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Page 63
by the U.S. or reduced ones by other countries, or a million and one other changes of the kind that are always occurring.
There are four, and only four ways, in which a country can adjust to such a disturbance and some combination of these ways must be used.
1. U.S. reserves of foreign currencies can be drawn down or foreign reserves of U.S. currency built up. In practice, this means that the U.S. government can let its stock of gold go down, since gold is exchangeable for foreign currencies, or it can borrow foreign currencies and make them available for dollars at official exchange rates; or foreign governments can accumulate dollars by selling U.S. residents foreign currencies at official rates. Reliance on reserves is obviously at best a temporary expedient. Indeed, it is precisely the extensive use by the U.S. of this expedient that accounts for the great concern with the balance of payments.
2. Domestic prices within the U.S. can be forced down relative to foreign prices. This is the main adjustment mechanism under a full-fledged gold standard. An initial deficit would produce an outflow of gold (mechanism 1, above); the outflow of gold would produce a decline in the stock of money; the decline in the stock of money would produce a fall in prices and incomes at home. At the same time, the reverse effects would occur abroad: the inflow of gold would expand the stock of money and thereby raise prices and income. Lowered U.S. prices and increased foreign prices would make U.S. goods more attractive to foreigners and thereby raise the number of dollars they wanted to buy; at the same time, the price changes would make foreign goods less attractive to U.S. residents and thereby lower the number of dollars they wanted to sell. Both effects would operate to reduce the deficit and restore balance without the necessity for further gold flows.
Under the modern managed standard, these effects are not automatic. Gold flows may still occur as the first step, but they will not affect the stock of money in either the country that loses, or the country that gains gold, unless the monetary authorities in the separate countries decide that they should. In every country today, the central bank or the Treasury has the power to offset the influence of gold flows, or to change the

 
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