one then obtaining. in the economic consequences of mr. churchill, a pamphlet he wrote in 1925, keynes argued that restoring the pre - war parity would generate deflation, with adverse effects on income, a contraction in the volume of business and economic crisis. the only way to avoid these effects was to reduce wages and prices. his warning went unheeded. in the opinion of many scholars, the return of all the major countries to the gold standard with a marked revaluation of their currencies was the underlying cause of the great depression of the 1930s. in italy, mussolini ’ s “ quota 90 ” policy for the lira, implemented in an authoritarian fashion in 1926 by the finance minister, giuseppe volpi, despite the misgivings of the governor of the bank of italy, bonaldo stringher, appears to have been influenced by keynes ’ s suggestions. in order to mitigate the deflationary effects, the revaluation of the lira to 90 against sterling, from a market rate that had reached nearly 150, was accompanied by an overall reduction in wages of 20 per cent. in the 1930s the fascist regime also began a large programme of major public works that supported domestic demand. the great depression and the economic crisis that gripped germany were the main cause, together with the country ’ s severe institutional difficulties, of the advent of nazism. the hyperinflation of the early 1920s had been the consequence of the impossibility for the german economy to expand again under the heavy burden imposed by the peace treaty. the second world war was not unrelated to the first, partly owing to the serious errors committed in the 1920s in international relations and monetary policies. the problem of unemployment emerged in all its drama. in the united states economic policy reacted with the new deal and with a monetary policy appropriate to the new conditions. economists laboriously rediscovered the problem of effective demand. the polish economist michael kalecki is among those to be recalled in this regard. but it was keynes who fully developed a new paradigm with which to grasp reality and make economic policy prescriptions. in his general theory of employment, interest and money, the classical vision in which supply generates demand in accordance with say ’ s law is criticized and the causal relationship is reversed : the level of economic activity depends on the demand for consumption and investment. the separation between the units where savings are formed and those where investment is decided, through banking and financial intermediation, renders investment independent of the availability of

agreements. they agreed to establish a monetary order based on fixed exchange rates, together with a process to realign exchange rates in the event of fundamental imbalances. important institutions, such as the international monetary fund, the world bank, and the general agreement on tariffs and trade, were also established. but since the 1970s, many economies have adopted flexible exchange rate regimes. in general, these regimes have been able to coexist with fixed exchange rate regimes, and to do so relatively well in a world of open capital markets. however, the success of this coexistence has depended on countries following " the rules of the game " appropriate to the exchange rate regime they have chosen. what do i mean by " the rules of the game "? for countries with a flexible exchange rate, this means that authorities should actually let their currency float freely. and for countries with a fixed exchange rate, this means that authorities need to run appropriate policies in order for the fixed exchange rate to be sustainable. in particular, countries with a fixed exchange rate and a current account surplus should not " sterilize " the foreign exchange interventions required to fix the value of their currency. by " sterilize, " i mean offsetting the effect of interventions on the domestic money supply. recently, problems have arisen from countries not playing by the rules of the game. certain asian economies have been stifling the inflationary effects of their interventions and, in the process, building up massive amounts of foreign reserves. when countries offset the effects of intervention, they delay domestic economic adjustment. they also delay global adjustment. just as worrying is the fact that such intervention is provoking threats of protectionist measures in certain political quarters. such wrong - headed measures could choke off the growth of international trade that has led to rising incomes worldwide. what is needed today is a renewal of the international monetary order and of the spirit of international co - operation that led to the original agreements. the global economy has changed enormously since the end of world war ii. but the danger posed by global imbalances is a clear reminder that there is still a need for a coherent international monetary order - and a need for countries to play by the rules. in this context, it is also very important that all countries work to protect and enhance the free flow of goods and services by finding a way to break the stalemate at the doha round of trade talks and by strengthening the world trade organization. we all need to support these efforts and