Chapter

Chapter 2: Developments in International Liquidity

Author(s):
International Monetary Fund
Published Date:
September 1971
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General Survey

Since the beginning of 1970, a number of important changes have influenced the development of international liquidity. These changes have affected the quantity, composition, and distribution of international reserves, as well as the availability of conditional liquidity and the use made of short-term credit facilities between national monetary authorities. The quantity of international reserves, after growing sluggishly in the second half of the 1960s, increased in 1970 by exceptional and disquieting proportions by some $16 billion, or 21.8 per cent (Table 1 and Chart 5).1 This was by far the largest annual increase in the period since World War II. The rapid pace of increase continued in the first months of 1971; at the end of March 1971, global reserves were 24 per cent above their level a year earlier. This chapter reviews these developments and concludes with a discussion of some of the policy issues that they have raised.

The acceleration of reserve growth since the beginning of 1970 and the associated changes in the characteristics of reserve developments, which will be detailed below, have reflected in some part deliberate measures taken to strengthen the international reserve system. The establishment of the Special Drawing Account and its activation for the first basic period that began on January 1, 1970 were directed specifically to the expansion, in an appropriate amount, of the level of global reserves; the global reserve level has also been influenced by arrangements made in 1968-69 to strengthen the international reserve system in general and its gold and sterling components in particular.2 The decision on allocation of special drawing rights was designed to restore a rate of growth in global reserves consistent with growth in the trend need for reserves, which was estimated at the equivalent of 5½ to 6¾ per cent a year.3

The fact that global reserves since the beginning of 1970 have increased much more rapidly than allowed for in these estimates reflects an increase of almost 50 per cent in foreign exchange reserves, mainly in the form of claims denominated in U.S. dollars. It should be noted that increases in foreign exchange reserves have in certain important respects (discussed later in this chapter) different effects on national economies and economic policies than reserve increases in gold or SDRs. The increases in foreign exchange reserves in the recent period have resulted from a combination of three main influences: the different phasing of cyclical developments in the largest national economies and a current tendency among national authorities to place more weight on monetary policy than on fiscal policy for purposes of internal stabilization; the persisting maladjustment in balances of payments of certain major countries, including the United States; and growing proliferation of official foreign exchange holdings, involving increased holding of official balances both in the Euro-currency market and in currencies other than the U.S. dollar, tending in both instances to result in an expansion of total foreign exchange reserves.

The conjunctural developments in the world economy, which need to be considered against the background of persisting imbalances in world payments, have been reviewed in Chapter 1. Monetary policy in the United States shifted toward ease in 1970, while large European countries attempted to maintain a considerable degree of credit stringency. As a result, the attraction of short-term capital from other countries to the United States, which had resulted in a U.S. official settlements surplus in 1968 and 1969, gave way to a strong reflux of short-term funds from the United States to European and other countries in 1970. The funds were channeled into the Euro-dollar market, into other money markets outside the United States, and direct to commercial borrowers in Europe and elsewhere; ensuing conversions into non-dollar currencies added to accruals of dollars in official reserves.

The flows of short-term capital were motivated initially by differentials in interest rates and in money market conditions, but in some instances they subsequently gave rise to additional flows of a speculative character. In the 15-month period from the end of 1969 to the end of March 1971, short-term capital flows exceeding $8½ billion went to one country, Germany; as a result, Germany’s reserves increased by virtually the same amount, accounting for three eighths of the increase in global reserves in this period, even though its surplus on current account was tending to decline from its earlier high level. These flows continued in April and in early May, when they were accompanied by heavy movements of funds into a number of other countries, notably Switzerland, the Netherlands, and Japan. Official foreign exchange holdings of Germany alone grew by an additional $3.2 billion in these five weeks. Following the exchange adjustments effected by a number of European countries in early May (see page 3), the movement of short-term funds to these countries was reversed. (See also page 27.)

Increases in official liabilities of the United States, in official claims held in Euro-markets, in sterling reserves held by countries of the overseas sterling area, and in official holdings of deutsche mark, combined to increase total foreign exchange reserves in 1970 by some $14 billion on the adjusted basis (i.e., excluding U.S. holdings of foreign exchange), despite a reduction of some $2 billion in foreign exchange claims as a result of repayments of swap credits granted by countries other than the United States.4

The recent large increases in foreign exchange holdings have reflected in part a reversal of the 1969 flows of funds to the United States, which involved a substantial flow of dollars out of official holdings and a net decline in reserves of industrial countries. (See Table 6.) The increase in global reserves in 1969 was limited to 2 per cent (Table 1). In 1969 and 1970 together, global reserves increased at an annual rate of $9 billion, or 11 to 12 per cent. This was still about twice as large as would be indicated by the estimates referred to above that had been made of annual reserve needs. This expansion was brought about in part by short-term capital flows, and might therefore be undone in the period ahead insofar as these movements are reversed. Nevertheless, the growth of reserves from the beginning of 1970 through the first quarter of 1971 was such, in pace and in composition, as to cause severe strains and to raise questions about the course of international reserves.

The developments in international reserves and, more generally, in the international monetary system since the beginning of 1970 have focused attention on a number of matters. These include the disturbances arising from persisting maladjustments in payments balances of major countries and from movements of short-term capital between international money markets; the effect of reserve flows between countries on the international transmission of inflationary influences; the influence of the Euro-currency markets on these processes and on reserve developments; the role played in the system by foreign exchange reserves held in various forms; and the possible desirability of developing closer international influence or control over the holding of reserves as a whole. In this chapter, aspects of these matters are reviewed in the light of the recent reserve developments, following a more detailed discussion of these developments in the next section.

Components of Reserve Growth

The components of reserve changes in the period 1961-70 are shown in detail in Table 2, which also indicates the sources of these reserve accruals.

The year 1970 showed a further small accrual ($0.3 billion) to official gold holdings,5 following a slightly smaller net accrual in 1969 and the large depletions in official gold stocks in 1967 and 1968. At the same time, there was a substantial net flow of gold in 1970 from national holdings to international institutions, almost entirely on account of transactions between the Fund and its members. These resulted in a net flow of $2.0 billion of gold into the Fund. Gold subscriptions totaled $1.8 billion, mainly in respect of increases in quotas under the Fifth General Review; purchases of gold for currency totaled $0.6 billion, predominantly under the arrangements for the purchase of gold from South Africa; and the Fund liquidated $0.4 billion of its gold investments held in the United States. Together with gold acquired through charges and repurchases, these inflows exceeded by the indicated margin gold outflows from the Fund, predominantly through sales of $0.9 billion of gold for currency, which included substantial amounts in connection with the mitigation of the effect of gold subscriptions related to the quota increases. These transactions are described on a fiscal-year basis in Chapter 3 and Supplementary Note A. Thus, although the modest net global accrual to official gold holdings in 1970 was larger than for any year since 1964, gold held in national reserves fell by the record amount of $1.9 billion, to $37.2 billion. A further slight reduction in countries’ gold reserves took place in the first quarter of 1971, to $36.9 billion; official gold holdings, including holdings of international agencies, showed little change during this quarter, at $41.3 billion.

Countries’ holdings of special drawing rights at the end of 1970 totaled SDR 3.1 billion,6 reflecting the allocation of SDR 3.4 billion at the beginning of the year, and the subsequent net transfer of SDR 0.3 billion to the General Account of the Fund.

Transactions through the General Account of the Fund in 1970, in their impact on global reserves, resulted in a net destruction of reserves. Use of Fund credit (the total of drawings outstanding in the Fund’s credit tranches) was reduced by $0.8 billion. However, the effect of this contractionary influence on reserve positions in the Fund was more than offset by the transfer of gold and special drawing rights to the General Account, to a total of $1.9 billion excluding the realization of $0.4 billion of the Fund’s gold investment, so that reserve positions in the Fund increased by $1.0 billion in 1970, to $7.7 billion (Table 2).

Reserves in foreign exchange in 1970 increased by $14.1 billion, or by almost 50 per cent, as indicated earlier. The major influences in this expansion were the U.S. deficit on official settlements transactions in 1970, and the increases in foreign exchange reserves other than claims on the United States, particularly in the form of official holdings of Euro-dollars (which, however, were in some part connected with the U.S. payments balance, as indicated later in this chapter).

The U.S. official settlements deficit amounted to $10.7 billion, without taking account of the allocation of special drawing rights to the United States (or to $9.8 billion after crediting this allocation). Of this deficit, a total of $1.2 billion was financed by a reduction of the U.S. gold stock and its gold tranche position in the Fund, and a further $2.2 billion by a reduction in its holdings of foreign exchange, leaving $7.3 billion to be financed by an increase in monetary liabilities to official institutions (Table 3). As there was a reduction of $0.4 billion in U.S. investment liabilities to the Fund as a result of the reduction of the Fund’s gold investment, other official monetary claims on the United States increased by $7.7 billion. This increase was exceptionally large, but it nonetheless accounted for only just over one half of the total increase in world foreign exchange reserves (Table 2). Reserves held in sterling by countries in the overseas sterling area increased by $0.5 billion, following an increase of $0.9 billion in 1969; these increases were the combined result of a strong upward trend in the total reserves of the overseas sterling countries, of the provisions of the sterling area agreements of 1968, and of the marked improvement in confidence in sterling since 1969. A further increase of almost $1 billion in global foreign exchange reserves in 1970 reflected increased reserve holdings of deutsche mark held in Germany.

Role of the Euro-Currency Markets

These three components of foreign exchange reserves—reserve liabilities of the United States, the United Kingdom, and Germany—thus accounted for some $9 billion of reserve growth in 1970; whereas known holdings of foreign exchange increased by $14 billion. Since foreign exchange claims representing the extension of swaps and other short-term assistance between monetary authorities were reduced by over $2 billion in 1970, as a result of repayments by the United Kingdom and France, this leaves a residual source of some $7 billion of foreign exchange to be accounted for. The most important component of this residual undoubtedly comprised increases in official holdings invested directly or indirectly in Euro-currency markets, primarily but not exclusively in the form of Euro-dollars. A substantial portion of these official holdings in the Euro-dollar market is related to deposits held by central banks with the Bank for International Settlements (BIS). In 1970 such deposits increased substantially, and the BIS placed a larger portion of its dollar deposits with banks outside the United States.

On the basis of information provided to the Fund by 51 countries, it is estimated that official holdings by these countries in U.S. dollars outside the United States, other than in claims related to central bank assistance, increased in 1970 by about $5½ billion, to a total of about $9 billion. The remaining residual increase of about $1½ billion in unidentified foreign exchange holdings included official holdings of other currencies in Euro-markets, official holdings of Euro-dollars by nonreporting countries, and any change arising from asymmetries in the reporting of official liabilities and assets. The official holdings in the Euro-dollar market are fairly broadly spread among the main groups of countries, as shown in Table 4.

The large increase in official holdings of dollars in the United States and in Euro-markets in 1970 took place against a background of sharply falling interest rates in U.S. money markets. The marked easing of monetary conditions in the United States induced large repayments by head offices of U.S. banks of the borrowings they had made from their foreign branches during the preceding period of extreme tightness in the U.S. money market. Gross liabilities of U.S. banks to their foreign branches had risen from $6 billion at the end of 1968 to a peak of about $15 billion in October 1969. They subsequently fell to below $8 billion at the end of 1970 and to $1½ billion in June 1971. The turnaround in these borrowings was the major factor responsible for the swing in the U.S. official settlements balance from a surplus of $2.7 billion in 1969 to a deficit of $10.7 billion in 1970, and of about $5½ billion in the first quarter of 1971. In the early months of 1971, the U.S. authorities acted to offset part of the impact of these repatriations of banking funds by issuing securities of the Export-Import Bank of the United States and of the U.S. Treasury to a total of $3 billion to foreign branches of U.S. banks. With the repayment of all but a small portion of the outstanding liabilities of U.S. banks to their foreign branches, little scope remains for further outflows of dollars from the United States in this particular form through the banking system.

Placements by central banks of dollar holdings in the Euro-dollar market have the general effect of increasing the size of the Euro-markets and adding to the scope for credit expansion through those markets. To the extent that Euro-banks7 or borrowers from Euro-banks convert these funds into domestic currency, there is a flow of dollars to the domestic central bank and, if the dollars are redeposited in the Euro-market, the expansion of Euro-dollar deposits is carried further; this may lead to a further expansion of official reserve holdings. At the same time, the effect of official placements of Euro-dollars in reducing interest rates in these markets will tend to promote outflows from these markets (or to deter inflows); to the extent that these flows are vis-à-vis accounts of U.S. residents in the United States, the effect will be to reduce the U.S. balance of payments deficit as calculated on the “liquidity” basis below what it would otherwise have been.

In 1970, as indicated above, official holdings in the Euro-dollar market increased very substantially; they accounted for perhaps the major portion of the growth in that market. (See page 103.) Total official holdings denominated in U.S. dollars in 1970—i.e., including both the claims on the United States and official dollar claims on Eurobanks—almost certainly increased by more than would have occurred if all dollars accruing in official hands had been held in the United States. At the same time, the increases in official claims on Euro-banks also tended to keep down the size of the U.S. official settlements deficit (since dollar claims held by central banks in the Euromarkets are not part of U.S. liabilities to official holders). The degree to which the Euro-dollar placements have increased total official dollar holdings, on the one hand, and reduced the U.S. official settlements deficit, on the other hand, cannot be estimated with any precision.

In an attempt to curb the expansionary influence resulting from the holding of official reserves in Euro-currency markets, central banks of major countries in the second quarter of 1971 decided for the time being not to place additional funds in Euro-currency markets and to withdraw funds when such action was prudent in the light of market conditions.

It may be noted that official Euro-dollar claims do not necessarily represent ultimate claims on the United States, any more than do other claims held in the Euro-dollar market. To the extent that Euro-banks were to reduce net claims held outside the United States, such a reduction of claims would be a charge on the dollar holdings of foreign central banks.

Background to Recent Reserve Developments

Reserve developments in 1970, as indicated earlier, represented to a considerable extent the backwash of developments in the previous year, as an easing of monetary conditions in the United States followed the tight monetary conditions of 1969. This expansion also needs to be viewed against the background of the sluggish movement of global reserves in the second half of the 1960s. Thus, over the four years from the end of 1965 to the end of 1969, preceding the exceptional expansion in reserves of 22 per cent in 1970, the annual average increase in reserves was around 1 ¼ per cent. The ratio of reserves at the end of the calendar year to imports during the year, which had fallen from 41 per cent in 1965 to 29 per cent in 1969, turned upward in 1970, to 32 per cent. An alternative basis of comparison, which has been used in previous analyses, is to relate an average of reserves at the end of the preceding year and the end of the current year to imports for that year; on that basis, as indicated in Chart 6, the ratio of reserves to imports continued to decline in 1970. It may be recalled that the ratio of reserves to imports is necessarily of only limited applicability as a yardstick of the degree of reserve ease.

In Table 5 reserve changes and their sources are shown for the years 1969 and 1970 taken together, with comparisons for two preceding four-year periods. The table shows that in 1969 and 1970, as an annual average, countries’ gold holdings fell by $0.9 billion, a rather larger fall than had been experienced on the average in the four years to the end of 1968 (and compared with average net accruals of slightly smaller magnitude in the preceding four years). Official claims on the United States increased by an average of $3.1 billion in 1969-70, following virtual stability in 1964-68. Thus, the net deficit on U.S. official settlements for the two years together, of $8.0 billion or an annual average of $4.0 billion, was financed to the extent of three fourths by an increase in liabilities. (See also Table 3.) The remaining financing through use of reserve assets, over the two years taken together, reflected entirely a reduction of foreign exchange holdings, as a result of repayments by other countries of swap credits previously granted by the United States (the counterpart asset forming part of U.S. foreign exchange holdings as long as the credits were outstanding). The U.S. holdings of gold and its gold tranche position in the Fund increased on balance in 1969 and 1970 together; its holdings of special drawing rights at the end of 1970 were fractionally below its allocation for that year.

In the first six months of 1971, reductions in U.S. reserve assets associated with the financing of its deficit totaled $1.7 billion, comprising reductions of $0.6 billion in the gold stock, $0.5 billion in the U.S. gold tranche position, $0.3 billion in foreign exchange holdings, and $0.3 billion in transfers of special drawing rights.

The main influences affecting reserve developments in 1970 continued to operate through the first quarter of 1971. Large outflows of short-term capital from the United States continued, involving a further large deficit in U.S. official settlements transactions. Global holdings of foreign exchange increased by about $5 billion in the first quarter, to $48½ billion; countries’ holdings of special drawing rights increased by the equivalent of $2.7 billion, reflecting the 1971 allocation of SDR 2.95 billion; but reserve positions in the Fund declined by $0.4 billion, reflecting a further reduction of $0.7 billion in use of Fund credit. In sum, total reserves in the first quarter of 1971 increased by some $7 billion, to $98½ billion (Table 6). In April and May 1971, under the influence of strong speculative flows, reserves of industrial countries rose by a further $4½ billion, entirely in the form of foreign exchange; part of this expansion was reversed by a reflux of speculative funds in June. Thus, reserves of industrial countries in the second quarter of 1971 increased by about $3 billion, compared with $5½ billion in the first quarter (of which $2 billion represented allocations of special drawing rights).

The very large expansion in holdings of foreign exchange in 1970 and in the first quarter of 1971 involved a sharp increase in the proportion of world reserves held in the form of foreign exchange, notwithstanding the introduction of special drawing rights. At the end of March 1971, foreign exchange holdings comprised almost one half of total reserves, compared with less than 40 per cent at the end of 1969 and less than 30 per cent at the end of 1951 (Table 7). Holdings of special drawing rights amounted to almost 6 per cent of the total; and countries’ holdings of gold fell below two fifths of their total reserves, compared with more than one half at the end of 1969 and two thirds at the end of 1951.

Reserve gains in the 15 months to the end of March 1971 were spread over a large number of countries, partly as a result of allocations of special drawing rights. However, gains of exceptional size were heavily concentrated. Thus, the four countries showing the largest reserve increases in 1970—Germany, Canada, Japan, and France—accounted for 63 per cent of the global increase. (See Table 9.) Reserve increases among less developed countries were shared by all four geographical groups (Table 6). For three of the four groups of less developed countries, there was also an increase in the proportion of reserves to imports in 1970 (Chart 6).

Among 60 developed and less developed countries, 43 showed a net reserve gain in 1970. Apart from the United States, only 16 countries showed overall deficits (based on changes in reserves, after allowing for SDR allocations, changes in credit tranche positions in the Fund, and in other official monetary liabilities); and the sum of deficits of these 16 countries was about $1 billion, an exceptionally small amount. The sum of official surpluses in 1970 was close to $20 billion. The discrepancy between these amounts reflected the official settlements deficit of the United States, allocations of special drawing rights, and asymmetries of unusual size connected with official holdings of reserves in Euro-currency markets. (See pages 81-82.)

The reserve gains experienced by the great majority of countries in this period contributed to a large reduction in recourse to official credit. Use of Fund credit, as noted above, declined substantially in 1970, and the decline was still more marked in the early months of 1971. At the end of June 1971, use of Fund credit—i.e., drawings outstanding in the credit tranches—totaled $2.1 billion, compared with $4.0 billion at the end of 1969. About one half of this decline reflected repurchases by the United Kingdom, but the decline in use of Fund credit extended to all the main country groups. For the less developed areas as a whole, use of Fund credit declined from $1.2 billion at the end of 1969 to $0.7 billion at the end of 1970, with little change in the first six months of 1971.

Since this net repayment of Fund credit has occurred at the same time as potential access to Fund credit has been increased by the substantial increase in Fund quotas (see pages 42-43), a particularly sharp expansion has taken place in the availability of conditional liquidity through credit tranche positions in the Fund. This availability rose from $17.0 billion at the end of 1969 to $25.3 billion at the end of 1970 (Table 1) and $26.5 billion at the end of June 1971. The tendency toward a reduced recourse to the Fund’s conditional facilities is to be attributed essentially to the marked improvement in the overall payments positions of most countries, referred to above, which is to an important degree the counterpart of the deterioration of the official settlements balance of the United States and of the very large increase in global reserves.

Additions were also made to conditional credit available on a regional basis; mutual credit facilities arranged by members of the European Economic Community to a total of $1 billion for short-term monetary support (with a further $1 billion subject to negotiation) have been in existence since early 1970 although no drawings have yet been made on these facilities. A credit facility currently equivalent to $2 billion for medium-term assistance is to be made available from January 1972.

The availability and use made of bilateral credit facilities between monetary authorities in 1970 are indicated in Table 8. This shows a sharp reduction, from $19.7 billion to $16.0 billion, in total ceilings (i.e., used and unused availabilities) of swaps and related credit facilities. This reduction reflects mainly the substantial repayments made by the United Kingdom and France; by the end of March 1971, the United Kingdom had fully paid off its swap indebtedness, as France had done during 1970. The only significant drawings on swap facilities in 1970 were those of $0.5 billion made by the United States. Total outstanding swap indebtedness at the end of 1970 was reduced to $1.8 billion, compared with $5.3 billion at the end of 1969 and the peak of $6.8 billion at the end of 1968.

Reserve Growth and Short-Term Capital Movements

The extent to which the reserve increases in 1970 were associated with inflows of capital is indicated in Table 9; to a predominant extent, these net flows comprised movements of short-term capital. The table shows, for the ten countries having the largest increases in reserves in 1970, the extent to which these reserve gains were attributable to current transactions, capital flows, and SDR allocations. In the first months of 1971, the major reserve gains appear to have been associated still more strongly with capital movements.

The large flows of short-term capital experienced in recent years have for the most part comprised movements of funds to or from the United States or the Euro-dollar market. To the extent that such flows influence the holding of dollars in official reserves, a corresponding impact is exerted on the level of global reserves. Reserve increases stemming from such influences, which to a predominant degree have underlain the very large recent reserve growth, have certain distinctive characteristics. Besides being concentrated on the particular countries receiving the capital, they are accompanied by a corresponding increase in short-term external liabilities of banks and business corporations in these countries, involving a contingent charge on their official reserves against the event of a reflux of funds.

These considerations suggest that an increase in global reserves of this character does not involve the same addition to global reserve ease as, for example, a generalized increase in world reserves of corresponding amount through allocations of special drawing rights; and that increases associated with short-term capital flows may, at least in part, be of a temporary character. The extent to which the provision of additional means of financing for these capital flows would be warranted will depend, inter alia, on the views taken of the costs and benefits of curtailing volatile capital flows through a variety of measures. (See pages 13-16.)

Whereas reserve increases that are associated with increases in short-term monetary liabilities or repayment obligations have a weaker influence on global reserve ease than increases in equal magnitude through SDR allocations, their potential expansionary effect on domestic money and credit is notably larger. The great majority of participant countries in the SDR scheme have made arrangements to freeze the domestic currency counterpart of their SDR allocations. By contrast, other accruals of reserves, whether associated with current or capital transactions, in most countries add pari passu, in their immediate effect, to the monetary base of the recipient countries, while there may be no corresponding contractionary effect on the monetary base in other countries.

Reserves and Inflation

The process of reserve growth can, depending on the source and nature of the additional reserves, have an important impact in adding to expansionary monetary influences in domestic economies. It is with an inflationary impetus of this kind, which has been widely experienced in the recent period, that this section is primarily concerned. At the same time, it is widely agreed that the effect of a particular level of global reserves on the balance between inflationary and deflationary forces in the world economy is limited and indirect. It would appear that, in the past, the increased availability of reserves has not played a very important role in determining the degree of demand pressure prevailing in the major economies. Low levels of reserves in certain countries have indeed acted as a constraint on the pursuit of more expansionary demand policies and, in some cases, the need to protect the level of reserves has helped to mobilize the necessary public support for disinflationary financial policies. But in general, and over time, the degree of demand pressure prevailing in the major economies since World War II has been determined predominantly by domestic considerations. The degree of reserve stringency in particular countries has tended to have an important influence on the use made of exchange rate adjustment and payments restrictions. The removal of the constraint on policy imposed by a low level of reserves may therefore allow some countries to pursue more expansionary policies than they could in the past. However, a much more direct and more substantial inflationary effect may be expected from monetary effects of reserve increases, stemming from inflows of gold or foreign exchange.

In 1970 and the early months of 1971, a number of industrial countries, and also some primary producing countries, found their attempts to curb inflation complicated or hampered by the expansionary monetary impetus arising from an influx of-reserves, typically taking the form of an inflow of capital. Where an inflow of foreign exchange is exerting undesired upward pressure on a country’s monetary base, and where the country is not able or is not prepared to check the inflow through direct measures of capital control or through selective fiscal measures or exchange rate measures, the authorities have two broad alternatives open to them in their monetary policy. If an attempt is made to fend off the reserve inflow, this will usually necessitate some increase in domestic credit and a reduction in interest rates to a level below that appropriate for domestic stabilization. The resulting expansion in domestic credit and in money supply will then exceed what is desired and what would have occurred in the absence of the external inflow.

An alternative course of action, comprising an attempt to neutralize the domestic monetary impact of the inflow of capital, is to offset the primary expansion in the domestic monetary base resulting from the influx of reserves by exerting an equivalent contractionary impact through monetary policy, e.g., by open market sales of domestic securities or by increases in minimum reserve requirements. A policy of this kind, attempting to insulate domestic monetary conditions from external influences, may be subject to two limitations. The first limitation is that the array of instruments available for acting on the domestic monetary base may be limited, and use of such instruments beyond a certain point may in some instances have undesired structural effects. Second, such a policy of domestic insulation will necessarily involve large accruals of reserves, which must be expected to continue in some degree as long as interest rates and credit conditions remain out of line with those in other markets, and in some circumstances may accelerate to unmanageable proportions.

Where the differences in interest rates and availability of credit reflect differences in conjunctural conditions, the differential in monetary conditions will be a temporary phenomenon, although it may nonetheless cause severe strains. The addition to reserves resulting from a given interest differential may in some circumstances slacken over time, either because of the limited willingness of international investors to hold funds in a particular currency, at least without cover for the exchange risk, or because inflows are curtailed by official restrictions of a number of kinds. It may then be possible to neutralize or partly neutralize the domestic monetary impact of the capital inflow by means of domestic monetary policy. The experience of the United Kingdom in the recent period conforms in certain respects to this pattern.

In other circumstances, however, capital flows may progressively increase in dimension, and domestic neutralization through monetary measures may not be considered feasible on a sufficient scale. Thus, where the capital flows set off by interest rate considerations occur in a framework of latent expectations of changes in officially permitted exchange rates (i.e., whether in parities or in movements of rates beyond the prescribed margins), the initial flows of interest-motivated funds may themselves trigger these exchange rate expectations. Then, continuance of the interest differential, far from involving a gradual diminution of capital flows, will rather involve an acceleration of such flows, which will have an increasingly speculative and self-aggravating content; such flows may at some point become unsustainable. The large inflows of capital to Germany and the Netherlands experienced in 1970 and the early months of 1971 (see page 20) may be interpreted in this light. In these countries, defense of the existing parities involved a combination of undesired increases in official reserves and of external liabilities of commercial banks or firms, together with undesirably large increases in money supply. Somewhat similar influences were felt by Canada, prior to its action in May 1970 in ceasing to maintain its exchange rate within the established margins.

External monetary influences exacerbated the problems of countering inflation in a number of countries in 1970, although in other important countries, the contribution of domestic influences to inflationary pressures remained predominant. In Germany the increase in reserves in 1970, measured as the change in net foreign assets, was equivalent to 40 per cent of the stock of “base money” or reserve money (holdings of cash plus banks’ deposits at the central bank) at the beginning of the year; the German authorities did not find it possible to neutralize, in full, expansionary forces of this scale. Other countries which experienced large increases in both money supply and in net foreign assets in 1970 included Canada, France, and the United Kingdom. In Italy and Japan, by contrast, the increase in net foreign assets was relatively small in relation to domestic monetary expansion.

Reserve Ease and the Adjustment Process

The inflationary developments in the world economy, which have been referred to above in certain aspects and discussed more fully in Chapter 1, must also be considered in the context of their implications for the size of global reserve needs. As concerns deliberate reserve creation through allocation of special drawing rights, the connection with the degree of world inflation, as pointed out earlier, is mostly indirect and diffuse. Generally, the prevalence of inflationary forces in the world economy calls for a greater degree of caution in deliberate reserve creation than would be appropriate in conditions of prevailing deflationary influences. In this context consideration has also to be given to the fact that, as a legacy of past inflation, the real value of a given stock of reserves has been reduced.

A sign of the pervasiveness of the recent inflationary pressures is that they extended the range of price inflation to internationally traded goods, which have shown substantial and general price increases for the first time since the boom of 1950-51 associated with the Korean War. From the mid-1950s to the end of 1968, there was no net change in world import prices. In 1969 a weighted average of world import prices showed an increase of 3 per cent; in 1970 the increase accelerated to 5 per cent. However, the upward movement of international prices appears to have slackened since the middle of 1970. Expansion in world import volume has declined somewhat from the exceptionally high increase of almost 13 per cent in 1968, to 10 per cent in 1969 and to 9 per cent in 1970. But, as a result of the increases in foreign trade prices, the increase in the value of world imports accelerated from 11½ per cent in 1968 to almost 14 per cent in 1969 and to 14½ per cent in 1970. Even so, as indicated earlier in this chapter, the exceptional increase in gross reserves in 1970 checked the earlier long decline in the proportion of reserves to imports (if reserves are expressed at year-end levels). A marked increase has also taken place in another measure of reserve ease, the ratio of annual changes in reserves to imports, on the basis of both gross reserves and net reserves. (See Chart 6.)

The effects on trade and payments policies that would be expected to result from an increase in global reserve ease would include the following: reduced reliance on trade and payments restrictions, an increase in the volume and a reduction in the tying of aid, a reduced propensity for countries to devalue their currencies and an increased willingness to undertake revaluations, and a reduced reliance on balance of payments credits. Not all these effects can necessarily be regarded as favorable: they are reviewed in this section as relevant indicators of an increase in reserve ease. The increases in net and gross reserves since the beginning of 1970 have been associated with a number of these developments, although the extent to which such developments can be precisely attributed to the increases in reserves is less clear; in particular, the impact of the large deficit in the U.S. balance of payments, and an equivalent overall surplus in the balance of payments of other countries, would tend to ease balance of payments constraints in countries other than the United States, aside from its impact on reserves. Together, these developments—the increase in global reserves and the large U.S. deficit—have undoubtedly had a considerable impact in easing balance of payments constraints on other countries, as regards policies resulting in payments outflows. The increased difficulties for domestic monetary management resulting from the large inflows of short-term capital were discussed in an earlier section.

No good measure exists of general tendencies in the prevalence of trade and payments restrictions. The best judgment that can be made is that changes in the restrictive system of member countries in 1969-70 “appear on balance to have resulted in a reduction in restrictions on current payments,” and that these relaxations of restrictions were aided by the increases in international reserves in 1970. However, in the sphere of non-tariff trade barriers the situation is less clear, and it is possible that on balance there was an increase in such restrictions.8

On a cautious assessment of these overall developments, it can be concluded that the earlier apparent tendency toward a possible increase in trade and payments restrictions, in particular in some large trading countries, has been checked, and that the increased availability of reserves has helped countries that had imposed restrictions on grounds of financial stringency, rather than of protectionist intent, to ease such restrictions. At the same time, the easing of the reserve situation has not removed the danger of a recrudescence of trade restrictions on protectionist grounds.

The marked tendencies toward a reduction in reliance on balance of payments credits in 1970, resulting in large net repayments of central bank credits and in substantial net repurchases in the credit tranches of the Fund, have been referred to earlier and are detailed in Tables 2 and 8. These tendencies reflect, inter alia, the successful reversal of the earlier payments deficits of the United Kingdom and France. The expansion in global net reserves has allowed the needed surpluses to be acquired by these countries without reducing the reserves available to other countries. The additional accrual of reserves resulting from increased holdings of foreign exchange has not had an equivalent impact on global reserve ease. However, these increases, together with the increases in net global reserves, have in general reduced the pressure on countries to devalue their currencies and have provided an increased tendency toward currency appreciations. It may be noted that, since the devaluation of the French franc in August 1969, six upward changes in the external value of currencies of industrial countries have taken place as a result of official action (including three appreciations in parity and three cases in which currencies have been allowed to appreciate in the market above the intervention point based on parity). No downward changes among industrial countries have taken place in this period.

Issues for Reserve Policy

The indicators that have been reviewed above point to a significant increase in reserve ease since the end of 1969. In this Report, no judgment is attempted on the implications that this increase may have for policy with regard to international reserve creation. A number of elements in recent developments, including the role played by factors that may prove to be temporary, suggest that such a judgment can more suitably be made when these events can be seen in a somewhat longer perspective. A decision with respect to future allocations of special drawing rights will need to be made in 1972, the final year of the first basic period. Without in any way prejudging that decision, this concluding section reviews a number of general issues for reserve policy and international monetary management that have been raised by the reserve developments described earlier in this chapter.

These developments, it may be recalled, have included an expansion on an unprecedented scale of reserves in the form of foreign exchange, and a proliferation in the form and location of foreign exchange holdings. The inflow of reserves has contributed to the difficulties faced by a number of countries in their attempts to counter inflation. The growth of foreign exchange reserves has also had adverse effects on the working of the international adjustment process. These disturbing and unplanned developments have occurred at the same time as the initiation of deliberate management of international reserve creation through the allocation of special drawing rights.

Considered in itself, there is no doubt that the experience to date with the working of the SDR facility has been markedly encouraging. The allocation of special drawing rights has made additional reserves available to a wide range of countries, including many that have not shared in inflows of short-term funds. It has strengthened the reserve position of all countries taken together. It has helped to permit reduced reliance on payments restrictions and to avoid undue resort to balance of payments credits.

Assessing the SDR facility in the context of developments in the international reserve system as a whole, the situation may be described in the following terms.

Recent experience has demonstrated the ability of the international community to create an international reserve asset and to use that reserve asset smoothly and effectively in day-to-day operations. The experience has also emphasized that such action of itself is not sufficient to regulate the volume of aggregate international reserves, and that further problems remain to be tackled if the reserve system as a whole is to be made responsive to deliberate management. The immediate issues and problems concerned include the following.

1. The persisting maladjustment in the balances of payments of some of the major industrial countries, notwithstanding the successful adjustment of earlier troublesome imbalances of other countries (see page 12), continues to have a serious impact on the development of the international reserve system. The adjustment problem has been complicated in the recent period by the divergence in business conditions in the United States and other industrial countries, and by the associated large flows of short-term capital stimulated by differential interest rates and monetary conditions. The evolution of the system of world reserves will be affected to an important extent by the pace at which the deficit in U.S. payments is reduced; progress in this respect will, of course, be dependent in part on developments and actions in surplus countries. Global reserve developments will also be importantly affected by the means by which remaining U.S. deficits are financed.

2. The fact that a substantial portion of reserve growth has taken the form of foreign exchange balances, held both in the main reserve centers and also outside them in Euro-currency markets or in domestic currency in national markets of other countries, points toward the need to consider the desirability of coordination of policies regarding the location and management of reserves. The holding of official balances in Euro-currency markets tends to promote the further expansion of these markets and may exacerbate the problems arising from the two-way flow of foreign exchange balances between private and official holdings. The development of the SDR facility has marked an important step in a gradual evolution in the direction of international understandings on the rate of growth in global reserves. An important issue that will deserve further attention for the longer run is whether, and if so by what means, this general principle should be extended in some measure to cover understandings with respect to other forms of reserves.

3. A third issue concerns the relation between international capital flows and the need for reserves and credit facilities. As indicated earlier in this chapter, the very large expansion of reserves that has taken place since the beginning of 1970 has been directly associated with short-term capital flows. Active consideration is now being given, in the Fund and elsewhere, to ways in which in the future the magnitude of such flows may be limited. This involves consideration of a broad range of measures in the fields of exchange rate policy, of fiscal and monetary policy, and of direct or indirect limitations on capital flows through administrative regulations and controls. The elements involved in this review have been discussed in Chapter 1. The future need for reserves and for international credit facilities will depend in part on the extent to which it will prove feasible and desirable to limit volatile flows of international funds by such means.

Table 1.Reserves, Credit Tranche Positions, and Other Unused Credit Facilities, End of Years, 1951-70(In billions of U.S. dollars)
End of

Year
GoldSDRsReserve

Positions

in Fund
Foreign Exchange1Total

Reserves

Adjusted1
Credit

Tranche

Positions

in Fund
Other

Unused

Credit

Facilities2
195133.91.715.150.76.5
195233.91.815.651.36.5
195334.31.916.953.17.1
195434.91.818.154.87.8
195535.41.918.455.77.9
195636.12.319.257.57.5
195737.32.318.458.07.2
195838.02.618.358.97.3
195937.93.217.959.012.9
196038.03.620.361.713.7
196138.94.220.863.812.81.7
196239.33.821.364.413.41.4
196340.23.923.667.713.52.0
196440.84.224.869.813.95.8
196541.95.424.271.412.53.8
196640.96.324.371.617.24.5
196739.55.726.571.818.25.3
196838.96.528.073.517.213.1
196939.16.729.175.017.014.3
197037.23.17.743.2391.325.314.2
Annual percentage changes
1952-0.13.73.51.10.3
19531.26.48.53.610.0
19541.8-2.46.63.29.9
19551.31.91.91.50.4
19561.821.24.43.3-4.3
19573.51.5-4.10.9-4.7
19582.010.6-0.41.61.6
1959-0.327.1-2.50.276.9
19600.39.813.54.85.9
19612.216.52.63.2-6.24
19621.1-8.72.50.94.3-16.2
19632.43.810.45.10.939.2
19641.55.55.23.12.9193.4
19652.529.4-2.42.4-10.1-35.3
1966-2.317.70.60.238.218.4
1967-3.4-9.29.00.35.717.7
1968-1.4-—12.95.72.3-5.5149.3
19690.53.73.82.0-1.29.3
1970-5.0414.448.621.848.9-1.0
Annual average percentage change0.548.76.23.29.14
Sources: International Financial Statistics and Table 8.

Excluding U.S. holdings of foreign exchange and including throughout the period amounts incorporated in published U. K. reserves in 1966 and 1967 from proceeds of liquidation of U. K. official portfolio of dollar securities.

Unutilized drawing facilities under swap arrangements and related credit arrangements between central banks and treasuries, as shown in Table 8.

Partly estimated.

A percentage change cannot be calculated, the base number being zero.

Sources: International Financial Statistics and Table 8.

Excluding U.S. holdings of foreign exchange and including throughout the period amounts incorporated in published U. K. reserves in 1966 and 1967 from proceeds of liquidation of U. K. official portfolio of dollar securities.

Unutilized drawing facilities under swap arrangements and related credit arrangements between central banks and treasuries, as shown in Table 8.

Partly estimated.

A percentage change cannot be calculated, the base number being zero.

Table 2.Sources of Reserve Growth, 1961-701(In billions of U.S. dollars)
Annual Changes in1961196219631964196519661967196819691970Memo Item

Outstanding

Totals at the

End of 1970
1. Gold Reserves Monetary gold0.60.40.80.70.2-1.6-0.70.10.3
Gold transactions by IMF and other international institutions (sales +)0.20.1-0.10.8-0.90.20.10.1-2.1
Countries’ gold reserves0.80.40.90.61.0-0.9-1.4-0.60.2-1.937.2
2. Special Drawing Rights Allocation of SDRs3.4
IMF holdings of SDRs (increase—)-0.3
Countries’ SDR holdings3.13.1
3. Reserve Positions in IMF Use of IMF credit1.00.40.10.31.6-0.51.20.3-0.8
IMF gold transactions (inflow +)2-0.40.10.1-0.1-0.31.0-0.41.6
IMF transactions in SDRs (inflow +)—..—0.3
IMF surplus (increase—)-0.1-0.1-0.1-0.1-0.1-0.1-0.1-0.1-0.1
Reserve positions in IMF0.6-0.40.10.21.21.0-0.60.70.21.07.7
4. Foreign Exchange Holdings
a. U.S. dollars U.S. deficit on official settlements31.32.72.01.61.3-0.33.4-1.6-2.710.74
U.S. reserve assets (including foreign exchange) used in transactions with countries-0.6-1.5-0.4-0.2-1.2-0.8-0.10.91.2-3.0
(i) Official claims on United States 50.71.21.61.40.1-1.13.3-0.7-1.57.7623.9
(ii) Identified official holdings of Euro-dollars 70.10.70.31.2-0.15.58.9
b.Official sterling holdings of overseas sterling area0.2-0.10.40.1-0.1-0.2-1.0-0.20.90.55.4
c.Official deutsche mark holdings80.30.91.5
d.Official French franc holdings9-0.1-0.10.1-0.1-0.10.10.4
e.Foreign exchange claims arising from swap credits and related assistance100.4-0.30.70.91.2-0.1-2.20.7
f.Unidentified Euro-currencies and residual 11-0.4-0.50.2-0.6-0.4-0.1-1.30.11.71.62.4
Countries’ holdings of foreign exchange0.50.52.21.2-0.60.12.21.51.114.143.2
Total Reserve Growth2.00.63.32.11.60.20.21.51.516.291.3
Sources: International Financial Statistics; Deutsche Bundesbank, Monthly Bulletin; and Fund staff information and estimates.

Adjusted reserves. See footnote 1, page 18.

Including gold subscriptions and effect of IMF gold deposits and gold investments.

Unlike the other components of reserve growth listed above, the deficit is already in a flow dimension and therefore is not expressed as a change from the previous year.

Before allocation of SDR 0.9 billion.

Includes claims on the United States denominated in the claimant’s own currency, i.e., Roosa bonds.

Excludes $0.4 billion in respect of reduction in IMF gold investment.

Fund staff estimates based on information supplied by 51 countries.

Estimates of deutsche mark claims of monetary authorities on Deutsche Bundesbank and German commercial banks, derived from Deutsche Bundesbank, Monthly Bulletin, December 1970 and May 1971.

Comprises foreign exchange holdings of the Malagasy Republic, Mali, and of common central banks of Equatorial Africa and West Africa, plus Fund staff estimates.

See footnote 4 on page 20.

Includes asymmetries arising from the fact that data on U.S. and U. K. currency liabilities are more comprehensive than data on official foreign exchange holdings shown in International Financial Statistics.

Sources: International Financial Statistics; Deutsche Bundesbank, Monthly Bulletin; and Fund staff information and estimates.

Adjusted reserves. See footnote 1, page 18.

Including gold subscriptions and effect of IMF gold deposits and gold investments.

Unlike the other components of reserve growth listed above, the deficit is already in a flow dimension and therefore is not expressed as a change from the previous year.

Before allocation of SDR 0.9 billion.

Includes claims on the United States denominated in the claimant’s own currency, i.e., Roosa bonds.

Excludes $0.4 billion in respect of reduction in IMF gold investment.

Fund staff estimates based on information supplied by 51 countries.

Estimates of deutsche mark claims of monetary authorities on Deutsche Bundesbank and German commercial banks, derived from Deutsche Bundesbank, Monthly Bulletin, December 1970 and May 1971.

Comprises foreign exchange holdings of the Malagasy Republic, Mali, and of common central banks of Equatorial Africa and West Africa, plus Fund staff estimates.

See footnote 4 on page 20.

Includes asymmetries arising from the fact that data on U.S. and U. K. currency liabilities are more comprehensive than data on official foreign exchange holdings shown in International Financial Statistics.

Table 3.U.S. Balance of Payments and Its Financing, 1969-70(In billions of U.S. dollars)
1969-70
19691970TotalAnnual rate
Balance on goods and services1.93.75.62.8
Transfers and long-term capital-4.8-6.0-10.8-5.4
Basic balance-2.9-2.3-5.3-2.6
Short-term capital (including banking liabilities)15.6-8.4-2.7-1.4
Official settlements balance2.7-10.7-8.0-4.0
Financed by
Reserve liabilities (decrease—)-1.57.35.82.9
Reserve assets (increase—)
Gold-1.00.8-0.2-0.1
IMF gold tranche-1.00.4-0.7-0.3
Foreign exchange0.82.23.01.5
Total reserve transactions-1.23.42.11.1
Memorandum item: SDR allocation (—)-0.9-0.9-0.4
Reserve change including SDR allocation (increase—)-1.22.51.30.7
Source: U.S. Department of Commerce, Survey of Current Business.

Official settlements balance less basic balance.

Source: U.S. Department of Commerce, Survey of Current Business.

Official settlements balance less basic balance.

Table 4.Estimated Official Holdings of Euro-Currencies, 1964-70(In billions of U.S. dollars)
1964196519661967196819691970
Identified official holdings of Euro-dollars 1
Ten industrial countries20.40.51.00.91.71.04.1
Other industrial countries30.20.20.30.50.50.50.8
Total, industrial countries0.70.81.31.42.11.54.9
More developed areas0.20.20.30.30.40.41.3
Less developed areas0.20.30.40.70.91.52.7
Total, primary producing countries0.40.50.60.91.31.94.0
Total, 51 countries11.11.21.92.33.43.48.9
Unidentified official holdings of Euro-currencies and
residual sources of reserves41.71.21.0-0.4-0.51.02.4
Sources: Fund staff information and estimates.

Fund staff estimates based on information supplied by 51 countries.

Belgium, Canada, France, Germany, Japan, Italy, the Netherlands, Sweden, Switzerland, and the United Kingdom.

Austria, Denmark, and Norway.

Includes asymmetries in data on reserves and liabilities: see footnote 11 of Table 2.

Sources: Fund staff information and estimates.

Fund staff estimates based on information supplied by 51 countries.

Belgium, Canada, France, Germany, Japan, Italy, the Netherlands, Sweden, Switzerland, and the United Kingdom.

Austria, Denmark, and Norway.

Includes asymmetries in data on reserves and liabilities: see footnote 11 of Table 2.

Table 5.Summary of Sources of Reserve Growth, End of 1960-End of 1970(In billions of U.S. dollars)
Annual Averages
End of

1960 to

end of

1964
End of

1964 to

end of

1968
End of

1968 to

end of

1970
1. Gold: country holdings0.7-0.5-0.9
2. SDRs: country holdings1.6
3. Reserve positions in the
Fund0.10.60.6
4. Official claims on the
United States1.20.43.1
5. Official holdings of Euro-
dollars0.62.7
6. Official sterling holdings of
overseas sterling area0.1-0.40.7
7. Foreign exchange claims
arising from swap claims
and related assistance0.10.6-1.2
8. Estimated official holdings
of deutsche mark and
French francs-0.10.6
9. Residual-0.1-0.41.7
Total2.00.98.9
Sources: Table 2, International Financial Statistics, and Fund staff information and estimates.
Table 6.Countries’ Official Reserves, Adjusted, 1960, 1964, and 1968-First Quarter 19711(In millions of U.S. dollars)
Total at End of PeriodComposition of Reserves at End of March 1971
19601964196819691970March

1971
GoldSDRsReserve

positions

in the Fund
Foreign exchange
Industrial Countries
United States19,35916,24012,18214,18313,85814,08610,9631,4431,680
United Kingdom5,0943,6912,4222,5272,8273,3171,1234821,711
Total24,45319,93114,60416,71016,68517,40312,0861,9251,6801,711
France2,2725,7244,2013,8334,9605,4903,5273501,613
Germany27,0337,8829,9487,12913,61015,8023,97745098410,391
Italy33,2513,8245,3425,0135,2996,0492,8842162912,658
Belgium and Netherlands3,3694,5714,6504,9176,0816,6143,2786181,0021,716
Switzerland2,3243,1203,9323,9954,7013,9422,8061,136
Other industrial Europe41,8453,3233,4863,4013,8324,1381,0072353622,534
Total, industrial Europe20,09428,44431,55928,28838,48342,03517,4791,8692,63920,048
Canada1,9912,8903,0463,1064,6794,8457913005863,168
Japan1,9492,0192,9063,6544,8395,8985392767984,285
Total, industrial countries48,48753,28452,11551,75864,68670,18030,8954,3705,70429,212
Primary Producing Countries
More developed areas
Other European countries 52,3583,9094,2604,8695,6916,1361,8161832323,906
Australia, New Zealand, and South Africa1,3122,6862,9902,7712,8293,1948742123331,774
Total, more developed areas3,6706,5957,2507,6408,5209,3302,6903955655,680
Less developed areas
Western Hemisphere62,8102,8403,9354,4955,6155,7201,0805315053,600
Middle East71,4152,3203,3103,0353,1003,4401,00242642,330
Asia83,0903,0954,2154,8155,1405,2856782742674,065
Africa92,1701,5902,4803,0654,1354,3954002321813,580
Total, less developed areas109,5859,91014,11015,56018,11518,9603,2901,0781,01713,575
Memorandum item:

of which selected oil producing countries11
1,4142,1783,0903,4674,1904,4349491031743,206
Grand Total61,74369,78973,47574,95891,32198,47036,8705,8427,28648,464
source: International financial statistics.

Excluding CMEA countries, mainland China, etc.; also excludes U.S. holdings of foreign exchange but includes U. K. dollar portfolio. Totals may not add because of rounding and because some area totals include unpublished data.

Includes the Bundesbank’s investment in U.S. and U. K. Treasury paper acquired in accordance with the U.S.-German agreements of 1967 and 1968 and the 1968 U. K.-German agreement. On March 31, 1971 these investments totaled $601 million.

Includes swap claims and nonmarketable U.S. Government securities.

Austria, Denmark, Luxembourg, Norway, and Sweden.

Finland, Greece, Iceland, Ireland, Malta, Portugal, Spain, Turkey, and Yugoslavia. Also includes unpublished gold reserves including gold to be distributed by the Tripartite Commission for the Restitution of Monetary Gold.

Argentina, Bolivia, Brazil, Central America, Chile, Colombia, Dominican Republic, Ecuador, Guyana, Haiti, Jamaica, Mexico, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay, and Venezuela.

Cyprus, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Saudi Arabia, the Syrian Arab Republic, the United Arab Republic, and the People’s Democratic Republic of Yemen since 1970.

Afghanistan, Burma, Ceylon, China, India, Indonesia, Korea, Malaysia, Nepal, Pakistan, the Philippines, Singapore, Thailand, and Viet-Nam and SDRs and reserve positions in the Fund only of Cambodia and Laos.

Excluding South Africa and the United Arab Republic.

Includes residual.

Iran, Iraq, Kuwait, the Libyan Arab Republic, Saudi Arabia, Trinidad and Tobago, and Venezuela.

source: International financial statistics.

Excluding CMEA countries, mainland China, etc.; also excludes U.S. holdings of foreign exchange but includes U. K. dollar portfolio. Totals may not add because of rounding and because some area totals include unpublished data.

Includes the Bundesbank’s investment in U.S. and U. K. Treasury paper acquired in accordance with the U.S.-German agreements of 1967 and 1968 and the 1968 U. K.-German agreement. On March 31, 1971 these investments totaled $601 million.

Includes swap claims and nonmarketable U.S. Government securities.

Austria, Denmark, Luxembourg, Norway, and Sweden.

Finland, Greece, Iceland, Ireland, Malta, Portugal, Spain, Turkey, and Yugoslavia. Also includes unpublished gold reserves including gold to be distributed by the Tripartite Commission for the Restitution of Monetary Gold.

Argentina, Bolivia, Brazil, Central America, Chile, Colombia, Dominican Republic, Ecuador, Guyana, Haiti, Jamaica, Mexico, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay, and Venezuela.

Cyprus, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Saudi Arabia, the Syrian Arab Republic, the United Arab Republic, and the People’s Democratic Republic of Yemen since 1970.

Afghanistan, Burma, Ceylon, China, India, Indonesia, Korea, Malaysia, Nepal, Pakistan, the Philippines, Singapore, Thailand, and Viet-Nam and SDRs and reserve positions in the Fund only of Cambodia and Laos.

Excluding South Africa and the United Arab Republic.

Includes residual.

Iran, Iraq, Kuwait, the Libyan Arab Republic, Saudi Arabia, Trinidad and Tobago, and Venezuela.

Table 7.Percentage Composition of Adjusted Global Reserves, End Of 1951, 1961, 1969, 1970, And First Quarter 1971
1951196119691970First

Quarter

1971
Gold66.960.952.240.737.4
SDRs3.45.9
Reserve positions
in the Fund3.46.59.08.47.4
Foreign exchange29.732.638.847.449.2
Total100.0100.0100.0100.0100.0
Source: International Financial Statistics.
Table 8.Swap Facilities and Related Credit Facilities of Central Banks and Treasuries, 1961-70(In millions of U.S. dollars)
1961196219631964196519661967196819691970Total, 1961-70
I. Ceilings at the end of period1
U.S. Treasury arrangements (1961) and
Federal Reserve System swap net-
work (1962-70)5759002,0502,3502,8004,5007,08010,50510,98011,230
Other facilities (excluding credit lines
under the regular FRS network)
EEC mutual short-term support fund1,000 2
In support of the pound3900(250)(3,330)1,7101,9803,4555,7755,4003,100
In support of the Canadian dollar(500)(900)
In support of the Italian lira92590125(405)
In support of the French franc2,3002,250
In support of the Belgian franc(100)
In support of the Danish krone(200)
In support of the Spanish peseta300
U.S. Treasury ad hoc swap line with
the Netherlands Bank126
Nordic swap facility (Denmark, Fin-
land, Iceland, Norway, Sweden)404040404081818181
U.S. Treasury foreign exchange agree-
ments with Latin American countries
and the Philippines2322208596141188225230225(150)
Total1,7071,6602,4256,7414,6916,70810,96719,88119,66115,966
II. Utilization
U.S. Treasury arrangements of 1961
Drawings46150196
Repayments-46-150-196
Federal Reserve System swap network
Drawings by System4207674756907102,0461,2076951,1958,205
Repayments by System-190-613-564-835-565-565-2,551-797-715-7,395
Drawings by United Kingdom251,3701,7656251,3502,0457954008,375
Repayments by United Kingdom-25-1,170-1,490-750-650-1,945-1,295-1,050-8,375
Drawings by other countries250951803025711,9491,6121,4346,393
Repayments by other countries-250-45-230-102-425-1,777-2,130-1,434-6,393
Total drawings6708872,0252,4551,6373,9675,2013,1023,02922,973
Total repayments-440-683-1,964-2,325-1,417-1,640-6,273-4,222-3,199-22,163
Net drawings230204611302202,327-1,072-1,120-170810
Facilities in support of pound (excluding regular swaps with FRS)3
Drawings9042509058371,4332,0152,5105669,420
Repayments-904-250-500-957-330-1,000-715-1,670-2,137-8,463
Net drawings405-1201,1031,0151,795-1,104-2,137957
Facilities in support of Canadian dollar

(1962), Italian lira (1964 and 1970),

French franc (1968, 1969, and 1970),

and Danish krone (1969)(all excluding regular swaps with FRS)
Drawings1002506001,7906003,340
Repayments-100-250-150-1,135-1,705-3,340
Net drawings450655-1,105
Other facilities 4
Drawings1263335464
Repayments-126-203-135-464
Net drawings126-123132-135
Total facilities49509201,1373,1803,2923,0706,1088,3145,7933,62936,393
Repayments-950-690-933-2,714-3,282-1,747-2,640-7,264-7,230-7,176-34,626
Net drawings of which230204466101,3233,4681,050-1,437-3,5471,767
of which
Drawings by United States230154-89-1451451,607-1,470-102480810
Drawings by United Kingdom6051559781,7151,895-1,604-2,787957
Drawings by other countries50-50200146625269-1,240
Sources: U.S. Federal Reserve, Bulletins and Annual Reports; U.S. Treasury Department, Bulletins and Annual Reports; Bank of England, Quarterly Bulletins; United Kingdom, Financial Statement and Budget Report 1970/71; Deutsche Bundesbank, Monthly Bulletins and Annual Reports; Banca d’ltalia, Annual Reports; Conseil National du Crédit, Annual Report; Banque de France, Balance Sheets; official announcements; and other central bank reports and balance sheets.

Parentheses indicate that part of the maximum ceiling represented by the figure in parentheses had been canceled before the end of the year; the entire amounts are included in the totals.

Subject to negotiation drawing rights can be increased by $1,000 million to $2,000 million.

Staff estimates compiled from data available in the sources indicated. Since the data are derived in a number of cases from amounts outstanding at the end of quarterly periods, gross drawings and repayments may be subject to a significant margin of error.

Excluding transactions between the United States and the Latin American countries and the Philippines.

Sources: U.S. Federal Reserve, Bulletins and Annual Reports; U.S. Treasury Department, Bulletins and Annual Reports; Bank of England, Quarterly Bulletins; United Kingdom, Financial Statement and Budget Report 1970/71; Deutsche Bundesbank, Monthly Bulletins and Annual Reports; Banca d’ltalia, Annual Reports; Conseil National du Crédit, Annual Report; Banque de France, Balance Sheets; official announcements; and other central bank reports and balance sheets.

Parentheses indicate that part of the maximum ceiling represented by the figure in parentheses had been canceled before the end of the year; the entire amounts are included in the totals.

Subject to negotiation drawing rights can be increased by $1,000 million to $2,000 million.

Staff estimates compiled from data available in the sources indicated. Since the data are derived in a number of cases from amounts outstanding at the end of quarterly periods, gross drawings and repayments may be subject to a significant margin of error.

Excluding transactions between the United States and the Latin American countries and the Philippines.

Table 9.Major Reserve Changes, 1970: The Role of Capital Flows1(In millions of U.S. dollars)
SDR
CurrentNetAllocation
ReserveSurplusCapitalon Jan. 1,
CountriesGain(Deficit—)2Inflow31970
Germany6,4816665,613202
Canada1,5731,255194124
Japan1,1851,970-907122
France1,1271131,9544165
Switzerland706706
Netherlands705-4741,09287
Libyan Arab
Republic672564108
Spain5358041342
Brazil530-49296359
Belgium459744-35671
Total change
Ten countries13,9734,4269,780872
All countries16,36353,414
Sources: International Financial Statistics and data reported to the International Monetary Fund.

Reserves are measured gross; capital flows are measured as a residual, as indicated.

Balance on goods, services, and public and private transfers; preliminary estimates.

Residual of reserve gain less current surplus and SDR allocation (and, for France and Spain, reductions of official short-term liabilities). Includes increase in foreign official holdings of domestic currency.

After allowing for repayments of central bank credits.

Adjusted reserves.

Sources: International Financial Statistics and data reported to the International Monetary Fund.

Reserves are measured gross; capital flows are measured as a residual, as indicated.

Balance on goods, services, and public and private transfers; preliminary estimates.

Residual of reserve gain less current surplus and SDR allocation (and, for France and Spain, reductions of official short-term liabilities). Includes increase in foreign official holdings of domestic currency.

After allowing for repayments of central bank credits.

Adjusted reserves.

Chart 5.Growth and Composition of Reserves end of Period, 1960-First Quarter 1971

(In billions of U.S. dollars)

1 Adjusted reserves; see Table 1.

Chart 6.Ratios of Reserves and Reserve Changes to Imports, 1961-70

(In per cent)

1These groups correspond to those indicated in Table 6.

The measurement of reserves, as in the Fund’s analyses of reserve developments in previous years, covers gold, special drawing rights, reserve positions in the Fund, and official holdings of foreign exchange excluding those of the United States. Since U.S. holdings of foreign exchange declined markedly in 1970 (see footnote 4, below), global reserves on an unadjusted basis showed slightly less expansion during the year, 18.3 per cent. Foreign exchange balances of nonofficial holders, including commercial banks, may sometimes be available to supplement reserves as defined above, but in other instances, by adding to the potential flow of funds between different currencies, such holdings may involve additional calls on reserves.

The arrangements concerning gold involved the action taken by leading central banks in March 1968 to prevent depletions in gold reserves by no longer supplying gold from their reserves to the private market; this was followed by the agreement reached at the end of 1969 relating to the purchase of gold by the International Monetary Fund from South Africa. This agreement provided an established basis for accruals to global gold reserves. These developments were described in the Annual Report, 1969, page 127 and the Annual Report, 1970, pages 34-35. The arrangements concerning sterling provided for the maintenance of a minimum proportion of reserves of overseas sterling area countries in sterling, the agreement by the United Kingdom to maintain the value in U.S. dollars of eligible official sterling reserves of overseas sterling area countries, and provision by 12 industrial countries and the Bank for International Settlements of a supporting stand-by credit facility to the United Kingdom (Annual Report, 1969, page 64).

A Report to the Board of Governors of the International Monetary Fund Containing the Managing Director s Proposal on the Allocation of Special Drawing Rights for the First Basic Period, International Monetary Fund (Washington, 1969).

Repayments of swap credits reduce global reserves to the extent that the claims held by the creditors were counted as reserve assets. The criterion used in this context is whether there is reasonable assurance that the claims can be mobilized in case of balance of payments need. In this Report, swap credits granted by countries other than the United States are classified in this way. Repayments of swap credits granted by the United States contributed to a reduction in U.S. holdings of foreign exchange by $2.2 billion in 1970, reducing their outstanding total to $0.6 billion.

Throughout this Report, gold is valued at $35 a fine ounce.

The unit of value of special drawing rights is equivalent to 0.888671 gram of fine gold. This is equivalent to one U.S. dollar of the weight and fineness in effect on July 1, 1944.

A broad definition of a Euro-bank is a bank that accepts deposits denominated in a currency other than that of the country in which it is located.

See Twenty-Second Annual Report on Exchange Restrictions (Washington, 1971), page 1.

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