The following paragraph provides a brief recap of chapters 16 and 18.
In a closed economy transactions are limited by the quantity of money spent on new wealth (MNW) - see chapter 23. In a stable state the quantity of MNW will equal the value of wealth created in each spending round, but as Keynes showed, that wealth value does not necessarily correspond to full employment. This is because workers are also spenders so with too little money there is a Catch 22 situation whereby employers won't hire more workers because there is no demand for the extra products they would produce, and there is no demand for those products because unemployed workers don't have the money to buy them - see chapters 15 and 16. If the quantity of MNW drops, then transactions and product sales drop as well, but not across the board. Non-essentials suffer first, so there isn't an even drop in demand. Some products suffer price drops and the employees of those producers suffer wage cuts and redundancies, but not others, at least not to the same extent. If all suffered equally and at the same time - which they can't - then employment wouldn't change; prices and wages would all fall together until they matched the reduced quantity of MNW but there wouldn't need to be any loss of jobs. With unequal price and wage drops, a balance will eventually be achieved when the level of wealth creation matches the lower amount of MNW, but that level will be less than before because more people are now unemployed and spend less than before. If the quantity of MNW rises then while there is spare capacity product supply increases to take up the excess, but when there is full employment a rise in MNW causes the value of money to fall because the value of wealth created can't rise any more, and there is inflation.
Now, consider an open economy with full employment, floating exchange rates (ignoring reserve currencies for now), free trade, free capital movement and plenty of internationally traded wealth. Barring full employment this is the current situation for the UK.
An important point to make is that the value of money coming into the country always matches the value of money going out because the foreign exchange (forex) market equates these amounts by varying relative currency values - which change continuously so as to bring about this match.
With floating exchange rates, apart from reserve currencies, hardly any domestic currency is owned by people outside the country.
Money created in the country stays in the country but varies in value continuously. This is an important point because we often hear about money flowing into or out of countries, and the term 'free capital movement' strongly implies such flows. Money flowing out of the country means that the home currency is being exchanged for another currency, and that is what is spent abroad, not the home currency. It is of course possible for people to hold foreign notes and coins, so this form of money does enter and leave a country, and forex dealers always hold quantities of the currencies they deal in, but the amounts in both cases are so small as to have negligible effects (remember that we are ignoring reserve currencies for now, these are foreign currencies that are deliberately retained), and in any case only changes in these amounts would show up in cash flows between countries and changes in amounts are normally very much smaller than the amounts themselves.
Most foreign exchange is carried out by banks exchanging currencies with other banks. They each quote both bid and offer prices for the foreign currencies they deal in, where these prices are for other banks, not for anyone else. The difference between the bid and offer prices is the bank's spread, and represents its profit margin. They deal in very large amounts - at least $millions and often $billions. To facilitate transfers all large banks have accounts with the central banks of the major currency countries, where reserves of all currencies pass between them just like BoE reserves pass between UK banks (amounts traded are so large that reserves are the only practical way to handle them), and outstanding net balances are settled periodically just like BoE reserve net balances are settled periodically between UK banks (Ryan-Collins et al. 2012 Section 6.4 & Appendix 3).
If a country's currency drops in value (depreciates) relative to other currencies then the price of its wealth becomes cheaper to buy with other currencies and exports tend to increase, similarly imports become dearer, so some pressure is brought to bear to reverse the decline, but this will only be significant if the country involved responds appropriately by increasing exports and decreasing imports and that isn't always easy, especially in the short term.
In open economies, changes in MNW, as well as reducing or stimulating domestic production, also change the value of the currency, and attempts to stimulate or dampen the economy by the government are countered by offsetting changes in the currency value. What happens in an open economy if the government tries to stimulate it by increasing the quantity of MNW? Let's say the UK government increases MNW by taking it from investment money (MEA - see chapter 23) - it sells bonds and spends the proceeds - then MNW increases, which in a closed economy would stimulate domestic production by the increased spending and hence demand taking up spare domestic capacity. But in an open economy the increased spending isn't just on domestic products, it also causes more products to be imported. Also domestic spending increases demand for products that would have been exported, so imports rise and exports fall, so more sterling is sold and less bought, leading to depreciation of the currency. Therefore whatever stimulus there would have been in a closed economy is now lessened by leakage of spending abroad and the associated drop in currency value. The loss of stimulus is related to the ratio of spending on imports plus spending on products that would have been exported to spending on domestic products.
Alternatively the government might try to stimulate the economy by reducing the bank rate (central bank base rate) so as to encourage banks to reduce their rates. In a closed economy this would normally stimulate demand by reducing the cost of debts and increasing demand for new loans, thereby increasing the money available to spend, but in an open economy it just reduces the demand for the currency as investors sell it to buy currencies that give better returns, so the currency again drops in value as spending is diverted abroad. What happens is that domestic investments that are now paying lower interest rates are sold and the currency exchanged so as to buy better paying foreign investments. As demand for domestic investments drops their prices drop, and as a result the real interest they pay comes back up to match foreign interest rates, and only then will the excess selling of domestic currency stop. The opposite occurs if the government tries to dampen the economy. Hence in a fully open economy government control is very much reduced. In effect the whole world is the market, and government actions affect the whole trading world rather than just the domestic economy, so any impact is considerably less effective domestically.
Because of these factors there are no fully open economies. Governments need to retain a degree of control to avoid domestic unrest. The financial sector does its best to make them as open as possible because that benefits the sector in having wider and deeper markets and therefore more profitable investment opportunities, so the financial sector tries to limit government control and regulation as much as possible.
Keynes understood the dangers of fully open economies, in particular their effect of handing over economic control to the international financial community for their own benefit and taking it away from individual governments for social benefit. That was why his Bretton Woods proposal required governments to maintain fixed exchange rates as far as possible and allowed retention of capital movement controls. It was designed to avoid damaging national sovereignty while stimulating world trade, which is to everyone's benefit, by:
i. use of an international currency, thereby avoiding the severe trade disincentives that accompany variable exchange rates;
ii. ensuring that both creditor and debtor countries strive to maintain trade balance to within reasonable limits; and
iii. discouraging trade barriers.