The balance of payments constraint

The first of these quotations is a vivid description of the situation during the period of fixed exchange rates and full employment which lasted from 1950 to 1966. During these years it certainly seemed to be the case that macroeconomic policy largely consisted of expanding demand until our foreign exchange reserves came under pressure, and then of restricting demand until unemployment became uncomfortably high, by which time the pressure on the reserves had gone. So, once again, demand could be safely expanded until … This was the famous stop—go cycle. Viewed in retrospect, one wonders why we grumbled about it so much. Unemployment was kept very low, growth was, by our own historical standards if not by those of contemporary Western countries, high, and fluctuations in output were smaller than in many other countries. Hence, although the balance of payments did seem to limit our power to stimulate demand and reduce unemployment, the limitation does not now appear to have been a very serious one.