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Page 66
led to resort to all four mechanisms. In the early postwar years, U.S. reserves rose; more recently they have been declining. We welcomed inflation more readily than we otherwise would have when reserves were rising, and we have been more deflationary since 1958 than we would otherwise have been because of the drain of gold. Though we have not changed our official price of gold, our trading partners have changed theirs, and thereby the exchange rate between their currency and the dollar, and U.S. pressure has not been absent in producing these adjustments. Finally, our trading partners used direct controls extensively and, since we instead of they have been faced with deficits, we too have resorted to a wide range of direct interferences with payments, from reducing the amount of foreign goods that tourists can bring in free of dutya trivial yet highly symptomatic stepto requiring foreign aid expenditures to be spent in the U.S., to keeping families from joining servicemen overseas, to more stringent import quotas on oil. We have been led also to engage in the demeaning step of asking foreign governments to take special measures to strengthen the U.S. balance of payments.
Of the four mechanisms, the use of direct controls is clearly the worst from almost any point of view and certainly the most destructive of a free society. Yet in lieu of any clear policy, we have been led increasingly to rely on such controls in one form or another. We preach publicly the virtues of free trade; yet we have been forced by the inexorable pressure of the balance of payments to move in the opposite direction and there is great danger that we shall move still farther. We can pass all the laws imaginable to reduce tariffs; the Administration may negotiate any number of tariff reductions; yet unless we adopt an alternative mechanism for resolving balance of payments deficits, we shall be led to substitute one set of trade impediments for anotherindeed, to substitute a worse set for a better. While tariffs are bad, quotas and other direct interferences are even worse. A tariff, like a market price, is impersonal and does not involve direct interference by government in business affairs; a quota is likely to involve allocation and other administrative interferences, besides giving administrators valuable plums to pass out to private interests. Perhaps worse than either

 
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