Chapter

Background

Author(s):
International Monetary Fund. Statistics Dept.
Published Date:
September 1983
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Statistics on international reserves are important indicators of the external economic performance of countries. A country’s holdings of international reserves represent its ability to meet balance of payments needs through official financial settlements.

Developments of international reserves over the period covered in this Supplement have paralleled the evolution of the international monetary system. Until the mid–1960s, gold was the principal reserve asset, and other official external claims were considered reserves if they were convertible into gold. The U.S. dollar was widely regarded as a reserve asset, first, because of its scarcity after World War II and, second, because of its convertibility de jure and de facto into gold. Furthermore, reserve assets were also held within the framework of multilateral payments arrangements such as those of the European Payments Union (EPU). In addition, the international payments system was fragmented into country groups, such as the sterling block and the franc zone.

The establishment of the International Monetary Fund led to the creation of a reserve asset in the form of a gold tranche position reflecting a member’s subscription to the Fund in gold. To the extent that the Fund made use of a member’s currency in drawings of other countries, a creation of new reserves was involved.

In order to underpin the stability of the international monetary system, and to provide an additional source of international liquidity, the Fund’s Executive Board in 1968 proposed an amendment to the Articles of Agreement providing the Fund with the authority to create a new reserve asset, the Special Drawing Right (SDR), which came into effect on July 28, 1969. The first allocation of SDRs was made on January 1, 1970 with subsequent allocations being made in 1971, 1972, and in the three years 1979 through 1981.

The increasing balance of payments deficit in the United States during the late 1960s led to increases in countries’ official holdings of U.S. dollars and raised the question of the continuance of the convertibility of the U.S. dollar into gold. Gold and currency speculations in international markets which caused heavy losses of official gold stocks as a result of intervention in gold markets finally led the central banks of seven countries actively participating in the London gold pool (Belgium, Germany, Italy, the Netherlands, Switzerland, the United Kingdom, and the United States) to decide in March 1968 to discontinue gold sales and agree to allow the price of gold in private markets to be determined by market forces. As a result, a two-tier price system came to be operated with an official price based on U.S. dollar 35 per fine ounce for official settlements and a free market price for other transactions.

Finally, with the suspension by the United States of convertibility into gold of officially held U.S. dollars on August 15, 1971, agreed par values and gold convertibility ceased to be operative altogether. The Smithsonian agreement of December 18, 1971 provided for the realignment of exchange rates among major Fund members, which included a depreciation of the U.S. dollar in terms of gold and the SDR, and appreciations of other currencies. With the further depreciation of the U.S. dollar in February 1973, the par value system had lost its significance. In Europe, the European Monetary System (EMS) entered into force in March 1979 with the main objective of stabilizing exchange rates between the currencies of the member states of the European communities. At the same time, the European common margin arrangement (the “snake”) ceased to exist. Within the EMS, a new reserve asset, the European currency unit (ECU),2 was created to serve as a means of official financial settlements. The creation of the ECU increased international reserves to some extent because of the inclusion of gold valued at market related prices.

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