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Page 67
tariffs or quotas are extra-legal arrangements, such as the ''voluntary" agreement by Japan to restrict textile exports.
Floating Exchange Rates as the Free Market Solution
There are only two mechanisms that are consistent with a free market and free trade. One is a fully automatic international gold standard. This, as we saw in the preceding chapter, is neither feasible nor desirable. In any event, we cannot adopt it by ourselves. The other is a system of freely floating exchange rates determined in the market by private transactions without governmental intervention. This is the proper freemarket counterpart to the monetary rule advocated in the preceding chapter. If we do not adopt it, we shall inevitably fail to expand the area of free trade and shall sooner or later be induced to impose widespread direct controls over trade. In this area, as in others, conditions can and do change unexpectedly. It may well be that we shall muddle through the difficulties that are facing us as this is written (April, 1962) and indeed that we may find ourselves in a surplus rather than deficit position, accumulating reserves rather than losing them. If so, this will only mean that other countries will be faced with the necessity of imposing controls. When, in 1950, I wrote an article proposing a system of floating exchange rates, it was in the context of European payments difficulties accompanying the then alleged "dollar shortage." Such a turnabout is always possible. Indeed, it is the very difficulty of predicting when and how such changes occur that is the basic argument for a free market. Our problem is not to "solve" a balance of payments problem. It is to solve the balance of payments problem by adopting a mechanism that will enable free market forces to provide a prompt, effective, and automatic response to changes in conditions affecting international trade.
Though freely floating exchange rates seem so clearly to be the appropriate free-market mechanism, they are strongly supported only by a fairly small number of liberals, mostly professional economists, and are opposed by many liberals who reject governmental intervention and governmental pricefixing in almost every other area. Why is this so? One reason

 
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