Fritz Machlup’s conference discussion paper reviews arguments advanced by Neisser and Hardy through eight questions about American gold policy. Finding little substantive disagreement with the principal speakers, he reorganizes their reasoning into deliberately provocative answers. His central distinction is between gold’s usefulness as an asset and the economic consequences of buying, pricing, or circulating it. An enormous gold stock may be practically useless while its acquisition has supported employment and income. Conversely, neither gold’s monetary prestige nor its accounting value establishes that policies encouraging its accumulation were wise.
The first two questions distinguish retrospective judgment from present policy. Machlup judges the 1933–34 dollar devaluation a mistake, despite possible short-run benefits to export prices and business expectations. Gold scarcity did not require it, domestic credit did not depend on preventing gold outflows, and a higher gold price did not automatically raise domestic commodity prices. Bank reserves could have been expanded through Federal Reserve open-market operations. Against these limited benefits he sets damage to international cooperation, deflationary pressure on countries remaining on gold, and wasteful additional production. He qualifies the last charge: British gold-price policy contributed more to increased world production than American devaluation did.
Yet condemning that decision does not warrant reversing it during wartime:
If it is found that a certain move was a mistake, it is not always possible to repair it by moving back; moving back may often be just another mistake.
Reducing the American gold price would diminish Britain’s purchasing power and exhaust its gold sooner, bringing forward the need for American credits. A gold import duty would have essentially the same effect, despite different political and accounting appearances. Machlup also disputes Neisser’s preference for encouraging Britain to sell American securities before shipping gold. Gradual, simultaneous sales would be less disruptive: dollars newly created through gold purchases would help Americans absorb the securities Britain offered. The appropriate policy therefore depends on current international circumstances, not simply on correcting a past error.
The third question supplies the article’s central conceptual move: distinguishing financial expenditure from real economic sacrifice.
We must, of course, distinguish between the budgetary or financial cost to the buyer, i.e., the U. S. Treasury, and, on the other hand, the real cost to the American public.
Unsterilized gold purchases were financed through newly created bank funds rather than taxes or borrowing. More importantly, exports exchanged for gold had largely been produced with otherwise unemployed labor and equipment. Their production therefore displaced little alternative output, although Neisser’s qualification concerning exhaustible natural resources remains relevant. Foreign spending of the dollars received for gold initiated further domestic spending and increased national income.
Machlup acknowledges that public works or relief might theoretically have produced comparable effects. His defense of gold-financed exports nevertheless incorporates political feasibility and business psychology: businessmen welcomed exports and gold accumulation while fearing larger public debt. Equivalent spending multipliers did not guarantee equivalent effects on confidence and investment. This defense is explicitly conditional. Once production bottlenecks appear, exports involve real opportunity costs; wartime aid to Britain may justify accepting those costs, but cannot make them disappear. Nor does the argument vindicate devaluation: Machlup maintains that European capital flight and demand for American goods after 1936 were not consequences of the gold price.
Questions four and five shift from domestic costs to gold’s international acceptability and value. Machlup rejects the fear that foreign countries would abandon gold while the United States continued buying it at a fixed price. Countries possessing gold stocks or mines have an interest in preserving their exchange value. Even a victorious Germany would have reason to retain that market; the decisive question would instead be whether America continued accepting its gold. Barter arrangements elsewhere need not undermine gold among remaining trading nations. He distinguishes governmental control of trade from settlement through blocked balances, which can force exporters to wait or accept unwanted goods.
Gold’s “value” must likewise be separated into dollar value, foreign-currency value, and purchasing power over commodities:
Gold can lose in value in terms of dollars only through an action of our own; not through actions of foreign nations.
Maintaining the dollar price is a policy choice, not something external forces necessarily make impossible. Foreign currencies appreciating against gold would also appreciate against the dollar, imposing pressures their governments would generally dislike. Commodity purchasing power, however, could fall as wartime expenditure raised prices. Machlup regards government spending and credit expansion as more important here than gold production, while allowing that excessive production might eventually justify a lower gold price.
The final three questions dismantle proposed uses of the accumulated stock. Restoring domestic gold circulation would absorb little gold; private hoarding might reduce excess bank reserves, but other methods could accomplish this without unstable hoarding behavior or an inconvenient commitment to a fixed price. Paying off government debt with gold would not escape monetary expansion. Certificates already issued against Treasury gold would need replacement, and former bondholders would deposit gold rather than retain non-interest-bearing coins. The resulting bank reserves and search for earning assets would resemble debt redemption through newly issued paper money.
Finally, international acceptance does not make America’s exceptionally large reserve useful:
Otherwise the buried gold does us no harm and no good.
Substantial expenditure of the reserve would require import surpluses that Americans ordinarily resisted, although prolonged war or serious inflation might change that attitude. Gold might offer leverage at a peace conference, but weakened countries would likely need imports more urgently than replenished reserves. Machlup’s concluding provocation—that much of the stock could vanish without national loss—thus follows from his broader analysis. Gold policy matters through employment, credit, international purchasing power, and political choices; possession of the metal is not itself evidence of economic benefit.
This work was divided into 8 sections when it entered the library's research corpus—an apparatus for search and citation, not necessarily the author's own table of contents. Each title opens its summary.
Put a question to this work; the Librarian answers from its 8 sections and cites the passage.
Ask the Librarian