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The group of writers labelled MMM consists of Metzler (1960 [1973: Chapter 8]), Meade (1951a and 1951b), and Mundell (1968). The first two wrote about 1950. Mundell was later but he winds up this era with the beginnings of what is known as the Mundell-Fleming model. Mundell was concerned primarily with policy recommendations, and the Mundell-Fleming literature, which I do not propose to survey extensively, is generally interpreted as being based on a text-book type of IS-LM analysis. Meade's important work has for some reason dropped out of the limelight; it is, like most of his work, too detailed and “complete” to serve as a useful hand-book. Presumably, also, the fact that it puts “wages and incomes” policy on the same footing as “financial” (fiscal plus monetary) policy made it somewhat alien to the spirit of western, particularly anglophone, economics in the post-World War II period. Metzler's work is on an entirely different analytical footing from the others. It is called “Keynesian” but is much more Wicksellian. Unlike the others, it is not at all policy-oriented. The role of the central bank is simply to buy and sell foreign exchange in order to peg the exchange rate; it is therefore applicable to any regime where exchange rates are fixed and the money supply varies with the balance of payments. I shall deal with it first. Metzler Metzler's contribution in this area is the paper, “The Process of International Adjustment under Conditions of Full Employment: A Keynesian View.” [ABSTRACT FROM AUTHOR]

Early Metzler: formal I An early formal development of the keynesian model of an open economy was Lloyd Metzler's thesis (submitted at Harvard University in 1942), from which two chapters were published in the journals. The two papers are clearly of a piece. They are different in style, as befit the respective journals (Econometrica and the Journal of political economy) at that time, but in content they are both studies in the application of keynesian analysis to the open economy problem. Distinguishing between various channels of adjustment, price (including price level, exchange rate, and interest rate changes), real income effects, and Ohlin-type expenditure and purchasing power changes, he concentrates his attention on the real income effects. While not as rich as Machlup's study (see below) in the proliferation of disturbances and varying institutional environments, Metzler's two papers here are spare and elegant; they constitute a breakthrough in the formal application of the keynesian apparatus to the open economy. The model is the same in both – a simple two-country keynesian model, in which consumption, imports, and investment are lagged functions of income. The first paper treats the issue of the dynamic stability of income in an open economy. If any parameter of the model changes, will income converge to a new equilibrium, given that the current account is unconstrained? If stable, what will the new equilibrium for the two countries, and the world, look like? [ABSTRACT FROM AUTHOR]

Keynes himself, as noted previously, nowhere presented a formal, precise statement of the application of the General theory model to an open economy. The same point is made, inter alia, by Nurkse (1947a [1947:264]). (And when Moggridge (1986: 57) defines the topics Keynes dealt with over time, he adopts a list drawn up by Williamson in the policy-oriented context of monetary reform.) When the applications did come, they came in a great rush. I shall not cover all of them, but have chosen from among them on the basis of seminal or path-breaking quality in the sense of stimulating other research and applications, frequent citations in the literature, or inherent interest. We find the following types of works: Surveys. These include those of Metzler, in his survey article (1948 [1973: Chapter 1]); Iversen (1935), assessing where the theory of international economics is, or should be, going after Keynes; and Haberler (1937 [1941]), in the international portions of Prosperity and depression. Nurkse (1944) includes a brief and cogent summary statement. More narrow direct applications of the keynesian theory to the theory of international adjustment. The two striking examples here are Machlup (1943) and the two Metzler papers (1942a and 1942b [1973: Chapters 10 and 2]), which I have labeled “Early Metzler”. Both are presented as explicitly analytical works, neither econometric nor prescriptive. Both deal with the dynamics of the adjustment; Metzler, in particular, places great emphasis on the discussion of stability conditions. […] [ABSTRACT FROM AUTHOR]

The mechanism of adjustment Keynes's view, as expressed in the Treatise, of the international adjustment mechanism under fixed exchange rates stems from the neoclassical preoccupation with the importance of the rate of interest and its impact on both the capital and current accounts. And it is Keynesian in its emphasis on the macroeconomic relationships. The inherited wisdom is difficult, he argues, to define and delineate. No systematic treatment of the subject exists in the English language, so far as I am aware. You will search in vain the works of Marshall, Pigou, Taussig or Irving Fisher. Even Professor Cassel's treatment, which is somewhat fuller, does not examine the train of causation in any detail. Mr. Hawtrey has a little more to say; but he is somewhat unorthodox on this matter and cannot be quoted as an exponent of the accepted doctrine. There remains, however, one outstanding attempt at a systematic treatment, namely Knut Wicksell's Geldzins und Güterpreise, published in German in 1898, a book which deserves more fame and much more attention than it has received from English-speaking economists. I think his position can best be classified as a Wicksellian macroeconomic theory combined with a Marshall-Lerner type of analysis, involving real adjustments, relative price changes, elasticities, and non-traded goods. [ABSTRACT FROM AUTHOR]

A brief summary of the highlights of the nineteenth century will serve as a background to later developments. I draw heavily on secondary sources, Fetter (1965), O'Brien (in his fascinating introduction to The correspondence of Lord Overstone, 1971: 70–82) and Viner (1937). The first two do not concentrate specifically on international considerations, but then the early monetary discussions distinguished less than did later ones between closed and open economy analysis. This justifies the muted distinction made by writers such as Fetter and O'Brien (and even, to a certain extent, Viner). I can think of several reasons for this: The openness of the British economy, which led naturally to the assumption that one was dealing with an open economy model. By contrast, the American economy (whence much of the later discussion issued) was, at least until recently, relatively closed. The institutional differences: throughout most of the nineteenth century, a metallic standard meant that bank notes were convertible into gold (and/or silver) at will, whether internally or externally. Thus, issues of the integrity and convertibility (into metal) of the liabilities of either the central or private banks were essentially independent of who was demanding the specie or bullion and what they planned to do with it. Bagehot indeed did distinguish between internal and external drains, but this came later, towards the end of the nineteenth century. Most of the literature I shall deal with here is British. [ABSTRACT FROM AUTHOR]