by Machlup
[Front Matter and Publication Details]: Title page, copyright information, and publication details for Fritz Machlup's 'International Payments, Debts, and Gold', published in 1964. [Acknowledgments and Preface]: Machlup acknowledges previous publishers and colleagues, then provides a preface outlining the book's scope. He explains that the essays cover monetary international economics, specifically the balance of payments, devaluation, gold reserves, and the transfer problem, noting that he chose to reproduce older essays with minimal changes to preserve the historical record. [Table of Contents and Lists of Illustrations]: Comprehensive table of contents and lists of graphic illustrations, tables, and T-account models. It outlines the five parts of the book: Foreign Exchange, Devaluation, Gold and Foreign Reserves, Reform Plans, and Capital Movements. [Part One Introduction: Foreign Exchange and Balance of Payments]: Introduction to Part One, providing a preview of Chapters I through VII. Machlup introduces major themes, including the distinction between 'needs' and 'economic demand', the political nature of 'program balances', and the methodological issues in balance-of-payments statistics (the 'numbers game'). [Chapter VII: The Mysterious Numbers Game of Balance-of-Payments Statistics - Introduction and Section A]: Machlup introduces the application of simple curve analysis to the theory of foreign exchanges, arguing that excessive specialization has led to a gap between economic theory and applied fields. He outlines a conceptual scheme for analyzing the foreign-exchange market based on supply and demand, initially simplifying the model to two countries and focusing exclusively on commodity trade while abstracting from gold and capital movements. The section establishes that under these restricted conditions, exports and imports must balance logically, with the exchange rate determined by the intersection of downward-sloping demand and upward-sloping supply curves. [Section B: Elasticities in Commodity Trade]: This section examines the factors determining the elasticities of supply and demand in the foreign-exchange market when transactions result from commodity trade. Machlup discusses how trade restrictions like quotas and tariffs, as well as the presence of competing foreign products and potential export articles, influence these elasticities. He explores the 'abnormal' case of a negatively inclined supply curve (backward-rising), which can occur if foreign demand for exports is inelastic, and compares its effects on exchange rates and trade volume to 'normal' positively inclined curves. [Section C: Capital Movements, Unilateral Transfers, and Payments for Services]: Machlup expands the model to include long-term capital movements, unilateral payments (like war tributes or remittances), and invisible services. He demonstrates how a capital export creates an additional demand for foreign exchange, leading to a higher exchange rate, decreased commodity imports, and increased commodity exports. The section also critiques the purchasing power parity theory, acknowledging its historical relevance during high inflation periods while maintaining that exchange rates can shift due to tastes or capital flows even without changes in monetary circulation. [Section D: Gold Movements, Gold Standard, and Pegged Exchange Rates]: This section introduces international gold movements and the mechanisms of the gold standard, where monetary authorities or stabilization funds maintain fixed exchange rates. Machlup explains how gold arbitrage creates infinite elasticity at the gold points and analyzes the resulting shifts in the balance of payments. He emphasizes the 'automatic' effects on domestic monetary circulation—where gold outflows lead to income deflation and gold inflows to inflation—and discusses how Exchange Stabilization Funds can 'sterilize' these effects by borrowing from the public rather than the central bank. [Section E: Exchange Speculation and Interest Rates]: The final section of the chunk explores the role of private pegging by commercial banks and the impact of international capital flows on interest rates. Machlup presents a paradoxical case where a 'favorable' balance of payments (capital inflow) can actually raise domestic interest rates if the funds used to purchase the foreign exchange are borrowed from the market rather than created by the central bank. He concludes by discussing the role of expectations in short-run analysis, noting that erratic speculation can make standard supply and demand curves shift so rapidly that short-run theoretical analysis becomes nearly impossible. [Misunderstandings in the Theory of Foreign Exchanges]: Machlup critiques the naive misunderstanding that the statistical balance of international payments directly represents the supply and demand of foreign exchange. Using a strawberry market analogy, he explains that observed transactions only represent single points of intersection and fail to distinguish between spontaneous and induced changes or shifts in the underlying curves. [Elasticity Pessimism in International Trade: Overestimation of Required Elasticities]: This section addresses 'elasticity pessimism,' the belief that international trade elasticities are too low for currency depreciation to be effective. Machlup argues that the 'critical value' (where the sum of demand elasticities must exceed unity) is often overestimated because theorists ignore finite supply elasticities, neglect the starting point of unbalanced trade, and overlook income effects. He posits that even with low demand elasticities, depreciation can improve the trade balance if supply elasticities are also low. [Underestimation of Actual Elasticities in Statistical Research]: Machlup critiques empirical studies from the interwar period that found low trade elasticities. He identifies several sources of downward bias: the use of aggregative index numbers that overweight goods with low elasticity, the failure to account for simultaneous shifts in demand and supply, technical errors in curve-fitting (least-squares bias), and the neglect of long-run time lags. He concludes that these statistical 'measurements' are likely significant underestimations of true market responsiveness. [Three Concepts of the Balance of Payments: Market, Programme, and Accounting]: Machlup distinguishes between three often-confused meanings of the 'balance of payments.' The Market Balance (ex ante) describes effective supply and demand at specific exchange rates. The Programme Balance (ex ante) represents a nation's 'needs' or targets for planning and negotiation, often independent of price. The Accounting Balance (ex post) is a necessarily balancing record of past transactions. He explains how the 'dollar shortage' is defined differently within each framework and critiques the use of accounting data to make market predictions. [The Impossibility of Using Accounting Balances as Market Indicators]: Machlup argues that an accounting balance of payments cannot indicate the state of the market balance because identical accounting results can stem from vastly different economic conditions, such as stable markets, flexible exchange rates, or government rationing. He critiques the International Monetary Fund's attempt to bridge this gap through the concept of 'Compensatory Official Financing,' noting the difficulty in distinguishing between autonomous transactions and those induced by balance-of-payments pressures. [Critique of Compensatory Official Financing and Program Balances]: The author examines inconsistencies in how the IMF applies the concept of compensatory financing to aid programs like UNRRA and ERP. He argues that these funds often address 'program balances' (needs for development or relief) rather than 'market balances' (excess demand for foreign exchange), leading to circular reasoning where deficits are defined by the financing provided rather than market pressures. [Conclusions on the Three Concepts of Balance of Payments]: Machlup concludes by distinguishing between market, programme, and accounting balances, showing that a deficit in one can coexist with a surplus in another. He argues that 'dollar shortages' are often misdiagnosed because observers fail to identify which concept they are using, and that persistent market deficits require price and exchange rate adjustments rather than just loans. [Dollar Shortage and Disparities in the Growth of Productivity]: This section begins a detailed critique of the theory that disparities in productivity growth between the US and the rest of the world cause a chronic dollar shortage. Machlup reviews the contributions of Balogh, Williams, and Hicks, distinguishing between those who blame 'lax' monetary policy and those who point to 'structural' conditions. He specifically examines Hicks's model of 'import-biased' improvements as a potential cause of real income loss in stagnant countries. [The Role of Equilibrium in Economic Analysis]: Machlup provides a methodological 'cleaning job' for the concepts of equilibrium and disequilibrium. He defines equilibrium as a mental tool—a 'useful fiction'—used to isolate causes and effects in models. He warns against the 'fallacy of misplaced concreteness' (treating abstract equilibrium as an observable historical fact) and 'disguised politics' (embedding social goals like full employment into the definition of equilibrium). [Comments on the Balance of Payments: Mechanism and Discipline]: Machlup distinguishes between the 'mechanism' (automatic effects on reserves), the 'rules of the game' (central bank policy norms), and 'discipline' (austerity in the face of deficits). He applies these to US history, noting how the dollar's role as a key currency complicates the definition of a 'deficit' when foreign central banks desire to hold dollar balances as reserves. [The Mysterious Numbers Game of Balance-of-Payments Statistics]: Machlup demonstrates how balance-of-payments statistics are subject to constant revision and reinterpretation based on changing economic theories. By examining the reported US balance for 1951 across twenty different sources, he shows how a $5 billion surplus was eventually transformed into a $1 billion deficit as the 'dollar shortage' theory gave way to concerns about US gold outflows. He argues that statistical 'facts' are often dictated by the prevailing theoretical preconceptions of the time. [Statistical Methods and the IMF's Shift in Balance Reporting]: This segment provides detailed statistical tables comparing different methods used by the UN and U.S. Department of Commerce to calculate the U.S. balance of payments for 1959 and 1960. It highlights how the International Monetary Fund (IMF) moved away from subjective terms like 'compensatory financing' to avoid analytical bias, illustrating that historical surplus/deficit figures are often artifacts of the specific accounting techniques employed. [Juggling the Items Between Balance and Offsets]: Machlup explains the 'mysterious numbers game' of balance-of-payments accounting, where items are shifted between the 'balance' and 'offsets' (above or below the line). Through a seven-step illustration using 1951 data, he demonstrates how a $5 billion surplus can be transformed into a nearly $1 billion deficit simply by reclassifying military items, private remittances, and various capital movements. [Classification Challenges and the Promotion of Errors and Omissions]: The author discusses the complexities of categorizing capital movements, such as distinguishing between private bank and non-bank capital. He specifically notes the reclassification of 'errors and omissions' to 'unrecorded transactions,' moving them above the line when they became too large to ignore as mere statistical noise. This leads to the distinction between the 'basic' (hard-core) balance and the 'overall' balance. [Distinctions Without Much Difference: The Peter and Paul Case]: Using an imaginary case of two brothers (Peter and Paul) moving funds from the U.S. to Germany, Machlup illustrates the arbitrariness of balance-of-payments reporting. Depending on the method used (A, B, or C), the same transaction can result in no deficit, a $1 million deficit, or a $2 million deficit. He quotes Walter R. Gardner to emphasize how inconsistent these concepts are with common-sense understanding. [Modern Presentations and the Debate on Autonomous vs. Compensatory Transactions]: Machlup critiques the efforts of Gardner and Triffin to define 'correct' presentations of the balance of payments. He argues that the distinction between 'autonomous' and 'compensatory' transactions is a matter of theoretical interpretation rather than objective fact. He highlights how Triffin's own calculations for the 1960 deficit changed significantly upon re-analysis, reinforcing the idea that no single 'true' balance exists. [The Sense of It All: Re-evaluating the Purpose of Balance-of-Payments Accounting]: In this concluding section of Part One, Machlup 'debunks' the idea of a single true balance of payments. He explains why statistical arrangements cannot definitively explain market pressures or measure liquidity, especially in a complex world of reserve currencies and central-bank interventions. He suggests that the most useful, though limited, arrangement is one that simply tracks changes in foreign assets and liabilities. [Part Two: The Effects of Devaluation - Introduction and Preview]: This introduction to Part Two distinguishes between 'devaluation' (government action) and 'depreciation' (market effect). Machlup previews the upcoming chapters which adjudicate between the 'elasticities-approach' and the 'income-absorption-approach' to devaluation. He emphasizes the necessity of specific assumptions regarding monetary policy and introduces the concept of 'real intake' as a supplement to real income and output. [Chapter IX: The Terms-of-Trade Effects of Devaluation upon Real Income and the Balance of Trade - Introduction]: Introductory metadata for Chapter IX, detailing its original publication in Kyklos (1956) and its focus on the relationship between devaluation, real income, and the trade balance. [Chapter VIII: Relative Prices and Aggregate Spending in the Analysis of Devaluation]: Machlup evaluates two competing approaches to devaluation: the traditional relative-prices (elasticities) approach and Sidney Alexander's aggregate-spending (income-absorption) approach. He critiques the deficiencies of the relative-prices approach, such as its reliance on fixed cost conditions and stable incomes. He then provides a detailed breakdown of Alexander's model, including the idle-resources effect, terms-of-trade effect, and direct absorption effects like the cash-balance and money-illusion effects. Machlup argues that Alexander's neglect of relative prices leads to errors, particularly regarding resource reallocation and substitution effects. He concludes that both approaches are complementary and necessary for a complete analysis, emphasizing that monetary policy and credit creation are critical variables often left implicit in aggregative models. [Chapter IX: The Terms-of-Trade Effects of Devaluation Upon Real Income and the Balance of Trade]: Machlup explores the complex relationship between currency devaluation, the terms of trade, and national income. He reviews the evolution of economic thought on whether devaluation worsens the terms of trade, citing thinkers like Haberler, Robinson, and Alexander. He distinguishes between various terms-of-trade concepts, arguing that the 'commodity terms of trade' is often insufficient because devaluation simultaneously affects resource allocation and factor productivity. Machlup critiques Alexander's 'equality rule'—the idea that a deterioration in terms of trade initially reduces the trade balance and real income by the same amount—by demonstrating that this depends on whether absorption or the foreign balance adjusts first. He uses an analogy of a free-lance writer to show that a deterioration in the terms of trade is often a necessary condition for a net increase in total income. [Geometric Analysis of Output Gains and Terms-of-Trade Losses]: Machlup uses geometric diagrams and numerical analogies to distinguish between the gains from increased output (idle-resources effect) and the losses from price reductions (terms-of-trade effect). He argues that focusing solely on the deterioration of terms of trade is misleading if it ignores the resource-reallocation effect, which can lead to a net increase in real income despite lower export prices. [Balance of Trade and Resource Reallocation Benefits]: This section explores the relationship between terms-of-trade effects and the balance of trade, emphasizing that an unfavorable change in the former does not necessarily imply a worsening of the latter. Machlup outlines three conditions under which currency devaluation and resource reallocation can increase national product: the removal of direct controls, the reduction of price distortions, and the conservation of foreign-exchange reserves. [The Dynamics of Exchange Reserves and Resource Allocation]: Machlup discusses the conservation of foreign-exchange reserves as a benefit of devaluation, distinguishing between autonomous and accommodating capital imports. He argues that while static theory might not justify one resource allocation over another, dynamic theory shows that allocations requiring a continuous loss of reserves are unsustainable, making the long-run reallocation effect of devaluation positive. [Conceptual Distinctions: Real Output, Intake, and Income]: Machlup defines and distinguishes between three core concepts: real domestic output (production), real intake (domestic use/absorption), and real income (earnings accounting for foreign assets). He critiques existing terminology like 'standard of living' or 'absorption' and explains how the difference between output and intake constitutes the balance of trade, while the difference between output and income relates to terms-of-trade effects and transfers. [Primary and Secondary Burdens of Devaluation]: The author analyzes the 'primary burden' (reduction in real intake due to improved trade balance) and the 'secondary burden' (reduction in real income due to worsened terms of trade). He highlights the conceptual and operational difficulties in isolating these burdens, especially when changes in output or employment occur simultaneously. [Income Propensities and Spending Behavior]: Machlup questions which 'income' variable (output, intake, or income) actually drives spending, consumption, and investment. Through hypothetical cases involving exporters and banks, he demonstrates that the incidence of income changes—who feels the loss and in what form—determines the behavioral response, cautioning against oversimplified algebraic models that treat 'Y' as a uniform variable. [Appendix: Numerical Tests of Terms-of-Trade Effects]: This appendix provides two detailed numerical cases to test the relationship between terms-of-trade deterioration and real national income. It demonstrates that a deterioration in terms of trade does not 'normally' worsen the trade balance and reduce real income by the same amount, highlighting the complexities of using price index deflators for foreign balances. [Part Three: Gold and Foreign Reserves - Introduction and Preview]: Machlup introduces the third part of the book, which focuses on gold and foreign reserves. He previews four chapters: two on the political and policy aspects of gold (including a 1940 critique and a 1960 proposal to reduce the gold price) and two theoretical essays on the concepts of international liquidity and the demand for foreign reserves. [Chapter XIII: Further Reflections on the Demand for Foreign Reserves]: This chapter, written between 1961-1962, explores the theoretical demand for foreign reserves and reflects on historical gold policies. Machlup revisits a 1940 discussion with Hardy and Neisser regarding the 1933-34 dollar devaluation, arguing it was a mistake based on fallacious motives, though subsequent gold imports provided some benefits to national income at low real cost. He analyzes the status of gold as an international means of payment, the impossibility of other nations abandoning it if the US retains it, and the domestic implications of gold circulation and public debt. The section concludes with a 1963 postscript noting that his earlier forecasts of reserve adequacy were upended by the US balance of payments shift from 'dollar shortage' to 'dollar glut' after 1958. [Chapter XI: A Proposal to Reduce the Price of Gold]: Machlup proposes a contrarian policy: reducing the dollar price of gold in installments to dampen speculation and reverse the 'gold liquidity preference.' He argues that expectations of devaluation cause a drain on reserves, whereas a scheduled reduction would force hoarders (including Russia and South Africa) to sell gold back to monetary authorities. This would increase international liquidity by shifting gold from speculative hoards to transactions reserves. He emphasizes that this plan requires international cooperation and would lower interest rates by increasing the supply of liquid funds, though it is not a substitute for sound domestic financial policy. [Chapter XII: The Fuzzy Concepts of Liquidity, International and Domestic]: A semantic and theoretical critique of the term 'liquidity' in economic discourse. Machlup argues that 'liquidity' has become a catch-all term that obscures more than it reveals, often confusing a quality of assets with a measurable quantity of money. He provides an exhaustive taxonomy of possible sources, uses, and subjects of 'paying capacity' to demonstrate the term's ambiguity. Crucially, he argues that liquidity is often non-additive; for example, adding the sight-liabilities of banker-countries to the gold reserves of depositor-countries creates a misleading picture of 'aggregate international liquidity.' He also critiques the application of Keynesian 'liquidity preference' to central bank behavior, noting that official reserve holding is a matter of discretionary political policy rather than a stable market function. [Chapter XIII: Further Reflections on the Demand for Foreign Reserves (Continued)]: Machlup analyzes the 'need' for international reserves under different institutional frameworks. He challenges the 'needs of trade' theory, which suggests reserves must grow proportionately with trade volume, using inventory theory to suggest requirements likely grow only by the square root of transactions. He distinguishes between reserves held for temporary disturbances and those used to sustain chronic overspending under modern full-employment policies. A significant portion of the essay explores the possibility of decentralized, private foreign-exchange reserves under a system of flexible exchange rates. He argues that while private holding might ignore 'external benefits' (like labor stability), it avoids the dysfunctional accumulation and political mismanagement inherent in official reserves. He concludes by redefining 'demand' for reserves in strictly economic terms as a willingness to sacrifice real goods for liquidity. [Chapter XIII (Conclusion) and Part Four Introduction]: Machlup concludes his reflections on the demand for foreign reserves by noting that the direction of his inquiry consistently points toward the problems of private reserve holding. He then introduces Part Four of the volume, which focuses on reform plans for the international monetary system. He notes the rapid pace of change in the field, necessitating a significantly expanded edition of his survey to include discussions of 37 new publications and various new variants of reform plans spawned within a single year. [Preview and Major Themes of International Monetary Reform]: Machlup provides a preview of Chapter XIV, outlining five major classes of reform plans for the international monetary system. He discusses the historical resistance to international central banking, drawing parallels to the initial opposition to national central banks. A major theme is the critique of including borrowing facilities in the calculation of world reserves, arguing that 'borrowable' funds are fundamentally different from owned assets and that conflating them confuses the issue of international liquidity. [Earlier Version and Record of Changes for Chapter XIV]: A detailed bibliographic record of the evolution of Chapter XIV from its 1961 origins to the 1964 revised edition. It lists translations and enumerates ten specific structural and content changes, including expanded discussions on the multiple-reserve-currency standard and various institutional plans for creating international reserves (e.g., Bernstein, Stamp, and Maudling plans). [Plans for Reform of the International Monetary System: Introduction and The Present System]: The beginning of Chapter XIV defines the gold-exchange standard and the role of the International Monetary Fund (IMF). Machlup distinguishes between gold reserves and foreign-exchange holdings (primarily dollar and sterling), and explains the technical nature of IMF drawing rights. He differentiates between the 'gold-tranche' (automatic) and 'credit-tranche' (conditional) positions, noting that only the former is typically viewed as a true reserve asset. [Statistical Analysis of World Reserves (1949-1962)]: This section provides a quantitative analysis of the growth and distribution of international reserves between 1949 and 1962. It includes Table XIV-1 and Table XIV-2, showing the shift from gold to foreign-exchange holdings (specifically U.S. dollars) and the changing distribution of reserves among the eleven major financial powers. Machlup highlights the decline in U.S. gross reserves and the sharp increases in the reserves of Italy, France, and Germany. [Reserve Composition and IMF Operational Mechanics]: Machlup analyzes the 'gold saturation' or reserve-asset preferences of different nations and provides a primer on IMF terminology and operations. He explains the mechanics of quotas, subscriptions, and the process by which the IMF participates in reserve creation by circulating previously created currencies. He critiques the practice of adding drawing rights to total liquidity figures, calling it deceptive because borrowing potentials of non-borrowing countries are economically irrelevant. [Charges Against the Present System: Payments, Adequacy, and Fragility]: Machlup categorizes the criticisms of the current international monetary system into three areas: balance-of-payments difficulties (including speculative 'hot-money' movements), the inadequacy of reserve growth relative to trade, and the fragility of the gold-exchange standard. He notes the 'dollar glut' and the danger of a system collapse similar to 1931. He concludes by introducing a classification of five types of reform plans, ranging from extending the gold-exchange standard to adopting freely flexible exchange rates. [Extension of the Gold-Exchange Standard]: Machlup discusses the potential for the gold-exchange standard to endure through 'muddling through' or by broadening its base to include multiple key-currencies like the German mark or French franc. He introduces the Zolotas Plan, which proposes a 'multi-currency international standard' featuring gold guarantees to protect foreign monetary authorities against devaluation losses. [The Roosa Plan and Multiple-Currency Reserves]: This section examines the Roosa Plan, which initiated the holding of various foreign currencies by the United States as part of its reserves through bilateral 'currency swaps' and 'swaps' with other leading countries. Roosa argues that this multilateralizes the role of key currencies and economizes on gold reserves, though Machlup notes these are bilateral rather than truly multilateral arrangements. [The Lutz Plan and the Risks of Multiple Reserve Currencies]: Friedrich Lutz's endorsement of the multiple-currency standard is analyzed as a way to prevent a shortage of international reserves as world trade grows. Machlup critiques the proposal by drawing parallels to the historical failures of bimetallism, noting that multiple international moneys at fixed exchange rates are susceptible to Gresham's Law and require strict monetary discipline among all issuing nations. [The Posthuma and Bernstein Plans: Standardizing Reserve Composition]: Machlup details the Posthuma and Bernstein plans, which seek to stabilize the multiple-currency system by requiring central banks to hold gold and foreign currencies in fixed proportions. Bernstein's 1963 proposal introduces a 'Reserve Unit'—a composite of eleven currencies—to be held alongside gold, aiming to prevent sudden switches between reserve assets and to ensure all countries are subject to similar monetary discipline. [Mutual Assistance Among Central Banks]: This section explores mechanisms for direct and indirect mutual assistance between central banks, often mediated by the IMF. Machlup compares the Zolotas, Bernstein, and Jacobsson plans, which provide compensatory finance to countries facing short-term capital outflows. He distinguishes between the IMF's role as a credit transfer intermediary in these plans versus a true bank of issue that creates credit. [Theoretical Justification for Compensating Hot-Money Movements]: Machlup provides a theoretical defense for international support specifically targeting speculative 'hot-money' outflows rather than 'basic-balance' deficits. He argues that because speculative funds often come from inactive cash balances, their outflow does not immediately reduce domestic effective demand, making it easier for monetary authorities to avoid inflationary 'offsetting' policies while waiting for confidence to return. [Centralization of Monetary Reserves: The Keynes and Triffin Plans]: Machlup examines proposals for the centralization of world monetary reserves, drawing parallels between national central banking and a potential world central bank. He provides a detailed analysis of the Keynes Plan, focusing on the creation of 'Bancor' through gold sales and overdrafts, and the Triffin Plan, which suggests expanding the IMF into a central-reserve bank with open-market powers. The section highlights the shift from a gold-exchange standard to a system where international deposits serve as primary reserves. [Mechanisms of the Keynes Plan and International Credit Markets]: This segment details the operational mechanics of the Keynes Plan, including the use of quotas, interest charges on both debit and credit balances, and the potential for a 'federal-funds' style international credit market for reserves. Machlup explains how reserve creation under Keynes is tied to clearing deficits and overdrafts, noting that this system does not guarantee secular growth of reserves if member central banks remain conservative and avoid chronic deficits. [The Triffin Plan: Active Reserve Creation and Open-Market Policy]: Machlup contrasts the Triffin Plan with the Keynes Plan, emphasizing Triffin's provision for an expanded IMF (X.I.M.F.) to actively create reserves through open-market purchases of securities. This mechanism is designed to ensure a steady secular growth of international liquidity independent of gold production or national deficits. The plan also addresses the fragility of the gold-exchange standard by converting dollar and sterling balances into interest-bearing, guaranteed IMF deposits. [The Stamp Plan and Development Aid as Reserve Creation]: The Stamp Plan is analyzed as a method of creating international reserves by issuing IMF certificates to underdeveloped countries for use in international trade. Machlup compares this to the Keynes and Triffin models, noting that while Keynes relies on overdrafts and Triffin on gilt-edged securities, Stamp proposes creating liquidity through long-term development loans, effectively linking international monetary reform with global aid. [Variants of Centralization: Day, Angell, and Harrod Plans]: Machlup reviews several other proposals for centralized reserve creation, including the Day Plan (endorsed by the Radcliffe Committee), the Angell Plan (which emphasizes voluntary reserves and gold-value guarantees), and four distinct plans by Roy Harrod. Harrod's proposals range from nonrepayable grants to financing commodity buffer stocks, all aimed at providing massive liquidity to relieve nations of balance-of-payments constraints. [The Maudling and Bernstein Plans: Transitioning to Centralized Reserves]: This segment discusses the Maudling Plan's 'mutual currency account' and Edward Bernstein's 1962 proposals to treat IMF drawing rights as genuine reserves. Machlup argues that Bernstein's plan, if extended to its logical conclusion, would transform the IMF into a reserve-creating central bank by converting potential credit into actual deposit liabilities through periodic quota increases. [Comparative Analysis: Credit Transfer vs. Credit Creation]: Machlup provides a summary table of eleven plans for centralized reserve creation and offers a theoretical distinction between 'credit transfer' (the IMF as an intermediary) and 'credit creation' (the X.I.M.F. as a central bank). Using T-accounts, he demonstrates how these different models affect the total volume of gross and net international reserves and the liquidity positions of member nations. [Increasing the Price of Gold: Theory and Revaluation Effects]: Machlup analyzes the fourth method of augmenting liquidity: increasing the official price of gold. He distinguishes between the up-valuation of existing stocks (a one-time capital gain) and the increase in the value of annual gold production. The text explores techniques for sterilizing revaluation profits and the varying impact on countries based on the composition of their reserves (gold vs. foreign exchange). [The Case for Gold: Rueff, Heilperin, and the Abolition of the Gold-Exchange Standard]: This section focuses on the arguments of Jacques Rueff and Michael Heilperin, who advocate for a higher gold price to abolish the gold-exchange standard and return to a pure gold standard. They argue that revaluation would allow the U.S. and U.K. to repay foreign-held liabilities, eliminating the 'fragility' of the current system. Machlup critiques these views by highlighting the risks of inflation and the difficulty of preventing central banks from expanding credit following a massive increase in reserve values. [Gold Speculation and the Machlup Plan for Price Reductions]: Machlup discusses the psychological impact of gold price changes on hoarders and speculators. He argues that a price increase might encourage expectations of future increases, leading to more hoarding. He proposes his own plan for gradual, periodic *reductions* in the gold price to discourage speculation and force gold out of private hoards into official reserves, thereby increasing liquidity without the risks of revaluation. [Alternative Gold Proposals: Hahn, Dahlberg, and Gradual Appreciation]: The final segment of the chapter reviews various alternative gold-related proposals. These include L. Albert Hahn's suggestion to stop central bank gold purchases from private parties, Arthur Dahlberg's plan to use gold price reductions to increase the velocity of money, and a U.S. Joint Economic Committee minority plan to end the guaranteed purchase price. It concludes with the Miyata-Wonnacott proposal for a pre-announced, gradual *increase* in the gold price at a rate lower than market interest to provide liquidity while avoiding speculative runs. [Freely Flexible Exchange Rates]: Machlup examines the fifth method for solving international monetary problems: freely flexible exchange rates. He contrasts this with fixed and occasionally adjustable systems, arguing that flexible rates remove the need for central bank reserves by allowing market prices to equilibrate supply and demand. The text analyzes the prerequisites for fixed rates—such as the willingness to inflate or deflate for exchange stability—and notes that these are rarely met in modern economies focused on full employment. Machlup discusses the risks of speculation under the 'adjustable peg' system and provides an extensive list of economists supporting flexible rates. He also addresses the 'sovereignty' of credit policy, the potential for increased inflation under flexible regimes, and the future of gold if it were to be demonetized by a lack of central bank support. [Concluding Remarks on International Monetary Reform]: The author concludes his survey of international monetary reform plans, noting that while he avoids blunt value judgments, a rational choice depends on how monetary policy fits with other economic objectives like growth and employment. He mentions temporary solutions like the 'General Arrangements to Borrow' and emphasizes that definitive solutions are unlikely, but reform is necessary to dispel fears of collapse. [Part Five: Capital Movements and the Transfer Problem - Introduction and Preview]: This section introduces Part Five of the volume, focusing on the transfer problem and capital movements. Machlup argues that the transfer problem remains highly relevant, specifically citing the US balance-of-payments situation in 1963. He previews six chapters that cover historical variations (British, French, German, and American), critiques of Hjalmar Schacht's views on reparations, the application of the income-multiplier theorem to transfers, and the causal relationship between capital flows and the trade balance. A central theme is the distinction between the 'budgetary problem' (extracting funds) and the 'transfer problem' (converting those funds into foreign exchange), and the roles of price and income effects in the adjustment process. [Chapter XIX and XX Previews and Major Themes]: Machlup provides a detailed preview of Chapters XIX and XX, focusing on algebraic models of transfer under growth conditions and the causal vs. tautological relationships between capital movements and the trade balance. He summarizes the major themes of Part Five, emphasizing that solving the 'budgetary problem' requires a real reduction in domestic consumption or investment outlays to facilitate transfer. [Earlier Versions and Record of Changes (Chapters XV-XIX)]: A detailed record of the original publication dates, languages, and specific revisions made to the essays in Part Five. It tracks the evolution of Machlup's thought from 1928 to 1963, including his critiques of Schacht and his later application of multiplier techniques to international trade. [Chapter XX: Capital Movements and Trade Balance - Introduction and Historical Variations]: Machlup introduces the transfer problem, examining whether large international payments exhaust reserves or trigger trade balance adjustments. He analyzes four historical variations: Britain (1793–1816) during the Napoleonic Wars, the French indemnity (1871–1875) following the Franco-Prussian War, German reparations (1924–1932) under the Dawes and Young Plans, and the United States' post-WWII foreign remittances (1950–1963). Through statistical comparisons of payments relative to national income and trade volume, he demonstrates that the U.S. case represents an unprecedentedly heavy transfer burden relative to trade volume, despite the initial absence of perceived 'transfer difficulties' due to foreign monetary expansion. [Chapter XVI: Foreign Debts, Reparations, and the Transfer Problem]: Written in 1928, this essay critiques Hjalmar Schacht's alarmist views on German foreign indebtedness. Machlup provides a sequence model to illustrate how capital inflows and outflows automatically affect domestic money circulation, prices, and the trade balance. He argues that the 'transfer problem' is essentially solved if the 'budgetary problem' (raising the funds domestically without credit expansion) is solved, as the resulting contraction in domestic spending naturally generates the necessary foreign exchange. He warns that central bank attempts to 'offset' these natural monetary fluctuations actually impede the transfer process. [Chapter XVII: Transfer and Price Effects]: Machlup responds to Gottfried Haberler's commentary on his transfer theory, specifically addressing the role of price changes. He examines four pessimistic propositions regarding the necessity of sharp price drops, low demand elasticities, wage reductions, and the 'double burden' on income. Machlup argues that the extraction of domestic funds (the budgetary solution) automatically exerts the necessary pressure on prices and wages, meaning no 'second' independent burden is required to effect the transfer. He concludes with a postscript acknowledging his earlier over-reliance on the assumption of perfect wage flexibility. [Chapter XVIII: The Transfer Problem: Income Effects and Price Effects]: This section applies national income multiplier analysis to the transfer problem. Machlup calculates the 'transferable portion' of a levy that can be moved through income effects alone without price changes. He demonstrates that the success of the transfer depends on the marginal propensities to save and import in both the paying and receiving countries. The analysis suggests that while income effects alone rarely achieve a 100% transfer, they significantly reduce the need for drastic price adjustments, especially if the receiving country expands its own disbursements. [Chapter XIX: The Transfer Problem Revisited]: In this retrospective piece, Machlup provides a semantic clarification of terms like 'transfer difficulties,' 'losses,' and 'burdens.' He introduces a new model for transfer under conditions of economic growth, moving away from the stationary models of the 1920s. He derives the 'warranted' rate of domestic primary disbursements in a paying country that is compatible with its transfer obligations, showing how growth in the receiving country can facilitate the transfer without requiring absolute domestic contraction. He identifies various types of economic loss, including terms-of-trade effects and output losses due to wage rigidity. [Chapter XX: Capital Movements and Trade Balance (Theoretical Analysis)]: Machlup provides a rigorous theoretical classification of international capital movements. He distinguishes between 'autonomous' (spontaneous) and 'induced' (accommodating) capital flows, explaining how the banking system absorbs shocks in a pegged exchange rate system. He addresses the 'chicken-or-egg' controversy regarding whether capital movements cause trade balances or vice versa, concluding that while net capital flow is tautologically equal to the trade balance, spontaneous capital movements are often the causal force. He categorizes 14 types of spontaneous capital exports and imports and analyzes their varying impacts on primary domestic disbursements. [Index]: Comprehensive alphabetical index for 'International Payments Debts and Gold', covering core topics (balance of payments, gold standard, transfer problem), key concepts (elasticities, liquidity, multiplier), and cited thinkers (Keynes, Ricardo, Viner, Triffin).
Title page, copyright information, and publication details for Fritz Machlup's 'International Payments, Debts, and Gold', published in 1964.
Read full textMachlup acknowledges previous publishers and colleagues, then provides a preface outlining the book's scope. He explains that the essays cover monetary international economics, specifically the balance of payments, devaluation, gold reserves, and the transfer problem, noting that he chose to reproduce older essays with minimal changes to preserve the historical record.
Read full textComprehensive table of contents and lists of graphic illustrations, tables, and T-account models. It outlines the five parts of the book: Foreign Exchange, Devaluation, Gold and Foreign Reserves, Reform Plans, and Capital Movements.
Read full textIntroduction to Part One, providing a preview of Chapters I through VII. Machlup introduces major themes, including the distinction between 'needs' and 'economic demand', the political nature of 'program balances', and the methodological issues in balance-of-payments statistics (the 'numbers game').
Read full textMachlup introduces the application of simple curve analysis to the theory of foreign exchanges, arguing that excessive specialization has led to a gap between economic theory and applied fields. He outlines a conceptual scheme for analyzing the foreign-exchange market based on supply and demand, initially simplifying the model to two countries and focusing exclusively on commodity trade while abstracting from gold and capital movements. The section establishes that under these restricted conditions, exports and imports must balance logically, with the exchange rate determined by the intersection of downward-sloping demand and upward-sloping supply curves.
Read full textThis section examines the factors determining the elasticities of supply and demand in the foreign-exchange market when transactions result from commodity trade. Machlup discusses how trade restrictions like quotas and tariffs, as well as the presence of competing foreign products and potential export articles, influence these elasticities. He explores the 'abnormal' case of a negatively inclined supply curve (backward-rising), which can occur if foreign demand for exports is inelastic, and compares its effects on exchange rates and trade volume to 'normal' positively inclined curves.
Read full textMachlup expands the model to include long-term capital movements, unilateral payments (like war tributes or remittances), and invisible services. He demonstrates how a capital export creates an additional demand for foreign exchange, leading to a higher exchange rate, decreased commodity imports, and increased commodity exports. The section also critiques the purchasing power parity theory, acknowledging its historical relevance during high inflation periods while maintaining that exchange rates can shift due to tastes or capital flows even without changes in monetary circulation.
Read full textThis section introduces international gold movements and the mechanisms of the gold standard, where monetary authorities or stabilization funds maintain fixed exchange rates. Machlup explains how gold arbitrage creates infinite elasticity at the gold points and analyzes the resulting shifts in the balance of payments. He emphasizes the 'automatic' effects on domestic monetary circulation—where gold outflows lead to income deflation and gold inflows to inflation—and discusses how Exchange Stabilization Funds can 'sterilize' these effects by borrowing from the public rather than the central bank.
Read full textThe final section of the chunk explores the role of private pegging by commercial banks and the impact of international capital flows on interest rates. Machlup presents a paradoxical case where a 'favorable' balance of payments (capital inflow) can actually raise domestic interest rates if the funds used to purchase the foreign exchange are borrowed from the market rather than created by the central bank. He concludes by discussing the role of expectations in short-run analysis, noting that erratic speculation can make standard supply and demand curves shift so rapidly that short-run theoretical analysis becomes nearly impossible.
Read full textMachlup critiques the naive misunderstanding that the statistical balance of international payments directly represents the supply and demand of foreign exchange. Using a strawberry market analogy, he explains that observed transactions only represent single points of intersection and fail to distinguish between spontaneous and induced changes or shifts in the underlying curves.
Read full textThis section addresses 'elasticity pessimism,' the belief that international trade elasticities are too low for currency depreciation to be effective. Machlup argues that the 'critical value' (where the sum of demand elasticities must exceed unity) is often overestimated because theorists ignore finite supply elasticities, neglect the starting point of unbalanced trade, and overlook income effects. He posits that even with low demand elasticities, depreciation can improve the trade balance if supply elasticities are also low.
Read full textMachlup critiques empirical studies from the interwar period that found low trade elasticities. He identifies several sources of downward bias: the use of aggregative index numbers that overweight goods with low elasticity, the failure to account for simultaneous shifts in demand and supply, technical errors in curve-fitting (least-squares bias), and the neglect of long-run time lags. He concludes that these statistical 'measurements' are likely significant underestimations of true market responsiveness.
Read full textMachlup distinguishes between three often-confused meanings of the 'balance of payments.' The Market Balance (ex ante) describes effective supply and demand at specific exchange rates. The Programme Balance (ex ante) represents a nation's 'needs' or targets for planning and negotiation, often independent of price. The Accounting Balance (ex post) is a necessarily balancing record of past transactions. He explains how the 'dollar shortage' is defined differently within each framework and critiques the use of accounting data to make market predictions.
Read full textMachlup argues that an accounting balance of payments cannot indicate the state of the market balance because identical accounting results can stem from vastly different economic conditions, such as stable markets, flexible exchange rates, or government rationing. He critiques the International Monetary Fund's attempt to bridge this gap through the concept of 'Compensatory Official Financing,' noting the difficulty in distinguishing between autonomous transactions and those induced by balance-of-payments pressures.
Read full textThe author examines inconsistencies in how the IMF applies the concept of compensatory financing to aid programs like UNRRA and ERP. He argues that these funds often address 'program balances' (needs for development or relief) rather than 'market balances' (excess demand for foreign exchange), leading to circular reasoning where deficits are defined by the financing provided rather than market pressures.
Read full textMachlup concludes by distinguishing between market, programme, and accounting balances, showing that a deficit in one can coexist with a surplus in another. He argues that 'dollar shortages' are often misdiagnosed because observers fail to identify which concept they are using, and that persistent market deficits require price and exchange rate adjustments rather than just loans.
Read full textThis section begins a detailed critique of the theory that disparities in productivity growth between the US and the rest of the world cause a chronic dollar shortage. Machlup reviews the contributions of Balogh, Williams, and Hicks, distinguishing between those who blame 'lax' monetary policy and those who point to 'structural' conditions. He specifically examines Hicks's model of 'import-biased' improvements as a potential cause of real income loss in stagnant countries.
Read full textMachlup provides a methodological 'cleaning job' for the concepts of equilibrium and disequilibrium. He defines equilibrium as a mental tool—a 'useful fiction'—used to isolate causes and effects in models. He warns against the 'fallacy of misplaced concreteness' (treating abstract equilibrium as an observable historical fact) and 'disguised politics' (embedding social goals like full employment into the definition of equilibrium).
Read full textMachlup distinguishes between the 'mechanism' (automatic effects on reserves), the 'rules of the game' (central bank policy norms), and 'discipline' (austerity in the face of deficits). He applies these to US history, noting how the dollar's role as a key currency complicates the definition of a 'deficit' when foreign central banks desire to hold dollar balances as reserves.
Read full textMachlup demonstrates how balance-of-payments statistics are subject to constant revision and reinterpretation based on changing economic theories. By examining the reported US balance for 1951 across twenty different sources, he shows how a $5 billion surplus was eventually transformed into a $1 billion deficit as the 'dollar shortage' theory gave way to concerns about US gold outflows. He argues that statistical 'facts' are often dictated by the prevailing theoretical preconceptions of the time.
Read full textThis segment provides detailed statistical tables comparing different methods used by the UN and U.S. Department of Commerce to calculate the U.S. balance of payments for 1959 and 1960. It highlights how the International Monetary Fund (IMF) moved away from subjective terms like 'compensatory financing' to avoid analytical bias, illustrating that historical surplus/deficit figures are often artifacts of the specific accounting techniques employed.
Read full textMachlup explains the 'mysterious numbers game' of balance-of-payments accounting, where items are shifted between the 'balance' and 'offsets' (above or below the line). Through a seven-step illustration using 1951 data, he demonstrates how a $5 billion surplus can be transformed into a nearly $1 billion deficit simply by reclassifying military items, private remittances, and various capital movements.
Read full textThe author discusses the complexities of categorizing capital movements, such as distinguishing between private bank and non-bank capital. He specifically notes the reclassification of 'errors and omissions' to 'unrecorded transactions,' moving them above the line when they became too large to ignore as mere statistical noise. This leads to the distinction between the 'basic' (hard-core) balance and the 'overall' balance.
Read full textUsing an imaginary case of two brothers (Peter and Paul) moving funds from the U.S. to Germany, Machlup illustrates the arbitrariness of balance-of-payments reporting. Depending on the method used (A, B, or C), the same transaction can result in no deficit, a $1 million deficit, or a $2 million deficit. He quotes Walter R. Gardner to emphasize how inconsistent these concepts are with common-sense understanding.
Read full textMachlup critiques the efforts of Gardner and Triffin to define 'correct' presentations of the balance of payments. He argues that the distinction between 'autonomous' and 'compensatory' transactions is a matter of theoretical interpretation rather than objective fact. He highlights how Triffin's own calculations for the 1960 deficit changed significantly upon re-analysis, reinforcing the idea that no single 'true' balance exists.
Read full textIn this concluding section of Part One, Machlup 'debunks' the idea of a single true balance of payments. He explains why statistical arrangements cannot definitively explain market pressures or measure liquidity, especially in a complex world of reserve currencies and central-bank interventions. He suggests that the most useful, though limited, arrangement is one that simply tracks changes in foreign assets and liabilities.
Read full textThis introduction to Part Two distinguishes between 'devaluation' (government action) and 'depreciation' (market effect). Machlup previews the upcoming chapters which adjudicate between the 'elasticities-approach' and the 'income-absorption-approach' to devaluation. He emphasizes the necessity of specific assumptions regarding monetary policy and introduces the concept of 'real intake' as a supplement to real income and output.
Read full textIntroductory metadata for Chapter IX, detailing its original publication in Kyklos (1956) and its focus on the relationship between devaluation, real income, and the trade balance.
Read full textMachlup evaluates two competing approaches to devaluation: the traditional relative-prices (elasticities) approach and Sidney Alexander's aggregate-spending (income-absorption) approach. He critiques the deficiencies of the relative-prices approach, such as its reliance on fixed cost conditions and stable incomes. He then provides a detailed breakdown of Alexander's model, including the idle-resources effect, terms-of-trade effect, and direct absorption effects like the cash-balance and money-illusion effects. Machlup argues that Alexander's neglect of relative prices leads to errors, particularly regarding resource reallocation and substitution effects. He concludes that both approaches are complementary and necessary for a complete analysis, emphasizing that monetary policy and credit creation are critical variables often left implicit in aggregative models.
Read full textMachlup explores the complex relationship between currency devaluation, the terms of trade, and national income. He reviews the evolution of economic thought on whether devaluation worsens the terms of trade, citing thinkers like Haberler, Robinson, and Alexander. He distinguishes between various terms-of-trade concepts, arguing that the 'commodity terms of trade' is often insufficient because devaluation simultaneously affects resource allocation and factor productivity. Machlup critiques Alexander's 'equality rule'—the idea that a deterioration in terms of trade initially reduces the trade balance and real income by the same amount—by demonstrating that this depends on whether absorption or the foreign balance adjusts first. He uses an analogy of a free-lance writer to show that a deterioration in the terms of trade is often a necessary condition for a net increase in total income.
Read full textMachlup uses geometric diagrams and numerical analogies to distinguish between the gains from increased output (idle-resources effect) and the losses from price reductions (terms-of-trade effect). He argues that focusing solely on the deterioration of terms of trade is misleading if it ignores the resource-reallocation effect, which can lead to a net increase in real income despite lower export prices.
Read full textThis section explores the relationship between terms-of-trade effects and the balance of trade, emphasizing that an unfavorable change in the former does not necessarily imply a worsening of the latter. Machlup outlines three conditions under which currency devaluation and resource reallocation can increase national product: the removal of direct controls, the reduction of price distortions, and the conservation of foreign-exchange reserves.
Read full textMachlup discusses the conservation of foreign-exchange reserves as a benefit of devaluation, distinguishing between autonomous and accommodating capital imports. He argues that while static theory might not justify one resource allocation over another, dynamic theory shows that allocations requiring a continuous loss of reserves are unsustainable, making the long-run reallocation effect of devaluation positive.
Read full textMachlup defines and distinguishes between three core concepts: real domestic output (production), real intake (domestic use/absorption), and real income (earnings accounting for foreign assets). He critiques existing terminology like 'standard of living' or 'absorption' and explains how the difference between output and intake constitutes the balance of trade, while the difference between output and income relates to terms-of-trade effects and transfers.
Read full textThe author analyzes the 'primary burden' (reduction in real intake due to improved trade balance) and the 'secondary burden' (reduction in real income due to worsened terms of trade). He highlights the conceptual and operational difficulties in isolating these burdens, especially when changes in output or employment occur simultaneously.
Read full textMachlup questions which 'income' variable (output, intake, or income) actually drives spending, consumption, and investment. Through hypothetical cases involving exporters and banks, he demonstrates that the incidence of income changes—who feels the loss and in what form—determines the behavioral response, cautioning against oversimplified algebraic models that treat 'Y' as a uniform variable.
Read full textThis appendix provides two detailed numerical cases to test the relationship between terms-of-trade deterioration and real national income. It demonstrates that a deterioration in terms of trade does not 'normally' worsen the trade balance and reduce real income by the same amount, highlighting the complexities of using price index deflators for foreign balances.
Read full textMachlup introduces the third part of the book, which focuses on gold and foreign reserves. He previews four chapters: two on the political and policy aspects of gold (including a 1940 critique and a 1960 proposal to reduce the gold price) and two theoretical essays on the concepts of international liquidity and the demand for foreign reserves.
Read full textThis chapter, written between 1961-1962, explores the theoretical demand for foreign reserves and reflects on historical gold policies. Machlup revisits a 1940 discussion with Hardy and Neisser regarding the 1933-34 dollar devaluation, arguing it was a mistake based on fallacious motives, though subsequent gold imports provided some benefits to national income at low real cost. He analyzes the status of gold as an international means of payment, the impossibility of other nations abandoning it if the US retains it, and the domestic implications of gold circulation and public debt. The section concludes with a 1963 postscript noting that his earlier forecasts of reserve adequacy were upended by the US balance of payments shift from 'dollar shortage' to 'dollar glut' after 1958.
Read full textMachlup proposes a contrarian policy: reducing the dollar price of gold in installments to dampen speculation and reverse the 'gold liquidity preference.' He argues that expectations of devaluation cause a drain on reserves, whereas a scheduled reduction would force hoarders (including Russia and South Africa) to sell gold back to monetary authorities. This would increase international liquidity by shifting gold from speculative hoards to transactions reserves. He emphasizes that this plan requires international cooperation and would lower interest rates by increasing the supply of liquid funds, though it is not a substitute for sound domestic financial policy.
Read full textA semantic and theoretical critique of the term 'liquidity' in economic discourse. Machlup argues that 'liquidity' has become a catch-all term that obscures more than it reveals, often confusing a quality of assets with a measurable quantity of money. He provides an exhaustive taxonomy of possible sources, uses, and subjects of 'paying capacity' to demonstrate the term's ambiguity. Crucially, he argues that liquidity is often non-additive; for example, adding the sight-liabilities of banker-countries to the gold reserves of depositor-countries creates a misleading picture of 'aggregate international liquidity.' He also critiques the application of Keynesian 'liquidity preference' to central bank behavior, noting that official reserve holding is a matter of discretionary political policy rather than a stable market function.
Read full textMachlup analyzes the 'need' for international reserves under different institutional frameworks. He challenges the 'needs of trade' theory, which suggests reserves must grow proportionately with trade volume, using inventory theory to suggest requirements likely grow only by the square root of transactions. He distinguishes between reserves held for temporary disturbances and those used to sustain chronic overspending under modern full-employment policies. A significant portion of the essay explores the possibility of decentralized, private foreign-exchange reserves under a system of flexible exchange rates. He argues that while private holding might ignore 'external benefits' (like labor stability), it avoids the dysfunctional accumulation and political mismanagement inherent in official reserves. He concludes by redefining 'demand' for reserves in strictly economic terms as a willingness to sacrifice real goods for liquidity.
Read full textMachlup concludes his reflections on the demand for foreign reserves by noting that the direction of his inquiry consistently points toward the problems of private reserve holding. He then introduces Part Four of the volume, which focuses on reform plans for the international monetary system. He notes the rapid pace of change in the field, necessitating a significantly expanded edition of his survey to include discussions of 37 new publications and various new variants of reform plans spawned within a single year.
Read full textMachlup provides a preview of Chapter XIV, outlining five major classes of reform plans for the international monetary system. He discusses the historical resistance to international central banking, drawing parallels to the initial opposition to national central banks. A major theme is the critique of including borrowing facilities in the calculation of world reserves, arguing that 'borrowable' funds are fundamentally different from owned assets and that conflating them confuses the issue of international liquidity.
Read full textA detailed bibliographic record of the evolution of Chapter XIV from its 1961 origins to the 1964 revised edition. It lists translations and enumerates ten specific structural and content changes, including expanded discussions on the multiple-reserve-currency standard and various institutional plans for creating international reserves (e.g., Bernstein, Stamp, and Maudling plans).
Read full textThe beginning of Chapter XIV defines the gold-exchange standard and the role of the International Monetary Fund (IMF). Machlup distinguishes between gold reserves and foreign-exchange holdings (primarily dollar and sterling), and explains the technical nature of IMF drawing rights. He differentiates between the 'gold-tranche' (automatic) and 'credit-tranche' (conditional) positions, noting that only the former is typically viewed as a true reserve asset.
Read full textThis section provides a quantitative analysis of the growth and distribution of international reserves between 1949 and 1962. It includes Table XIV-1 and Table XIV-2, showing the shift from gold to foreign-exchange holdings (specifically U.S. dollars) and the changing distribution of reserves among the eleven major financial powers. Machlup highlights the decline in U.S. gross reserves and the sharp increases in the reserves of Italy, France, and Germany.
Read full textMachlup analyzes the 'gold saturation' or reserve-asset preferences of different nations and provides a primer on IMF terminology and operations. He explains the mechanics of quotas, subscriptions, and the process by which the IMF participates in reserve creation by circulating previously created currencies. He critiques the practice of adding drawing rights to total liquidity figures, calling it deceptive because borrowing potentials of non-borrowing countries are economically irrelevant.
Read full textMachlup categorizes the criticisms of the current international monetary system into three areas: balance-of-payments difficulties (including speculative 'hot-money' movements), the inadequacy of reserve growth relative to trade, and the fragility of the gold-exchange standard. He notes the 'dollar glut' and the danger of a system collapse similar to 1931. He concludes by introducing a classification of five types of reform plans, ranging from extending the gold-exchange standard to adopting freely flexible exchange rates.
Read full textMachlup discusses the potential for the gold-exchange standard to endure through 'muddling through' or by broadening its base to include multiple key-currencies like the German mark or French franc. He introduces the Zolotas Plan, which proposes a 'multi-currency international standard' featuring gold guarantees to protect foreign monetary authorities against devaluation losses.
Read full textThis section examines the Roosa Plan, which initiated the holding of various foreign currencies by the United States as part of its reserves through bilateral 'currency swaps' and 'swaps' with other leading countries. Roosa argues that this multilateralizes the role of key currencies and economizes on gold reserves, though Machlup notes these are bilateral rather than truly multilateral arrangements.
Read full textFriedrich Lutz's endorsement of the multiple-currency standard is analyzed as a way to prevent a shortage of international reserves as world trade grows. Machlup critiques the proposal by drawing parallels to the historical failures of bimetallism, noting that multiple international moneys at fixed exchange rates are susceptible to Gresham's Law and require strict monetary discipline among all issuing nations.
Read full textMachlup details the Posthuma and Bernstein plans, which seek to stabilize the multiple-currency system by requiring central banks to hold gold and foreign currencies in fixed proportions. Bernstein's 1963 proposal introduces a 'Reserve Unit'—a composite of eleven currencies—to be held alongside gold, aiming to prevent sudden switches between reserve assets and to ensure all countries are subject to similar monetary discipline.
Read full textThis section explores mechanisms for direct and indirect mutual assistance between central banks, often mediated by the IMF. Machlup compares the Zolotas, Bernstein, and Jacobsson plans, which provide compensatory finance to countries facing short-term capital outflows. He distinguishes between the IMF's role as a credit transfer intermediary in these plans versus a true bank of issue that creates credit.
Read full textMachlup provides a theoretical defense for international support specifically targeting speculative 'hot-money' outflows rather than 'basic-balance' deficits. He argues that because speculative funds often come from inactive cash balances, their outflow does not immediately reduce domestic effective demand, making it easier for monetary authorities to avoid inflationary 'offsetting' policies while waiting for confidence to return.
Read full textMachlup examines proposals for the centralization of world monetary reserves, drawing parallels between national central banking and a potential world central bank. He provides a detailed analysis of the Keynes Plan, focusing on the creation of 'Bancor' through gold sales and overdrafts, and the Triffin Plan, which suggests expanding the IMF into a central-reserve bank with open-market powers. The section highlights the shift from a gold-exchange standard to a system where international deposits serve as primary reserves.
Read full textThis segment details the operational mechanics of the Keynes Plan, including the use of quotas, interest charges on both debit and credit balances, and the potential for a 'federal-funds' style international credit market for reserves. Machlup explains how reserve creation under Keynes is tied to clearing deficits and overdrafts, noting that this system does not guarantee secular growth of reserves if member central banks remain conservative and avoid chronic deficits.
Read full textMachlup contrasts the Triffin Plan with the Keynes Plan, emphasizing Triffin's provision for an expanded IMF (X.I.M.F.) to actively create reserves through open-market purchases of securities. This mechanism is designed to ensure a steady secular growth of international liquidity independent of gold production or national deficits. The plan also addresses the fragility of the gold-exchange standard by converting dollar and sterling balances into interest-bearing, guaranteed IMF deposits.
Read full textThe Stamp Plan is analyzed as a method of creating international reserves by issuing IMF certificates to underdeveloped countries for use in international trade. Machlup compares this to the Keynes and Triffin models, noting that while Keynes relies on overdrafts and Triffin on gilt-edged securities, Stamp proposes creating liquidity through long-term development loans, effectively linking international monetary reform with global aid.
Read full textMachlup reviews several other proposals for centralized reserve creation, including the Day Plan (endorsed by the Radcliffe Committee), the Angell Plan (which emphasizes voluntary reserves and gold-value guarantees), and four distinct plans by Roy Harrod. Harrod's proposals range from nonrepayable grants to financing commodity buffer stocks, all aimed at providing massive liquidity to relieve nations of balance-of-payments constraints.
Read full textThis segment discusses the Maudling Plan's 'mutual currency account' and Edward Bernstein's 1962 proposals to treat IMF drawing rights as genuine reserves. Machlup argues that Bernstein's plan, if extended to its logical conclusion, would transform the IMF into a reserve-creating central bank by converting potential credit into actual deposit liabilities through periodic quota increases.
Read full textMachlup provides a summary table of eleven plans for centralized reserve creation and offers a theoretical distinction between 'credit transfer' (the IMF as an intermediary) and 'credit creation' (the X.I.M.F. as a central bank). Using T-accounts, he demonstrates how these different models affect the total volume of gross and net international reserves and the liquidity positions of member nations.
Read full textMachlup analyzes the fourth method of augmenting liquidity: increasing the official price of gold. He distinguishes between the up-valuation of existing stocks (a one-time capital gain) and the increase in the value of annual gold production. The text explores techniques for sterilizing revaluation profits and the varying impact on countries based on the composition of their reserves (gold vs. foreign exchange).
Read full textThis section focuses on the arguments of Jacques Rueff and Michael Heilperin, who advocate for a higher gold price to abolish the gold-exchange standard and return to a pure gold standard. They argue that revaluation would allow the U.S. and U.K. to repay foreign-held liabilities, eliminating the 'fragility' of the current system. Machlup critiques these views by highlighting the risks of inflation and the difficulty of preventing central banks from expanding credit following a massive increase in reserve values.
Read full textMachlup discusses the psychological impact of gold price changes on hoarders and speculators. He argues that a price increase might encourage expectations of future increases, leading to more hoarding. He proposes his own plan for gradual, periodic *reductions* in the gold price to discourage speculation and force gold out of private hoards into official reserves, thereby increasing liquidity without the risks of revaluation.
Read full textThe final segment of the chapter reviews various alternative gold-related proposals. These include L. Albert Hahn's suggestion to stop central bank gold purchases from private parties, Arthur Dahlberg's plan to use gold price reductions to increase the velocity of money, and a U.S. Joint Economic Committee minority plan to end the guaranteed purchase price. It concludes with the Miyata-Wonnacott proposal for a pre-announced, gradual *increase* in the gold price at a rate lower than market interest to provide liquidity while avoiding speculative runs.
Read full textMachlup examines the fifth method for solving international monetary problems: freely flexible exchange rates. He contrasts this with fixed and occasionally adjustable systems, arguing that flexible rates remove the need for central bank reserves by allowing market prices to equilibrate supply and demand. The text analyzes the prerequisites for fixed rates—such as the willingness to inflate or deflate for exchange stability—and notes that these are rarely met in modern economies focused on full employment. Machlup discusses the risks of speculation under the 'adjustable peg' system and provides an extensive list of economists supporting flexible rates. He also addresses the 'sovereignty' of credit policy, the potential for increased inflation under flexible regimes, and the future of gold if it were to be demonetized by a lack of central bank support.
Read full textThe author concludes his survey of international monetary reform plans, noting that while he avoids blunt value judgments, a rational choice depends on how monetary policy fits with other economic objectives like growth and employment. He mentions temporary solutions like the 'General Arrangements to Borrow' and emphasizes that definitive solutions are unlikely, but reform is necessary to dispel fears of collapse.
Read full textThis section introduces Part Five of the volume, focusing on the transfer problem and capital movements. Machlup argues that the transfer problem remains highly relevant, specifically citing the US balance-of-payments situation in 1963. He previews six chapters that cover historical variations (British, French, German, and American), critiques of Hjalmar Schacht's views on reparations, the application of the income-multiplier theorem to transfers, and the causal relationship between capital flows and the trade balance. A central theme is the distinction between the 'budgetary problem' (extracting funds) and the 'transfer problem' (converting those funds into foreign exchange), and the roles of price and income effects in the adjustment process.
Read full textMachlup provides a detailed preview of Chapters XIX and XX, focusing on algebraic models of transfer under growth conditions and the causal vs. tautological relationships between capital movements and the trade balance. He summarizes the major themes of Part Five, emphasizing that solving the 'budgetary problem' requires a real reduction in domestic consumption or investment outlays to facilitate transfer.
Read full textA detailed record of the original publication dates, languages, and specific revisions made to the essays in Part Five. It tracks the evolution of Machlup's thought from 1928 to 1963, including his critiques of Schacht and his later application of multiplier techniques to international trade.
Read full textMachlup introduces the transfer problem, examining whether large international payments exhaust reserves or trigger trade balance adjustments. He analyzes four historical variations: Britain (1793–1816) during the Napoleonic Wars, the French indemnity (1871–1875) following the Franco-Prussian War, German reparations (1924–1932) under the Dawes and Young Plans, and the United States' post-WWII foreign remittances (1950–1963). Through statistical comparisons of payments relative to national income and trade volume, he demonstrates that the U.S. case represents an unprecedentedly heavy transfer burden relative to trade volume, despite the initial absence of perceived 'transfer difficulties' due to foreign monetary expansion.
Read full textWritten in 1928, this essay critiques Hjalmar Schacht's alarmist views on German foreign indebtedness. Machlup provides a sequence model to illustrate how capital inflows and outflows automatically affect domestic money circulation, prices, and the trade balance. He argues that the 'transfer problem' is essentially solved if the 'budgetary problem' (raising the funds domestically without credit expansion) is solved, as the resulting contraction in domestic spending naturally generates the necessary foreign exchange. He warns that central bank attempts to 'offset' these natural monetary fluctuations actually impede the transfer process.
Read full textMachlup responds to Gottfried Haberler's commentary on his transfer theory, specifically addressing the role of price changes. He examines four pessimistic propositions regarding the necessity of sharp price drops, low demand elasticities, wage reductions, and the 'double burden' on income. Machlup argues that the extraction of domestic funds (the budgetary solution) automatically exerts the necessary pressure on prices and wages, meaning no 'second' independent burden is required to effect the transfer. He concludes with a postscript acknowledging his earlier over-reliance on the assumption of perfect wage flexibility.
Read full textThis section applies national income multiplier analysis to the transfer problem. Machlup calculates the 'transferable portion' of a levy that can be moved through income effects alone without price changes. He demonstrates that the success of the transfer depends on the marginal propensities to save and import in both the paying and receiving countries. The analysis suggests that while income effects alone rarely achieve a 100% transfer, they significantly reduce the need for drastic price adjustments, especially if the receiving country expands its own disbursements.
Read full textIn this retrospective piece, Machlup provides a semantic clarification of terms like 'transfer difficulties,' 'losses,' and 'burdens.' He introduces a new model for transfer under conditions of economic growth, moving away from the stationary models of the 1920s. He derives the 'warranted' rate of domestic primary disbursements in a paying country that is compatible with its transfer obligations, showing how growth in the receiving country can facilitate the transfer without requiring absolute domestic contraction. He identifies various types of economic loss, including terms-of-trade effects and output losses due to wage rigidity.
Read full textMachlup provides a rigorous theoretical classification of international capital movements. He distinguishes between 'autonomous' (spontaneous) and 'induced' (accommodating) capital flows, explaining how the banking system absorbs shocks in a pegged exchange rate system. He addresses the 'chicken-or-egg' controversy regarding whether capital movements cause trade balances or vice versa, concluding that while net capital flow is tautologically equal to the trade balance, spontaneous capital movements are often the causal force. He categorizes 14 types of spontaneous capital exports and imports and analyzes their varying impacts on primary domestic disbursements.
Read full textComprehensive alphabetical index for 'International Payments Debts and Gold', covering core topics (balance of payments, gold standard, transfer problem), key concepts (elasticities, liquidity, multiplier), and cited thinkers (Keynes, Ricardo, Viner, Triffin).
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