The archive.

European governments in the mid-1960s complained that the international monetary system compelled them to lend to America, piling up dollars they never wished to hold; de Gaulle charged that the dollar-exchange standard let the United States run up foreign debt almost for free. These two Wicksell Lectures test that grievance. In the first, Machlup weighs eight hypotheses for the persistent U.S. payments deficit—rejecting relative price inflation outright, crediting European devaluations and America's outsized transfer commitments—while insisting that a deficit is never a bare fact but an artifact of accounting convention. The second reconceives the holding of any foreign reserve, gold included, as an interest-free loan to the rest of the world without maturity, and compares fiduciary reserves, gold, and no reserves at all under freely flexible rates.

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

Two words—adjustment and financing—have been used in so many senses that the confusion hides genuine disagreement over what governments facing a payments imbalance should actually do. Machlup imposes order by carving out a third category. Real adjustment is narrowed to the classical mechanism of relative costs, prices, incomes, and resource allocation; financing is confined to short-term funds that tide over an imbalance; and between them sits what he names compensatory corrections—measures such as tariffs, subsidies, and lasting capital-flow shifts that reduce the need for adjustment without being either. The taxonomy carries a policy sting: because real adjustment is painful and financing a mere stopgap, authorities reach for corrective measures that so often fail through retaliation, offsetting trade effects, and induced import demand.

Rationing a scarce supply of foreign exchange under direct controls does not reduce the demand, but merely leaves part of it unsatisfied.

Recall the old "cloakroom theory" of banking, in which a bank merely stores money and hands it back like a coat checked at the door—a fiction long since exploded for commercial banks, which plainly manufacture deposits by lending. Machlup's essay asks why the same superstition still binds international institutions, keeping the IMF a warehouse of member currencies rather than a creator of reserve money. He recounts how the United States rejected Keynes's Clearing Union at Bretton Woods for fear that international money creation would siphon real resources from creditor nations to overspenders, then presses the question reserve creation cannot escape: whoever spends newly created money first commands real goods at others' expense. Costless reserve deposits, unlike gold mined at great cost, could hand that saving to developing countries—if the world will decide who ought to benefit.

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.

Behind the Bretton Woods debates over how much gold and foreign exchange a country ought to hold lies a prior question Machlup insists economists have dodged: whether monetary authorities can be said to need reserves at all. Distinguishing need from desire and demand, he defines a need by the consequences of its absence — devaluation, deflation, exchange controls — and turns that test against the familiar ratios of reserves to imports, money supply, or past deficits, which he finds describe convention rather than requirement. Data from fourteen industrial countries between 1949 and 1965 show variation no single formula explains. His wife's-wardrobe analogy reframes the matter: what a growing world economy needs is not a particular stock but annual additions to reserves, enough to keep governments from lurching toward restriction.

This article will address itself to the question whether it is possible to find any objective criteria for the need of monetary reserves, either for individual countries or for the world at large.

Ten executives gather around the table of a fictional XYZ Corporation, and each proposes a different use for the same surplus — plant expansion, higher dividends, basic research, university gifts, worker bonuses, price cuts — while insisting that his preferred policy serves the company and the national interest alike. From this staged meeting Machlup builds a satirical assault on the doctrine of corporate social responsibility, showing that once profit maximization under competition gives way to an open-ended mandate to serve society, almost any managerial preference can be dressed as public duty. His remedy is competition, which narrows discretion and forces attention back to product and efficiency. The comedy also skewers behavioral theories of the firm, where a surplus of equally plausible motives makes any single corporate decision impossible to predict.

Perhaps they illustrate the enormous difficulties of “behavioral theories”: ten participants in corporate decision making propose ten different courses of action, and there is no warrant for any generalization as to what they are likely to decide after the coffee break.

Machlup’s presidential address returns to the 1946 American Economic Review battlefield twenty years on, asking not which theory of the firm is realistic but what each is built to explain. The governing distinction is between the firm as an analytical construct and the firm as an actual organization: competitive price theory uses a deliberately simplified agent to infer how prices and outputs move when wages or taxes change, and treating that fiction as a miniature General Motors commits the “fallacy of misplaced concreteness.” Behavioral and managerial models — Baumol’s sales maximization, Williamson’s expense preference — are not refutations but tools for different problems, above all monopoly and oligopoly, where discretion widens. His verdict is a disciplined pluralism that matches each model to the question it was designed to answer.

Thus, instead of a heated contest between marginalism and managerialism in the theory of the firm, a marriage between the two has come about.

The Rio Agreement on Special Drawing Rights succeeded, on Machlup's reading, precisely because it refused to call a spade a spade: by avoiding contested words — credit, loan, reserve, repayment — it let France read SDRs as a repayable credit facility while Britain and America read them as new reserve assets. Reconstructing the negotiations among the IMF and the Group of Ten, he explains SDRs as a closed giro system among monetary authorities, money created by allocation rather than lending, whose acceptability rests on mutual willingness rather than collateral. He endorses the design while insisting on its limits: added liquidity works only indirectly, easing the pressure that pushes governments toward import restrictions and deflation, and it leaves the dollar overhang, gold speculation, and rigid exchange rates unresolved.

Money needs takers, not backers; the takers accept it, not because of any backing, but only because they count on others accepting it from them.

Education and income rise together, but which drives which? Machlup's compact study, expanded from a 1969 lecture, insists the causation runs both ways and on different clocks: schooling may raise productivity only after long lags, while prosperity quickly raises the demand for education — and, crucially, its cost. He is skeptical of residual-growth accounting that credits education with large unexplained gains, warns that in poor agrarian societies schooling can breed aversion to manual work and urban frustration, and separates the long payoff of formal schooling from the faster returns of on-the-job training. His most durable point is structural: because teaching is labor-intensive and resists productivity gains, education grows dearer as wages climb in the sectors that do, the logic later christened Baumol's cost disease.

Educational efforts may be regarded as consumption, investment, waste, or drag.

Suppose the molecules in a physics laboratory suddenly began to speak — disputing the textbook account of Brownian motion, offering their own versions of events. Machlup’s parable dramatizes the one methodological difference he thinks genuinely separates social from natural science: the social scientist studies beings who talk, interpret, theorize, and lie about themselves. Rejecting both a wholly separate logic for social inquiry and the claim that no real difference exists, he refines Verstehen into the disciplined construction of models of purpose and belief that must also treat actors’ own testimony as data — data that may mislead. Bankers deny they create credit; businessmen reject profit-maximization; yet economics, he insists, cannot be learned by watching or interviewing, only through abstract constructs of purposeful action.

It is one of the characteristics of the natural sciences that their subjects of investigation do not talk about themselves.

A word that means one thing in Vienna and nearly its opposite in Washington cannot anchor a coherent politics — and liberalism, Machlup argues, has drifted until an American liberal would count as an anti-liberal in Europe. Originating as a Hayek lecture, the essay traces that drift from Lockean individualism through the reinterpretation of freedom as effective power, and dissects two governing confusions: being free to act versus being free from want, and what one may do versus what one can do. Against the slogan that freedom is indivisible he sets a catalogue of some two dozen distinct liberties — economic, political, intellectual, moral — that routinely collide. The genuine liberal, he concludes, ranks freedoms and restricts one only to secure another, and refuses to let welfare be relabeled as liberty.

Food is not liberty, and liberty is not food. Medical care is not liberty, and liberty is not medical care.

Presented frankly as a mystery story, this essay treats the explosive growth of Euro-dollar deposits as a conceptual puzzle before an empirical one. Machlup's verdict is a disciplined agnosticism: Euro-banks may have created dollar money, but the statistics cannot say how much, because the debate keeps confusing deposits with loans, credit with money, and flows with stocks. He polices those categories relentlessly — distinguishing legal form from economic function, primary from derivative deposits, genuine money creation from the interbank redepositing that inflates gross totals through London-Zurich-Milan chains. His preferred analogy is the American nonmember bank, holding claims on member banks as reserves and building liabilities atop them. Offshore dollars, he concludes, are real, regulation-sensitive, and largely invisible to any national money-stock measure — stateless money.

Words guide the attention of the audience; the use of the word "market" may divert attention from the important nonmarket aspects of the Euro-dollar system.

When Washington stopped buying and selling gold in August 1971, the official thirty-five dollars an ounce ceased to be a price and became a mere bookkeeping entry — and most of the ensuing debate, Machlup contends, mistook that accounting figure for an operative economic force. Devaluing the dollar in gold would change nothing real: trade, employment, and competitiveness turn on exchange rates set in the market, not on how governments label their gold stocks. He dismisses the talk of burden sharing as claptrap, separates genuine transfer burdens from the mercantilist pseudo-burden of forgone reserves, and warns that raising gold's book value would keep alive the illusion of restored gold convertibility. What matters instead is purchasing power: no asset serves as a reserve unless its holder knows what he can get for it.

Where there are no sales, no purchases, and no exchanges of gold against dollars, there can be neither a price nor an exchange value of gold in dollars.