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change rates have frequently been associated with financial and economic instabilityas, for example, in hyperinflations, or severe but not hyperinflations such as have occurred in many South American countries. It is easy to conclude, as many have, that floating exchange rates produce such instability. |
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Being in favor of floating exchange rates does not mean being in favor of unstable exchange rates. When we support a free price system at home, this does not imply that we favor a system in which prices fluctuate wildly up and down. What we want is a system in which prices are free to fluctuate but in which the forces determining them are sufficiently stable so that in fact prices move within moderate ranges. This is equally true of a system of floating exchange rates. The ultimate objective is a world in which exchange rates, while free to vary, are, in fact, highly stable because basic economic policies and conditions are stable. Instability of exchange rates is a symptom of instability in the underlying economic structure. Elimination of this symptom by administrative freezing of exchange rates cures none of the underlying difficulties and only makes adjustments to them more painful. |
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The Policy Measures Necessary for a Free Market in Gold and Foreign Exchange |
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It may help bring out in concrete terms the implications of this discussion if I specify in detail the measures that I believe the U.S. should take to promote a truly free market in both gold and foreign exchange. |
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1. The U.S. should announce that it no longer commits itself to buy or sell gold at any fixed price. |
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2. Present laws making it illegal for individuals to own gold or to buy and sell gold should be repealed, so that there are no restrictions on the price at which gold can be bought or sold in terms of any other commodity or financial instrument, including national currencies. |
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3. The present law specifying that the Reserve System must hold gold certificates equal to 25 per cent of its liabilities should be repealed. |
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