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tral banks, governments, and residents hold large funds in the United States in the form of deposit accounts or U.S. securities that can be readily sold for dollars. At any time, the holders of these balances can start a run on the U.S. Treasury by trying to convert their dollar balances into gold. This is precisely what happened in the fall of 1960, and what is very likely to happen again at some unpredictable date in the future (perhaps before this is printed). |
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The two problems are related in two ways. In the first place, as for a bank, income account difficulties are a major source of loss of confidence in the ability of the U.S. to honor its promise to sell gold at $ 35 an ounce. The fact that the U.S. has in effect been having to borrow abroad in order to achieve balance on current account is a major reason why holders of dollars are interested in converting them into gold or other currencies. In the second place, the fixed price of gold is the device we have adopted for pegging another set of pricesthe price of the dollar in terms of foreign currenciesand flows of gold are the device we have adopted for resolving ex ante discrepancies in the balance of payments. |
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Alternative Mechanisms for Achieving Balance in Foreign Payments |
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We can get more light on both of these relations by considering what alternative mechanisms are available for achieving balance in paymentsthe first and in many ways the more fundamental of the two problems. |
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Suppose that the U.S. is roughly in balance in its international payments and that something comes along which alters the situation by, let us say, reducing the number of dollars that foreigners want to buy compared to the number that U.S. residents want to sell; or, looking at it from the other side, increasing the amount of foreign currency that holders of dollars want to buy compared to the amount that holders of foreign currency want to sell for dollars. That is, something threatens to produce a "deficit" in U.S. payments. This might result from increased efficiency in production abroad or decreased efficiency at home, increased foreign aid expenditures |
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