This is a single-author special paper: a pedagogical, technical survey of reform proposals for the Bretton Woods international monetary system. Machlup’s central aim is classificatory and diagnostic rather than programmatic. He maps the reform debate by asking what defect each proposal is meant to cure: payments adjustment, reserve scarcity, or the fragility of the gold-exchange standard.
THERE has been growing dissatisfaction with the present international monetary order or disorder.
The paper first explains the existing system: official reserves consist not only of gold but also of dollar and sterling claims, while IMF “positions” are more ambiguous. Machlup’s insistence on accounting precision is one of the work’s core conceptual moves. He distinguishes asset holdings from borrowing rights, gross from net reserves, and liquidity from usable reserve money.
A possibility to borrow in the future is not easily treated as a "reserve."
His second section separates three charges against the system: balance-of-payments difficulty, inadequate reserve growth, and danger of collapse. He rejects the idea that all payments deficits are system defects, but accepts that the gold-exchange standard disciplines countries unequally.
It provides inadequate discipline for key-currency countries, but rather harsh discipline on other countries.
The survey then organizes reform plans into five families: extension of the gold-exchange standard; mutual assistance among central banks; centralization of reserves and reserve creation; raising the gold price; and freely flexible exchange rates. Machlup’s treatment of central-bank cooperation is especially careful. Stand-by credits and swap lines may stabilize hot-money flows, but they do not by themselves create international money.
The role of the I.M.F. in these interventions is that of an intermediary and guarantor, not that of a bank of issue or of a commercial bank engaged in the creation of credit.
This distinction prepares the discussion of Keynes, Triffin, Stamp, Angell, Harrod, Maudling, Day, and Bernstein. Machlup’s decisive analytical contrast is between credit transfer and credit creation. A Fund that borrows strong currencies and relends them merely reallocates reserves; a world central bank creates new reserve assets by issuing liabilities accepted as international money.
Pure creation of reserves is at the other end; its criterion is that not only the gross reserves but also the net reserves of all national monetary authorities taken together are increased as a result.
Machlup is skeptical of gold-price solutions, especially because public discussion of revaluation encourages speculation. His own counterproposal is deliberately paradoxical: reduce, not raise, the official gold price, so that gold holders face losses as well as gains.
The chief objective would be to make it perfectly clear all around that gold hoarders could lose money.
The final substantive section treats flexible exchange rates as a fundamentally different answer. Instead of enlarging reserves, flexibility would reduce the need for them by letting exchange rates clear the market.
Gold and exchange reserves are needed only if exchange rates are not permitted to move to the level that would equilibrate the market at the moment.
Machlup does not simply endorse floating rates. He frames them as the logical counterpart of autonomous national monetary policy. Fixed rates require monetary coordination; independent full-employment or growth policies require exchange-rate flexibility.
Fixed exchange rates among countries with coordinated monetary policies, and freely flexible rates among countries pursuing autonomous policies—this appears to be the maxim consistent with the theorems of monetary economics.
The concluding stance is deliberately non-final. Machlup refuses to name one best reform because every plan depends on political discipline, monetary doctrine, reserve preferences, and the willingness of central banks to coordinate.
An intelligent choice would have to depend on many conditions, and one cannot ascertain whether and to what extent they are fulfilled.
The work’s relevance lies in its disciplined reconstruction of the pre-SDR reform debate. It clarifies why “liquidity” was never a single problem: it could mean reserves for trade, protection against hot money, confidence in key currencies, or freedom for domestic policy. Machlup’s lasting contribution is to convert a crowded policy controversy into an analytical map of institutional mechanisms and their consequences.
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