ECONOMIC

system, these demand changes were assumed to take place automatically.Since exchange rates were established by the fixed price of gold in eachcountry, payments equilibrium was assumed to be preserved by the impact ofnet transfers of gold on the domestic money supply and hence on the total demandfor goods and services. However, since most governments today considerit their responsibility to manage domestic demand in accordance withtheir goals of employment and price stability, complete reliance on adjustmentsof domestic demand to keep the balance of payments "balanced" istherefore not considered reasonable. At the same time, any government followinga rational policy will manage its domestic demand with regard to theside effects on international currency markets, since exchange rate movementshave a feedback on domestic economic variables.The methods by which a country equalizes its foreign currency paymentsand its foreign currency receipts affects not only its own economy butforeign economies as well, and hence there needs to be agreement onmutually acceptable conduct. The Bretton Woods Agreement, for instance,established a strong presumption that countries would use domestic derpandmanagement policies for balance of payments adjustment whenever thatwould not be inconsistent with domestic price stabilization and employmentobjectives.Under present arrangements countries are free to decide on their ownthe extent to which demand management policies should contribute toa correction of payments imbalance. Nevertheless, in the course of internationaldiscussions related to current balance of payments developments,the impact of alternative adjustment measures on other countries is explored,and where conflicts are identified, mutually satisfactory solutions can usuallybe worked out.In the future international monetary system, it is generally assumed,countries will continue to have considerable flexibility in choosing amongalternative adjustment measures, and they will also continue to take intoaccount the effect of their policies on other countries. It is expected thatthe adjustment policies of countries will be reviewed by a new committeethat will be established in the International Monetary Fund to be composedof policy-making officials from national capitals.When Should Countries Use Controls?It would also be theoretically possible to have a system in which balanceof payments equilibrium is maintained by government controls overinternational transactions. The Communist countries, in fact, have adoptedsuch a system. In most non-Communist countries an adjustment systembased exclusively on the use of controls would be unacceptablebecause it would entail unwarranted government interference with privatedecisions and because it would lead to inefficient production and consumptionpatterns. In some circumstances, however, governments have found itdesirable to use controls to adjust the balance of payments.204