Machlup’s essay, written after the August 1971 suspension of U.S. gold sales to foreign monetary authorities, argues against confused monetary language. Its main thesis is that the debate over devaluing the dollar in gold terms mistook an accounting entry for an operative economic price. Once the United States no longer bought, sold, or exchanged gold for dollars, the official $35 figure ceased to be a price or parity and became only a book value.
The chief purpose of this paper is to clarify the issues.
The opening section supplies the essay’s central conceptual distinction: before 1968, $35 was a market price maintained by the Gold Pool; after the two-tier system, it was only an official exchange value for monetary authorities; after August 15, 1971, it was merely a balance-sheet convention. Machlup’s argument turns on this demystification.
Where there are no sales, no purchases, and no exchanges of gold against dollars, there can be neither a price nor an exchange value of gold in dollars.
This distinction structures the rest of the essay. Machlup accepts that the dollar was overvalued and that exchange-rate realignment was necessary, but he denies that changing the book value of gold could alter the real effects of that realignment. Trade, employment, prices, and competitiveness depend on exchange rates in foreign-exchange markets, not on how governments label their gold stocks. The talk of economic burden sharing is therefore, in his view, a category error.
the talk about sharing them is pure claptrap
Machlup separates real burdens from political ones. The United States may bear a genuine transfer burden if it must replace dollar liabilities with real goods sent abroad. Surplus countries may suffer transition costs as export industries adjust. But their loss of reserve accumulation is only a mercantilist pseudo-burden, since receiving fewer paper claims and more real resources is not an economic loss. What governments call burden sharing often means blame shifting: an appreciation of the franc, mark, or yen can be represented as imposed by Washington only if the public accepts a monetary fairy tale.
The announcement would have no influence, either mechanical or hypnotic.
The middle sections ask whether a U.S. gold initiative might at least coordinate simultaneous realignment. Machlup concedes this possible political advantage, but warns that it may revive the old rigidity of fixed parities. His deeper concern is that negotiators might treat a one-time gold correction as reform, instead of learning why the par-value system failed. The essay then turns to the balance sheets of central banks, where gold’s book value does matter in a narrower sense. Countries with large gold holdings, especially France, would prefer not to write down gold, SDRs, and Fund positions when their currencies appreciate against the dollar. Yet Machlup calls most balance-sheet repair accounting gimmickry unless reserves are actually to be used.
The serious reserve question is purchasing power. If gold is to remain a reserve asset, holders must know what it can be exchanged for in a crisis, perhaps through the IMF. This is a real argument for eventually fixing an exchange value for existing official gold, but not for confusing that issue with exchange-rate adjustment.
No asset can function as a liquid reserve unless the holder can count on what he will get for it when he needs to liquidate it.
Machlup applies the same reasoning to SDRs and IMF reserve positions. If SDRs remain tied to a depreciated dollar while major currencies appreciate, their purchasing power falls, especially for developing countries. Uncertainty about future dollar devaluation also makes SDRs and Fund claims illiquid, since holders may postpone use in expectation of gain. Thus the gold-value dispute reduces usable liquidity, but it does not prove a general shortage of reserves.
The strongest argument against early gold revaluation is institutional: it may encourage hopes of restoring gold convertibility. Machlup rejects this as a dangerous orthodoxy. Existing monetary gold may be made exchangeable through the Fund, but the dollar should not again be convertible into gold.
the illusion of a return to gold convertibility must be given up
The final sections extend the distinction to newly mined gold, especially South African sales. Guaranteeing exchangeability for existing official reserves is not the same as promising to buy new gold at a higher official price. The conclusion emphasizes monetary realism. Machlup insists that reform requires adjustable parities and disciplined flexibility, not repairs to gold symbolism.
A wider band is not enough.
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