Fritz Machlup, Involuntary Foreign Lending (1965)

Machlup’s Wicksell Lectures address the 1965 crisis of the dollar-exchange standard and the European, especially French, charge that the United States financed itself abroad with dollars that surplus central banks were obliged to hold. He states the grievance sympathetically: some countries claimed they were

compelled, under some unwritten rules of the present international monetary system, to extend loans to the United States of America

The thesis is deliberately qualified. Machlup accepts that the system can make central banks unwilling creditors of the United States, but denies that this proves a simple American expropriation or that gold would solve the problem. The first lecture reconstructs the U.S. balance-of-payments deficit; the second compares fiduciary reserves, gold reserves, and no official reserves as alternative settings for involuntary lending.

His opening move is methodological. Balance-of-payments accounting is indispensable but conventional: the same transactions can appear as surplus or deficit depending on classification, while statistical balances do not directly reveal market pressures.

The reported deficits or surpluses are not “facts”, but only factual judgments based on interpretations, which in turn rest on tentative hypotheses.

This skepticism governs the first lecture’s “score card.” Machlup rejects monocausal blame—foreign aid, tourism, military expenditure, or U.S. direct investment—because cutting one item would alter income, trade, and capital flows elsewhere. He also rejects the charge that American inflation caused the post-1958 dollar glut: compared with major European surplus countries, the United States had smaller increases in money supply, wholesale prices, consumer prices, and wages. His pointed formulation is that

A failure to deflate is not “inflation”.

Other causes fare better. European devaluations, especially France’s, were intended to build reserves and therefore contributed to U.S. deficits. American credit expansion may have offset deflationary pressures, though evidence cannot prove whether it caused the deficit or merely cushioned it. Speculative short-term outflows worsened the 1960s position. Most important is the transfer problem: the United States undertook unprecedented aid, military spending, loans, and private capital exports without forcing a corresponding trade adjustment.

Machlup’s discussion of European complaints is neither dismissive nor deferential. Imported inflation can occur when central banks buy dollars, but surplus countries also chose fixed rates, undervaluation, and domestic credit expansion. Complaints about American takeovers mix economic concern with nationalism. Complaints about delayed adjustment must specify a remedy—deflation, devaluation, exchange-rate flexibility, or controls—most of which surplus countries themselves resisted.

The second lecture supplies the conceptual core. Machlup returns to elementary monetary theory: holding money is implicit lending, since a bank deposit is a loan to the bank. The same logic applies internationally.

Receiving foreign currency implies foreign lending regardless of whether or not the recipient is conscious of his making a loan.

From this premise he distinguishes explicit from implicit lending and voluntary from forced or induced abstaining. A central bank accumulating dollar reserves gives up present command over resources for claims on the reserve-currency country. Gold does not escape this logic. It has no named debtor, but economically it too postpones access to real resources:

the increase in a country’s foreign reserve through an addition to its gold holdings is equivalent to its granting a foreign loan without interest and without maturity date.

Thus the three reserve systems differ in how they channel the same underlying relation. Fiduciary reserves created to finance deficits maximize involuntary lending; formula-based “gratis” reserves could reduce the need for surplus countries to earn reserves by financing deficit countries; a gold standard narrows but does not abolish the sacrifice; and a no-official-reserve system with freely flexible rates would eliminate official involuntary lending, though private dollar balances would remain.

Machlup closes by recasting the United States as “world banker.” Foreign dollar balances are not only an American privilege; they are liabilities of a deposit banker whose money others use for transactions.

Lending to the deposit banker is implied in a system in which bank deposits function as circulating media.

The lectures remain relevant because they turn “exorbitant privilege” into an institutional banking problem. Involuntary lending exists, but its scale was smaller than rhetoric implied, its causes were multiple, and neither gold nor accounting indignation could substitute for monetary reform.