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Eliminating U.S. Restrictions on Trade |
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A system such as that just outlined would solve the balance of payments problem once and for all. No deficit could possibly arise to require high government officials to plead with foreign countries and central banks for assistance, or to require an American President to behave like a harried country banker trying to restore confidence in his bank, or to force an administration preaching free trade to impose import restrictions, or to sacrifice important national and personal interests to the trivial question of the name of the currency in which payments are made. Payments would always balance because a pricethe foreign exchange ratewould be free to produce a balance. No one could sell dollars unless he could find someone to buy them and conversely. |
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A system of floating exchange rates would therefore enable us to proceed effectively and directly toward complete free trade in goods and servicesbarring only such deliberate interference as may be justified on strictly political and military grounds; for example, banning the sale of strategic goods to communist countries. So long as we are firmly committed to the strait jacket of fixed exchange rates, we cannot move definitively to free trade. The possibility of tariffs or direct controls must be retained as an escape valve in case of necessity. |
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A system of floating exchange rates has the side advantage that it makes almost transparently obvious the fallacy in the most popular argument against free trade, the argument that "low" wages elsewhere make tariffs somehow necessary to protect "high" wages here. Is 100 yen an hour to a Japanese worker high or low compared with $ 4 an hour to an American worker? That all depends on the exchange rate. What determines the exchange rate? The necessity of making payments balance; i.e., of making the amount we can sell to the Japanese roughly equal to the amount they can sell to us. |
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Suppose for simplicity that Japan and the U.S. are the only two countries involved in trade and that at some exchange rate, say 1,000 yen to the dollar, Japanese could produce every single item capable of entering into foreign trade more cheaply than the U.S. At that exchange rate the Japanese could sell |
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