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stock of money without gold flows. Hence this mechanism will be used only if the authorities in the country experiencing the deficit are willing to produce a deflation, thereby creating unemployment, in order to resolve its payments problem, or the authorities in the country experiencing the surplus are willing to produce an inflation.
3. Exactly the same effects can be achieved by a change in exchange rates as by a change in domestic prices. For example, suppose that under mechanism 2 the price of a particular car in the United States fell by 10 per cent from $ 2,800 to $ 2,520. If the price of the pound is throughout $ 2.80, this means that the price in Britain (neglecting freight and other charges) would fall from £1, 000 to £900. Exactly the same decline in the British price will occur without any change in the United States price if the price of a pound rises from $ 2.80 to $ 3.11. Formerly, the Englishman had to spend £1,000 to get $ 2,800. Now he can get $ 2,800 for only £900. He would not know the difference between this reduction in cost and the corresponding reduction through a fall in the U.S. price without a change in exchange rate.
In practice, there are several ways in which the change in exchange rates can occur. With the kinds of pegged exchange rates many countries now have, it can occur through devaluation or appreciation, which is to say, a governmental declaration that it is changing the price at which it proposes to peg its currency. Alternatively, the exchange rate docs not need to be pegged at all. It can be a market rate changing from day to day, as was the case with the Canadian dollar from 1950 to 1962. If a market rate, it can be a truly free market rate determined primarily by private transactions as the Canadian rate apparently was from 1952 to 1961, or it can be manipulated by government speculation as was the situation in Britain from 1931 to 1939, and in Canada from 1950 to 1952 and again from 1961 to 1962.
Of these various techniques, only the freely floating exchange rate is fully automatic and free from governmental control.
4. The adjustments produced by mechanisms 2 and 3 consist of changes in flows of commodities and services induced

 
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