conceptual schemes, almost from year to year, and each is hampered by the important requirement of correspondence between theoretical and statistical concepts.

This correspondence is never complete, of course, but even rough correspondence is hard to achieve. The theorist, engaged in rethinking the relevant relationships, labors under constraints imposed by the concepts employed in the estimation and presentation of the statistical material. The statistician, engaged in adapting his material for analysis and interpretation in the light of dominant theories, labors under constraints imposed by contradictions between conceptual frameworks employed in different theories and from frustrations inflicted by the fact that many of the theoretical constructs defy all attempts at operational definition.

Balance-of-payments statisticians have had a back-breaking job of trying to keep up with the changes in balance-of-payments theory. In another essay I showed how the statistical balance of payments of the United States for a single year—1951—was changed at least fifteen times between 1952 and 1959 in accordance with changing conceptions of what “balance” means and which balance matters; but none of the balances then recorded was among the two now featured in our official statistics.1

The problem of correspondence and noncorrespondence concerns not only the final “balance” but also most of the items that make it up. This can be illustrated with reference to some financial transactions which may be interpreted either as correcting (reducing) or as financing an imbalance. The statistician has to rely on an operational definition; he may, for example, resolve to treat changes in monetary reserves and in “liquid” foreign claims and debts involving commercial banks as well as monetary authorities as “monetary movements” (to use the expression of the Balance of Payments Yearbook of the International Monetary Fund). He will exhibit these changes “below the line” in the statistical accounts of the balance of payments, implying that they finance the balance of all items “above the line.” Movements of long-term capital, movements of short-term capital not involving the banking system, and unilateral transfers are all shown above the line and may therefore correct the imbalance that would exist in their absence.

This sounds easier than it is in many instances; in several borderline cases the interpretation will be arbitrary. Such cases are of three kinds:

  • (1) Some changes in liquid liabilities to foreign banks entered as financing items (below the line) may be more appropriately regarded as financial correctives, that is, as capital inflows reducing rather than financing a deficit. This reinterpretation refers chiefly to those parts of the holdings of dollar balances by foreign banks with American banks that meet a sustained increase in their demand for holding cash. The probability that these balances will be firmly held, or even further increased, is much greater than the probability that they will be withdrawn tomorrow or the next day.
  • (2) Some contrived inflows of short-term capital may be more appropriately regarded as financing items rather than as correctives. This refers to “nonliquid” funds that are more likely to flow out again than to stay. The usual operational criteria for regarding them as nonliquid (and hence placing them above the line) are the form of the credit instruments, the stated terms of maturity, and the type and nationality of debtors and creditors; the theoretical criterion, however, is the probability of quick withdrawal.
  • (3) Some contrived changes on long-term capital account, known to be reversed before long, may be more appropriately regarded as financing items. This refers to flows of long-term capital that are almost certain to be reversed. We do not know how we could statistically divide movements of long-term capital—called long-term because of the terms of maturity—according to the likelihood of their reversal. But this is what really matters.

In other words, the operational definitions guiding the balance-of-payments accountants cannot do justice to the economic character of the transactions in question. Many financial correctives, producing changes in the balance of payments on capital account, will foreseeably prove of only temporary effectiveness—and will therefore merely postpone the need for real adjustment—and some will almost inevitably reverse themselves and will therefore be completely ineffective over an economically relevant period. Hence, one must frequently question the statistical or economic interpreter's decision to record as an improvement what is in fact only a device for gaining time—a financing device.

Payments Problems of a Nation: Correctives and Adjustment

In my first attempt to distinguish “real adjustment” from mere correctives and mere financing, I concluded that “temporary financing is a stopgap, often embarrassing and, of course, of limited duration”; that “policies designed to bring forth the desired compensatory corrections will, more often than not, have repercussions that frustrate the attempts” and, even if they work, will not be “consistent with the economic principle”; and that “real adjustment” was therefore the only reliable cure of an imbalance in international payments.1

My terminological proposals and theoretical arguments have met with severe criticism: I was rebuked for having proposed “persuasive definitions” and for having violated my own rules in concealing my value judgments by a clever choice of concepts and assumptions. I admit that some of my theoretical judgments, especially the policy implications of of my arguments, may look like a sketch painted entirely in black and white, using black for what I defined as real and financial correctives, and white only for what I defined as real adjustment. I shall try to defend my distinctions and restate my arguments in less vulnerable terms.

These arguments will be based on a number of distinctions which I consider relevant for judging the effectiveness and efficiency of policy measures to correct an imbalance of payments. For each argument and each conclusion we shall ascertain whether and where it may involve a departure, overtly or covertly, from the rule of “value-neutrality” and where the proposed classification of policy measures may depend on indirect effects expected on the basis of theoretical arguments that rely excessively on “special” (perhaps specious) assumptions.

Real Flows or Financial Flows

Since I distinguish “real adjustment” from correctives, and “real correctives” from “financial correctives,” the first issue bears on the significance of the modifying adjectives used here. The distinction between policy actions designed to affect real flows and those designed to affect financial flows is fairly straightforward—to the extent that one agrees on what is “real” and what is “financial”. The traditional distinction in the international accounts between balances of visible and invisible trade, on the one hand, and balances on unilateral transfers and capital movements, on the other hand, seems to correspond roughly to the meanings of real and financial flows. The correspondence is too rough, however, and exceptions should be pointed out.

For certain items that are usually entered among services or invisible trade, one may question whether they are properly characterized as “real” (in the sense of “products made with the aid of real resources”). I refer particularly to returns on foreign investment, such as payments of interest, dividends, and profit shares, but also to royalties, license fees, and other payments for rights or titles to things produced and delivered in the past. None of these payments are for services sold in the accounting period to foreign buyers, or bought from foreign sellers; or for products of inputs which the selling country in the period of the report either diverted from domestic to foreign use or failed to divert from foreign to domestic use; or for outputs which buyers purchased because relative incomes and relative prices were what they were and which the sellers supplied because of a given comparative-cost situation. Real flows, in the economist's theoretical system, are those international transactions the changes of which he attempts to explain by changes in comparative costs, relative prices, and relative incomes. Sound analytical practice, therefore, will remove payments of the other type, such as those described above, from the balance on goods and services and treat them, like unilateral transfers, as a special class within the current account, representing a financial flow.

Such a rearrangement of the current account does not imply any criticism of now customary statistical conventions. There is economic sense in the procedure, in balance-of-payments accounting, of putting tourist expenditures and forwarders' commissions in the same box as patent-license fees, interest payments, and dividends: all these are payments for services rendered and all figure in the income accounts of national-income statistics. But what is useful for one purpose need not be so for another purpose. For questions involving real-location of resources, a switching of inputs to alternative outputs, not all payments for services rendered can reasonably be treated alike. For these questions, certain payments are not indicative of real flows and are therefore regarded as financial flows. Whether this theoretical “insight” is accepted or rejected, surely no value judgment is involved in the distinction.

For Good or Only For a Time

Policy measures may be designed to remain in force for good or only for a time. This is a distinction that implies neither value judgments nor theoretical arguments. One merely has to take at its face value what the governmental authorities say when they adopt the policy or take the action in question.

A temporary measure is, of course, only a means for gaining time, either because one hopes that the imbalance will go away or an expected event will soon straighten things out, or because one wants to put off a really remedial action for a while. Examples of such temporary measures are the border-tax arrangements by Western Germany from 1968 to 1969, the surcharge on imports to the United Kingdom from 1964 to 1966, and the Interest Equalization Tax on foreign securities in the United States from 1963 on for a supposedly brief period, which has not ended as yet (1971).

In none of these instances did the authorities expect that their measures would restore balance; they expected the measures to tide them over until balance was restored by other means or events.

Lasting or Only Temporary Effects

Policy measures may be expected to have lasting or only temporary effects. This distinction is free from value judgments, but it presupposes theories linking causes and effects under stipulated conditions. One may disagree on such theories, especially because effects are predicted on the basis of assumptions about human behavior as affected by a variety of motivations, expectations, fears and hopes.

The validity of such assumptions may change over time. For example, exhortation and moral suasion may be successful for a time, but less so after people have found out that noncompliance pays; mandatory restrictions and prohibitions may be violated at an increasing rate after people discover that others have gotten away with their infringements; new regulations regarding taxes, tariffs, foreign-exchange transactions, etc., may achieve the intended results only until loopholes are detected and techniques of getting around the legal obstacles are developed.

Thus, even a supposedly permanent policy may have only temporary effects; a measure adopted “for good” may “wear off” after a while.

Sustainable Flows or Exhaustible Stocks

Judgments of the effectiveness of a governmental policy or action depend on assumptions not only regarding human behavior but also regarding several other matters. One important difference is whether the policy or measure acts chiefly on sustainable flows or on exhaustible stocks.

To give an example, an incentive for enlarging the international movement of capital funds may affect the supply of newly saved funds (current saving) and of liquid funds held in given amounts. The former may be in amounts recurring period after period, whereas the latter will be limited to available balances.

The distinction between these effects may be of great importance, but the conclusion in every case will depend both on factual judgments and on theoretical arguments. No value judgments, however, are involved.

Market Forces or Direct Controls

Measures may work either through market forces or through direct controls—and this distinction does have certain connotations in normative or evaluative economics. The bias in favor of economic liberty and “free market” forces and against “regimentation” that has developed from liberal or libertarian philosophy, or the opposite bias found in much bureaucratic and technocratic thinking, may-but need not - be inseparably intertwined with the economic analysis of the effectiveness of the measures in question.

It is possible, I submit, to discuss the effects which specified changes in costs, prices, or disposable incomes are likely to have upon exports or imports of commodities, and to contrast the findings with those of an analysis of the effects of quantitative restrictions (quotas) on trade, without being carried away by any pro-market or anti-market bias. On the other hand, I admit, there may be a correlation among (a) particular ideological prejudices, (b) factual assumptions judged to be realistic, and (c) results derived from the supposedly objective theoretical argument. However strong or weak this correlation may be, the distinction between the two techniques of achieving a desired effect remains significant.

Automatic Processes or Discretionary Actions

Similar ideological prejudices may color the distinction between automatic processes or mechanisms and discretionary actions.

To illustrate, any purchase of foreign currency (directly or indirectly) from the central bank automatically reduces the stock of domestic money unless it is deliberately offset by an extension of domestic loans or purchase of domestic securities by the central bank. On the other hand, changes in discount rates, reserve requirements, credit lines or rationing, tax rates, tariffs, quotas, and so forth, are clearly discretionary measures. There have been biases in favor of or against automatic processes; and many who distrust discretionary policies have preferred mechanisms that operate fully automatically or, as a second-best solution, the adoption of rules that simulate the operation of such mechanisms and leave little to the discretion of the managers.

In the examples given above of discretionary changes I omitted foreign-exchange rates, because changes of exchange rates can be fully automatic (if the monetary authorities do not intervene and allow rates to be fully flexible, determined by “free market” forces), or formula-determined (assuming that any authorities will ever be willing to submit to the dictates of a rigid formula), or discretionary (subject to the judgment of the authorities in charge).

I believe it is possible to use these distinctions without being unduly influenced by political value judgments. Of course, in recommending or choosing the most suitable arrangements one cannot help being influenced by assumptions about the honesty, wisdom, and intelligence of the men in authority as well as by one's value judgments derived from political philosophy.

Universal or Selective, Neutral or Discriminatory

There are two pairs of distinctions that overlap to a considerable extent: universal versus selective measures and neutral versus discriminatory measures. Not all universal measures are neutral in their effects on different sectors of the economy, but one can say, without unreasonable exaggeration, that all selective measures are per se discriminatory (unless one reserves the latter expression for a narrower concept).

The idea in distinguishing universal from selective measures is most easily understood in the case of exchange rates: if a change in the exchange rate applies uniformly to all sales and purchases of foreign currencies regardless of the sources or uses of the funds, regardless of the persons or institutions involved, regardless of the purposes intended or attained, the rate change is universal; it is selective if it applies to specified types of transactions and not to others, for example, to capital movements but not to trade, to imports but not to exports, to some exports but not to others, to luxury imports but not to the import of necessaries, to unlicensed importers but not to licensed ones, etc.

The idea is not so simple in the case of monetary policy. One may say that a reduction in the rate of increase of the domestic money supply qualifies as a universal measure, not a selective one. However, the techniques of implementing the change in the rate of increase may include selective credit controls, arbitrary ceilings to the credit extension of individual banks, interest-rate increases that burden building and construction more than most other activities. Thus, with any of these techniques, the application of the supposedly universal measure becomes selective and discriminatory.

One may still distinguish between measures that are selective and discriminatory by design and those which have non-neutral, discriminatory effects that are not intended but are inherent in the execution or implementation of the measures. There is a significant difference between intentional and innocent deviations from neutrality. After all, no action improving an imbalance of payments can be neutral in its effects upon imports and exports; the charge of selectivity and discrimination (though I admit that the word “charge” reveals an adverse value judgment) can be leveled only against measures which deliberately favor or disfavor particular sectors of the economy, or particular forms of transactions, or particular types of transactors, more than would be necessary under the most universal scheme.

Effective or Ineffective, Efficient or Inefficient

Two more pairs of distinction may be included in this review: between effective and ineffective measures and between efficient and inefficient measures. The first pair refers to the probability that the measures in question have the desired results, if not entirely in the desired magnitude then at least to a large extent. The second pair refers to undesired side-effects of the measures and to comparisons of the social and economic costs of attaining the desired results by alternative techniques.

Needless to say, the second distinction applies only to effective techniques; it relates to the question whether the effects achieved by a particular type of action could have been obtained at lower costs by a different course of action. Both pairs of distinction rest on theoretical arguments about causes and effects, arguments on which experts may disagree. Conclusions concerning effectiveness, however, are usually free from value judgments, whereas conclusions concerning efficiency include evaluative elements in that certain social costs can only be sized up in terms of subjective preferences for different social goals such as individual freedom, total output, economic growth, income distribution, and so forth.

Several of the reviewed distinctions are logically prior to conclusions regarding effectiveness and efficiency. For example, whether certain measures or policies have lasting or only temporary effects, perhaps because they rely upon influences either on sustainable flows or chiefly on exhaustible stocks, these are questions that have to be answered before one can decide the degree of effectiveness. Whether certain measures or policies operate through market forces or through direct controls, by means of automatic mechanisms or of discretionary decisions, and whether they are universal or selective, neutral or discriminatory, these are questions the answers to which bear heavily on the efficiency of any scheme.

The Choice of Definitional Criteria

In my earlier attempts at distinguishing “corrective” actions or events - “compensatory corrections, financial or real” - from “real adjustment,” I was inconsistent in my choice of definitional criteria. At some places I stressed the automaticity of adjustment but included also such deliberate governmental actions as were designed to simulate the automatic processes of adjustment which, under “classical” assumptions, are generated by an imbalance of payments. At other places I put chief emphasis on the universality and neutrality of adjustment measures and on the selectivity and discrimination that characterized discretionary correctives. On one occasion I defined real adjustment by enumerating changes (a) in aggregate demand, (b) in general cost-and-price relations, and (c) in foreign-exchange rates, and left all other developments and measures in the crowded box labeled “correctives.”

I submit that the inconsistencies are minor and well within the tolerance usually accorded to terminological decisions in applied economics. I also submit that the pollution of the concepts in question by value judgments and ideological preconceptions is no worse than that of most other sets of concepts employed (and, indeed, indispensable) in applied economics. However, it may relieve the conscience of some participants in these discussions if we adopt a single definitional criterion that separates correctives from real adjustment without violating the principle of value-neutrality preferred by most economic analysts.

I nominate for election to this position the nonuniformity of “equivalent” or “effective” changes in exchange rates in different international transactions. That is to say, I propose to use the word “corrective” for those measures that are designed to improve an imbalance in payments by effecting non-uniform changes of costs, or prices paid, or net proceeds received, in certain types of international transactions (concerning goods, services, securities, loans, gifts or what not). Such changes are in a sense equivalent to changes produced by the adoption or alteration of multiple exchange rates. These equivalent taxes or bounties on selected international transactions may take many different forms: they may be customs duties (imposed for balance-of-payments reasons), surcharges or subsidies on imports, positive or negative taxes on purchases from or sales to foreigners, quantitative restrictions on imports, exports, loans, or payments, or anything that increases or reduces the cost of selected types of foreign transactions.

Concluding Judgment

If the non-uniform change in the effective exchange rate is taken as the sole criterion, one may admit that some correctives are adopted to remain permanently in force, that they may have lasting effects, may operate through market forces, may be free from the exercise of administrative discretion, and may conceivably be even efficient. Still, the probability is high that they are adopted as temporary makeshifts, are only temporarily effective, are discriminatory, and inefficient. These are judgments to be established by analysis, however, and not by definition.

There is a difference between a presumption and a judgment. If the policy measures of the type characterized here as correctives of an imbalance of payments are, with a high degree of probability, only temporarily effective and relatively inefficient, any proponent of a corrective measure has the burden of proof that the proposed measure will be effective for a sufficiently long period and will not be more costly than alternative measures and, most importantly, will be less costly than a process of real adjustment. Only very strong evidence to this effect can rebut the general presumption of limited effectiveness and doubtful efficiency of corrective measures.

[1]Fritz Machlup, “Real Adjustment, Compensatory Correction, and Foreign Financing of Imbalances in International Payments,” in Richard E. Caves, Harry G. Johnson, and Peter B. Kenen, editors, Trade, Growth and the balance of Payments (Chicago and Amsterdam, 1965), pp. 185–213.

[1]“The Mysterious Numbers Game of Balance-of-Payments Statistics,” in Fritz Machlup, International Payments, Debts, and Gold (New York: 1964) and International Monetary Economics (London: 1966), pp. 140–166.

[1]“Real Adjustment, Compensatory Correction, and Foreign Financing,” op. cit., pp. 211 and 213.