Fritz Machlup, Remaking the International Monetary System (1968)

Machlup interprets the Rio Agreement on Special Drawing Rights as a monetary reform achieved through deliberate semantic looseness. Its success depended on avoiding terms whose strict definition would have revealed unresolved conflict: credit, loan, reserve, repayment, and drawing. He frames the accomplishment with a deliberately ironic subtitle:

How to Get Agreement by Avoiding Excessively Clear Language

The book thus treats SDRs as both institutional invention and diplomatic compromise. Machlup reconstructs the negotiations among the IMF, the Group of Ten, and OECD bodies to show how the agreement repeated Bretton Woods’ reliance on elastic language. France could see SDRs as credit; the United States and Britain could see them as new reserves. This ambiguity did not make the agreement meaningless. It made agreement possible, while leaving economists to clarify what official vocabulary blurred.

Machlup’s main clarification is that SDRs belong to a closed giro system among monetary authorities. Drawing is misleading because it suggests removal from a fund; giro better describes the transfer of accounting balances whose total remains in being. SDRs are not ordinary IMF loans and not claims on a single debtor. They are allocated balances, transferable for convertible currency, because participants undertake to accept them. Machlup approves this structure because it loosens international liquidity from the assumption that money must always be someone else’s debt.

The plan as a whole makes eminently good sense. The more I study it the better I like it.

This approval rests on his theory of nondebt-money. The Special Drawing Account is not a bank issuing liabilities backed by assets; it is a bookkeeping institution for reciprocal undertakings among members. SDRs resemble gold in being reserve assets without being ordinary debts, though their acceptability depends on agreement rather than custom. Machlup’s central point is that the decisive property of money is not collateral but willingness to accept it:

Money needs takers, not backers

The essay then asks what added liquidity is supposed to do. Machlup rejects the simple view that central-bank reserves directly finance trade. Their influence is indirect and political: inadequate reserves push governments toward import restrictions, payments controls, aid reductions, and deflationary policies. SDRs can therefore support liberalization by reducing the pressure for such measures. Yet he insists that easier reserves may also weaken adjustment incentives and make inflationary policy more tolerable. Unlike gold inflows, SDRs are not automatically expansionary; they work through policy choices inside a managed system.

Machlup treats distribution with similar restraint. He examines proposals to allocate new reserves preferentially to poor countries, rich countries, conservative countries, or deficit countries, and explains why a universal formula prevailed. He doubts that SDRs can serve as substantial development aid, since poor countries’ shares would be small relative to their trade and capital needs. Their greater benefit may be indirect, if stronger reserves in industrial countries reduce protectionism and make assistance easier. Chronic-deficit countries may gain time, but SDRs cannot substitute for balance-of-payments adjustment.

The semantic analysis is therefore central, not decorative. Credit may mean confidence, a loan, a book entry, bank-created money, or a claim. Competing descriptions of SDRs can each seem correct under different definitions. Machlup’s distinction is that SDRs are credit only in the sense of fiduciary reserves or account credits, not loans advanced by the Fund. Likewise, reconstitution is not repayment: rebuilding an SDR position transfers reserve units within the system, whereas repayment of bank debt extinguishes money.

Machlup’s conclusion is deliberately limited. Rio may address the liquidity problem, but it does not solve the U.S. payments deficit, the dollar overhang, gold speculation, rigid exchange rates, or confidence in reserve currencies. He criticizes reliance on controls and disguised devaluations, preferring real adjustment and ultimately greater exchange-rate flexibility. His final judgment separates achievement from illusion:

The plan agreed upon in Rio de Janeiro may, if executed wisely, solve the liquidity problem.

The book’s significance lies in that separation. Machlup shows how international money can be created by agreement, how ambiguity can permit institutional innovation, and why increasing reserves cannot by itself resolve adjustment, confidence, development, and exchange-rate discipline within the system that uses them.