The Cloakroom Rule of International Reserves: Reserve Creation and Resources Transfer

Machlup’s essay clarifies whether the IMF should remain a custodial warehouse of national currencies or become an institution able to create internationally acceptable reserve liabilities. He begins from the old banking fallacy that treated deposits as stored objects, then redefines the same image as a possible policy rule: monetary authorities may understand creation perfectly well and still choose to suppress it.

Older students of money and banking surely remember the cloakroom theory of commercial banking.

The key distinction is between ignorance and restraint. Commercial banks do not merely hand back what depositors left with them; their liabilities may function as money. Yet a legal order can deliberately prevent or limit that capacity. Machlup uses this distinction to interpret Bretton Woods: the IMF was not founded on a naïve belief that monetary creation was impossible, but on a rule that confined it largely to lending subscribed national currencies.

Indeed, most countries, having understood the capacity of commercial banks to create money, have taken measures to control or limit the exercise of this power.

Against this background, Keynes’s rejected Clearing Union becomes the revealing countermodel. It would have issued liabilities usable as reserves by central banks, whereas the actual Fund mainly transfers or rents out currencies supplied by members. Machlup stresses, however, that even the existing IMF is not simply a heap of preexisting money: many member subscriptions are newly created liabilities of national monetary authorities. The decisive difference is that these are still national monies, not IMF liabilities accepted as world reserves.

The proposed “International Clearing Union” was supposed to extend credit to countries in deficit and thereby create deposit liabilities accepted as international reserve by the central banks of member countries.

Much of the essay attacks the conventional language of IMF “resources.” For an ordinary bank, resources matter because depositors may demand outside money; for a central bank, foreign reserves matter because external settlement may be required. But an international reserve bank whose liabilities are accepted by national central banks would not need resources in the same sense. Its real constraint would not be liquidity but inflation, governance, and agreement on the rate and distribution of reserve creation.

Machlup therefore shifts the problem from mechanics to political economy. New international money gives its first recipients command over real goods before others receive offsetting claims. If reserves are created through loans to deficit countries, purchases of exchange, development-finance securities, open-market operations, or formula allocations, the incidence differs sharply. Some methods produce immediate spending by deficit or developing countries; others accumulate as balances in surplus-country central banks and may have weaker real effects.

This is why reserve creation cannot be treated as a purely technical substitute for gold. Cheap book-entry reserves save the world the real cost of mining and holding gold, but the saving has to accrue somewhere. Linking new reserves to development finance may look like a concealed transfer imposed on industrial countries; alternatively, it may seem the fairest way to distribute the gains from replacing costly gold with low-cost institutional liabilities.

In the opinion of an increasing number of experts, the required reform or necessary evolution will take the form of extending the functions of the IMF and, especially, of allowing its liabilities to become reserve assets for national monetary authorities.

The essay’s enduring contribution is its separation of four questions often confused: whether international money can be created, whether its issue can be controlled, whether reserve growth is needed, and who gains real purchasing power from first use. Machlup’s answer is that a cloakroom rule for the IMF is not logically necessary. But abolishing it would make distribution explicit: international reserve creation is efficient only if the world also decides, politically, who may spend the new money first.