apolicy instrument for orrecting a balanceof-payments deficit.It must use a combination of devaluation-to obtain an allocation of foreign and domestic demand among domestic and foreign output oonsistent with balance-of-payments equilibrium-and deflation to match aggregate domestic demand with aggregate domestic supply.More generally,it must use a proper oombination of what I have elsewhere called "expenditure-reducing"and"expenditure switching"policies.This general principle is developed at length in James Meade's classic book on The Theory of International Eemomic Policy:The Balance of Payments,though it was known before.It constitutes the third,and most useful,version of the recognition of the and the “absorption approach that is gically satisfactory (though not economically satisfactory from the point of view of the new monetary approach).Unfortunately,Meade his analysis in tems ofshort-rqrimalysis and tha the policy-makers understood the theory as well as he did,both of which characteristics made the book extremely inaccessible to policy-makers and may help to account for the bumbling of British demand-managempolicy after the.Also follwing the tradi of British central banking and moneary theory,Meade identified monetary policy with the fixing of the level of interest rates,a procedure that automatically excludes consideration of the monetary cons devaluation by assuming them to be absorbed by the monetary authorities (this is the reason for the economic objection to the Meade synthesis mentioned abave) Subsequent to the work of Meade and others in the 1950s,the main development in conventional balance-of-payments theory has been the development of the theory of the fiscal monetary policy mix following the.A.Mundell.In the ge era logic of the Meade has tohave two policy instruments if it is toachieve simultaneously internal and external balance (full employment and balance-of-payments qulibrium).In Meade's system,the instrumentsare demand manag ent by fiscal and/or monetary policy,and the exchange rate(wage-price flexibility).What if wage are rigid,and controls and exchange-rate changes are ruled out by national and international political considerations?A solution can still be found,at least in principle,if capital is rate differentials.Fiscal expansion and monetary expansion then have the same effects on the current account,increasing imports and possibly decreasing xports,but the capital:fiscal expansion increse rest rates and attracts a capital inflow while monetary expansion has the opposite effect;it follows that the two policies can be"mixed"so as to achieve a capital acoount surplus or deficit qa to the current acot deficitor the level of full employment of the coonomy. This extesion of the Meade approch has lent infinite mathemtica product differentiation,with little significant improvement in quality of economic product,and will not oncer us further except to note that theoretical investigation of the model led