Ill

THE RETURN TO GOLD

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it also means that this method is a most rapidand powerful corrective of real disequilibria inthe balance of international payments arisingfrom whatever causes, and a wonderful pre-ventive in the way of countries which are in-clined to spend abroad beyond their resources.

Thus when there are violent shocks to thepre-existing equilibrium between the internaland external price levels, the pre-war method islikely to break down in practice, simply becauseit cannot bring about the readjustment ofinternal prices quick enough. Theoretically, ofcourse, the pre-war method must be able tomake itself effective sooner or later, providedthe movement of gold is allowed to continuewithout restriction until the inflation or defla-tion of prices has taken place to the necessaryextent. But in practice there is usually a limitto the rate and to the amount by which theactual currency or the metallic backing for itcan be allowed to flow abroad. If the supplyof money or credit is reduced faster thansocial and business arrangements allow pricesto fall, intolerable inconveniences result.

(iii) The Restoration of a Gold Standard

Our conclusions up to this point are, there-fore, that, when stability of the internal pricelevel and stability of the external exchanges areincompatible, the former is generally prefer-able; and that on occasions when the dilemmais acute the preservation of the former at the