V monetary reserves and fund resources
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International Monetary Fund
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Abstract

The payments difficulties of the postwar period have caused a continuous and serious depletion of the monetary reserves of many countries. For some of the countries actively engaged in the war, there had already been a large deterioration during the war years, and since the war there has been further widespread decline of reserves which has not yet been halted.

Movements of Monetary Reserves

The payments difficulties of the postwar period have caused a continuous and serious depletion of the monetary reserves of many countries. For some of the countries actively engaged in the war, there had already been a large deterioration during the war years, and since the war there has been further widespread decline of reserves which has not yet been halted.

Total gold reserves outside the United States and the Soviet Union (calculated in 1934 dollars) were estimated at $10.8 billion in 1929 and $12.4 billion in 1937, and had risen to approximately $13.7 billion at the end of 1945. By the end of 1947, reserves outside the United States and the Soviet Union, and excluding the gold holdings of the Fund, had fallen to about $10.3 billion, and by the end of 1948 to a little more than $9 billion.

At the end of 1937, the gold holdings of Europe, excluding the Soviet Union, amounted to approximately $10.9 billion. At the end of 1945, their gold holdings had fallen to about $7 billion, and at the end of 1948 to approximately $5.1 billion. The proportionate decline since 1945 in European gold reserves has indeed been a little less than that in the reserves of non-European countries, excluding the United States and the Soviet Union. At the end of 1948, however, the latter were still twice as large as before the war. Of course, the reserve histories of individual countries both inside and outside Europe diverge widely from the trends revealed in these regional averages, and for some countries any further decline of reserves would create a difficult situation. On the other hand, United States gold holdings, which in 1929 were $6.6 billion and in 1937 $12.8 billion, had risen to $20 billion in 1945 and amounted to $24.4 billion at the end of 1948.

The gold reserves of most countries other than the United States and the Soviet Union have thus declined very sharply. In real terms the decline has been much greater than indicated by the dollar figures as the price level of international trade goods has more than doubled. Their present inadequacy in relation to world trade is indicated by the fact that they have declined in amount while the dollar value of world exports has more than doubled.

This decline in aggregate gold reserves does not take account of official holdings of short-term dollar assets in the United States, which for some countries are a significant supplement to gold holdings. After falling from $4.2 billion at the end of 1945 to $1.8 billion at the end of 1947, they amounted to $2.9 billion on March 31, 1949. The common reserve in gold, dollars, and other foreign exchange held by the Fund should also be taken into account.

The problem of inadequate reserves is of special importance now that dollar earnings are threatened by recession in the United States. Restrictions on imports, because of the lack of means to pay for them, would intensify and spread the difficulties of recession.

Use of the Fund’s resources can mitigate to some extent the effects of depression on deficit countries. It would not, however, even if the resources were much larger, be an effective means of combating depression. There is no country without some measure of responsibility for the maintenance of economic stability; but the national policies of the great industrial countries are of predominant importance both in preventing depression and in applying remedies for any depression tendencies which appear. The Fund will have given whatever financial help it can, if it relieves the strain on the payments position of its members in accordance with the Fund Agreement, while suitable corrective measures are instituted by the national authorities.

In the longer run any general program for restoring international balance must take into account the accumulation of adequate reserves. A major step in strengthening the reserve position of countries is to place their internal economies on a stable basis and to restore their payments position so that confidence in their currencies will be established. If these conditions are satisfied and there is a reasonable assurance of political security, it should be possible to avoid further flight of capital and even to encourage the repatriation of capital now held abroad. As stability and confidence are restored and countries place their international payments in order, any additional exchange resources that might then come to them would be available to strengthen their reserve position. As payments conditions improve, cooperative steps to strengthen reserve positions in general will be necessary.

Exchange and Gold Transactions

During the fiscal year ended April 30, 1949, the Fund completed 18 purchases and sales of foreign exchange, aggregating the equivalent of $119.5 million, with 10 members. In the previous fiscal period, which extended over 10 months, the total of the Fund’s exchange transactions had been $544 million.

The use of the Fund’s resources continues to be governed by the general policies set forth in the Annual Report for 1948 (pp. 46-50) and in earlier Annual Reports. The decline in the volume of exchange transactions in 1948-49 is to be explained in part in terms of the Fund’s policy governing the use of its resources in the light of the European Recovery Program. The considerations justifying the Fund’s view that, as a general rule, ERP countries should request the purchase of U.S. dollars from the Fund only in exceptional or unforeseen cases were set forth in last year’s Annual Report. The possibility was, however, also foreseen that these countries might wish to purchase from the Fund currencies other than U.S. dollars, including those of some countries participating in ERP, and during the year under review two members, the Netherlands and Norway, have purchased from the Fund 300,000,000 and 200,000,000 Belgian francs, respectively. The equivalent of these amounts, $11 million, is included in the total of $119.5 million referred to above.

In addition to exchange transactions, one transaction was effected involving the sale of approximately $6 million by the Fund against gold.

Between March 1, 1947, when the Fund commenced operations, and April 30, 1949, the Fund effected exchange transactions totaling the equivalent of $725.5 million on behalf of 17 members and gold transactions totaling $6.2 million.

As a result of the payment of Brazil’s subscription, adjustments in the subscriptions already paid in gold by other members, and the payment of service and other charges in gold, the Fund’s holdings of gold increased during the year ended April 30, 1949 from $1,362.6 million to $1,439.3 million. On April 30, 1949, its holdings of currencies, including non-negotiable, non-interest bearing notes, amounted to the equivalent of $5,526.7 million, of which $1,340.5 million was in U.S. dollars.

The following is a tabulation of Fund transactions. Further details are contained in Appendix XVI.

Currencies Purchased from the Fund

(in thousands of U.S. dollars)

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Currencies Sold Against Gold

(in thousands of U.S. dollars)

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Exchange transactions raised the Fund’s holdings of the currencies of nine members above their quotas at various points of time in the last two years. These members have therefore become subject to the pertinent charges prescribed in the Fund Agreement.

During the course of the year, some members with monetary reserves lower than their quotas have availed themselves of the opportunity provided in the Fund Agreement to pay in their own currencies a portion of the Fund’s charges which are normally payable in gold. These payments have been accepted provisionally and may require adjustment after agreement is reached on the amount of the monetary reserves of the members involved.

Repurchases

At the end of each financial year of the Fund, members have, in certain circumstances stipulated in Article V, Section 7, and Schedule B of the Fund Agreement, an obligation to use part of their monetary reserves to repurchase part of the Fund’s holdings of their currencies. The amount of monetary reserves to be used in this way is equal to one half of any increase which has occurred during the year in the Fund’s holdings of the currency of the member with the repurchase obligation, plus one half of any increase, or minus one half of any decrease, that has occurred during the year in the member’s monetary reserves.

Repurchases are not required where the member’s monetary reserves as of the end of the financial year are below its quota or to the extent that repurchase would reduce those monetary reserves to an amount less than the member’s quota. This provision is intended to help members preserve a minimum reserve corresponding to the amount of each member’s quota. Further, there is no repurchase obligation where the Fund’s holdings of the currency of a member are, at the end of the financial year, below 75 per cent of the member’s quota, or where the Fund’s holdings of any currency required to be used in repurchase are in excess of 75 per cent of the quota of the member concerned. Repurchases, moreover, are not required to the extent that they would result in the Fund’s holdings of the repurchasing member’s currency being reduced below 75 per cent of the member’s quota as of the end of the financial year, or to the extent that the Fund’s holdings of the currency of a member which is being used in repurchase would be increased above 75 per cent of that member’s quota.

The fundamental aims of the repurchase provisions in the Fund Agreement are to protect the liquidity of the Fund by restoring or establishing a desirable level of its holdings of currencies, and to ensure that its resources will be a secondary line of reserves and that members will not use the resources of the Fund, directly or indirectly, to build up their independent monetary reserves.

Although the Fund Agreement provides that a member shall repurchase at the end of the financial year of the Fund, it is impossible that this obligation should be discharged precisely at the prescribed date, since the state of the member’s monetary reserves at the end of the year is one of the determinants of the obligation. Data on monetary reserves cannot be ascertained and communicated to the Fund immediately, so that an appreciable interval of time will necessarily elapse before repurchase obligations can be computed and carried out, although the repurchases are made as of the end of the financial year. The interpretations of the pertinent provisions which were adopted in order to reconcile the intent of the Fund Agreement with the administration of repurchase are set out in Appendix XIII.

Monetary reserves data have been reported by 27 members, of whom one has been computed to have had a repurchase obligation as of April 30, 1948.1 Eleven members, the holdings of whose currencies by the Fund were above 75 per cent of their respective quotas, had no repurchase obligation because their monetary reserves were less than their quotas or had decreased during the year by more than the Fund’s holdings of their currencies had increased. Eight members, the holdings of whose currencies were above 75 per cent of their quotas on April 30, 1948, have not yet reported their monetary reserves data at all or have reported inadequate data.

1

The first repurchase transaction of the Fund took place on May 26, 1949 with Costa Rica.

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