Chapter

Adequacy of Monetary Reserves

Author(s):
International Monetary Fund
Published Date:
February 1996
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On July 10, 1952, ECOSOC passed a resolution following an examination of a report entitled Measures for International Economic Stability. This resolution, inter alia, asked the Fund to keep under continuous review the adequacy of monetary reserves, and to furnish an analysis on the subject for the meeting of ECOSOC in 1953.

As a result, the staff prepared, in April 1953, a draft report on “The Adequacy of Monetary Reserves.” This was discussed in the Board in May and after revision was sent to ECOSOC in June 1953, being described as a technical analysis and not a statement of Fund policy. The report as further revised and published in Staff Papers, October 1953, is reproduced below.

The Adequacy of Monetary Reserves

(October 1953)

On June 30, 1952, the Economic and Social Council of the United Nations (hereinafter referred to as ECOSOC) began consideration of a report, Measures for International Economic Stability, prepared by a group of experts 1 appointed by the Secretary-General pursuant to a resolution adopted by ECOSOC on August 15, 1950. Chapter IV of the report, entitled “International Monetary Reserves”, states “Our examination of existing reserves has convinced us that they are not in general adequate.” The chapter gives reasons for this conclusion and discusses means of increasing reserve adequacy—including increasing the size of the resources of the International Monetary Fund and making its resources more readily available to members. While the chapter considers the adequacy of monetary reserves generally, its primary emphasis (in accordance with the experts’ terms of reference) is on their adequacy to protect countries from deflationary shocks of external origin and to check the international spread of depression.

After consideration of the report, ECOSOC adopted a resolution on July 10, 1952, the operative paragraphs of which referring to the International Monetary Fund are as follows:

  • “5. Urges the International Monetary Fund, in supporting the efforts of its members to meet balance of payments difficulties arising from recession:

  • (a) To apply its rules flexibly and, in this connexion, to give careful consideration to the suggestions contained in chapter IV of the report entitled Measures for International Economic Stability; and

  • (b) To be prepared to use its resources as promptly and as fully as is consistent with its Articles of Agreement;

  • 6. Requests the International Monetary Fund:

  • (a) To keep under continuing review the adequacy of monetary reserves for the purpose of helping countries to meet temporary disequilibria in their balances of international payments, having in mind the desirability of:

  • (i) Avoiding, to the extent practicable, recourse to restrictions on trade and payments imposed for balance of payments reasons, and of promoting general convertibility of currencies and liberalization of trade;

  • (ii) Creating conditions favourable to a steady expansion of international trade, and to high levels of production and consumption, employment and real income; and

  • (b) To furnish an analysis of this question to the Council in 1953.”

Two aspects of reserve adequacy are stressed in the resolution. Paragraph 6 (a) (i) stresses adequacy of reserves to permit removal of trade and exchange restrictions imposed for balance of payments purposes and the attainment of general convertibility of currencies. Paragraph 6 (a) (ii) stresses adequacy of reserves to expand world trade and to maintain high levels of employment and real income—and so, inferentially, to check the spread of depression. This paper will be concerned with both aspects, which may be characterized as the multilateral trade and high level employment aspects, respectively.

The paper as a whole has been prepared on a technical level.2 It is an analysis of the factors affecting reserve adequacy. It is not to be construed as a statement of Fund policy, and its general conclusions are not to be taken as indicating Fund attitude on specific country situations or day-to-day operating problems.

NATURE OF MONETARY RESERVES AND THE CONCEPT OF ADEQUACY

The concept of “adequacy” is a difficult one, and any standard of adequacy must be based upon a consideration of the purposes which monetary reserves are meant to serve and the obstacles which are expected to be encountered in fulfilling these purposes. While the concept of adequacy presents the greatest complexity, the concept of “monetary reserves” itself bristles with difficulties. It may be helpful, therefore, to start by considering first the nature of monetary reserves and then the meaning of the term adequacy.

Nature of monetary reserves

Monetary reserves may be defined narrowly or broadly. The most useful type of definition depends upon the purpose intended to be served. If the purpose is statistical or legal, the definition must, before all else, be precise. When the broader implications of reserves are taken into account, however, a precise definition is not possible without a loss of realism.

Some items are included in the term “reserves” by universal agreement. Beyond these, potential items shade away imperceptibly from those whose reserve character is almost as clear as those conventionally included in reserves to those which are scarcely reserves at all. A similar hierarchy exists for items which might be considered as deductions from reserves. Because of the essentially arbitrary character of all cutoff points, narrow definitions of reserves fail to give a true picture of the relative international liquidity of different countries. Precise reserve computations are also subject to discontinuous changes in time, as portions of a country’s assets move into or out of the categories formally characterized as “reserves”, or as portions of a country’s liabilities are formally allowed, or cease to be formally allowed, as deductions. Consequently, when the purpose is to consider the over-all “deficit-financing power” of different countries or regions, as is true for this paper, it is desirable, in principle, to treat the concept of reserves broadly, even though only narrow and particular concepts can be measured and compared.

Viewed in this manner, the monetary reserves of a country 3 may be defined as the assets which its authorities have available to meet payments to other countries. The nature and ownership of these funds may be quite varied. The two tests of the reserve, or near-reserve, character of any item which may be in doubt are, first, its availability to the monetary authorities of the country in case of need and, second, its acceptability by potential creditors.

Gold and currencies readily convertible into gold held by monetary authorities meet both of these tests perfectly and so form the core of the monetary reserves of most countries. Very short-term securities of countries with convertible currencies or private securities or bankers’ acceptances of unquestioned credit and short maturity payable in such currencies and held by the monetary authorities of other countries meet both tests about equally well. The same is true of gold and convertible currencies or of any of the above-mentioned assets held by commercial banks or other financial institutions in countries where such institutions are considered to be part of the “official family” and are closely accountable to the monetary authorities.

Other items that meet only one of the two tests may, depending on the country and the time, be equivalent to reserves as defined above, and for some purposes could be included in reserves. In any event, their availability in financing a deficit is an important factor in any consideration of the adequacy of reserves. For example, gold and convertible currencies and short-term securities held by others than the monetary authorities and their “official families” may in some countries and at some times function in much the same way as reserves. The holders may themselves use such assets to meet payments abroad, or they may sell such assets to the monetary authorities when required to do so by law or when induced to do so by financial considerations.

Apart from such assets, whose reserve character is diminished only by the fact that they are not held by the monetary authorities and their “official families”, there are assets held by the monetary authorities which can perform the deficit-financing function, although not so widely or so readily as gold and convertible currencies, including short-term securities. These assets include inconvertible currencies, credit balances in bilateral or multilateral payments agreements (as EPU), and debt-type securities (other than those already mentioned) payable in foreign currencies, whether convertible or inconvertible, and having an international market.

While access to foreign exchange under predetermined conditions cannot be regarded as reserves, such rights do perform some of the functions of reserves and affect the standard of adequacy of reserves. Stand-by agreements and the provisions for drawing needed currencies from the International Monetary Fund, the right to incur debit balances with the EPU or under bilateral payments agreements, and established lines of credit against which a foreign currency may be drawn all provide means of meeting balance of payments deficits.

Some countries include stocks of silver and precious stones in their monetary reserves under the provisions of their national laws. These assets are not reserves in the meaning of the term used here, because they are not readily salable at an approximately predetermined price. They may, nevertheless, be salable abroad and could be used to secure additional foreign exchange when necessary. This may also be true of other commodities readily salable in international markets and of equity securities similarly salable. The possession of such assets by the monetary authorities or by others may affect the level of what may be regarded as adequate reserves, even if they are not included in a definition of reserves.

Monetary reserves, however they may be calculated, may be stated at their full gross amount or they may be stated “net” after subtraction of liabilities on account of which near-term payments may have to be made to foreigners—as, for example, short-term debts of the government, the monetary authorities, or the banking and business communities, debit balances in clearing accounts, or foreign holdings of national currency.

As already noted, when it is necessary to give precision to the concept of monetary reserves, particular items (positive and sometimes negative) must be selected from the broad variety of reserve and near-reserve items just enumerated. Thus, a calculation of a member’s monetary reserves pursuant to specified standards is necessary to determine its obligation, if any, to repurchase its currency from the Fund. Such calculations are based on the definitions of terms in Article XIX of the Fund Agreement. Reserve comparisons in which the need for precision is primarily statistical, rather than legal, present similar problems. Thus, data on movements of monetary reserves are presented in the Fund’s annual Balance of Payments Yearbook, and data on their amount in its monthly publication, International Financial Statistics. Similarly, statistical comparisons of monetary reserves on several alternative bases are presented later in this paper. Each presentation or comparison helps in the understanding of over-all reserve adequacy. But any single basis of comparison can, at best, give only an approximation of the “real” amounts of the reserves actually available to the monetary authorities of each country in case of need.

The concept of adequacy

Adequacy of reserves depends on the prospective problems that confront a country and, therefore, will differ from country to country and from problem to problem. No amount of reserves can be adequate to finance a chronic or continuing imbalance in a country’s payments. Therefore, the problem of reserve adequacy can be discussed meaningfully only for those countries prepared to take appropriate measures to balance their external accounts over an entire cycle—but which may, nevertheless, encounter substantial payments deficits in some years, or even occasionally for several years together.

It is obvious that this fundamental assumption of a strong and balanced payments position over the course of a cycle, which is essential for determining the adequacy of reserves for the only purpose for which reserves can ever be adequate, that is, to meet temporary needs, is not generally or even widely met by the situation currently prevailing. Some countries have failed to establish their exchange rates at appropriate levels, and other countries have been so concerned over assuring full employment or rapid economic development that their monetary policies have been too expansionist to enable them to bring their international payments into balance without severe exchange and import restrictions. Unless such countries are prepared to moderate their monetary policies, and, if necessary, readjust their exchange rates, they will be under steady pressure in their international payments, and they will necessarily find that their reserves are inadequate to establish and maintain multilateral trade without widespread and continuing restrictions and discriminations.

While satisfactory fiscal and monetary policies are indispensable to establishing a strong payments position, it does not follow that a country with noninflationary fiscal and monetary policies and an appropriate exchange rate will inevitably have a strong payments position. The international payments position of a country is affected not only by its own policies, but also by those of the countries with which it trades. An inflationary fiscal or monetary policy or an unsatisfactory exchange rate in another country may cut off the flow of imports from customary sources and force the country to seek other sources of supply. And a restrictive import or exchange policy in another country with inflationary fiscal or monetary policies or an unsatisfactory exchange rate may make it difficult for a country with sound policies to maintain its exports and to earn the gold, dollars, or foreign exchange which it could secure under better conditions. No doubt, with severely rigorous policies and a far-reaching shift in the pattern of production, a country may offset the effects of bad policies of its trading partners. But that is a costly step which countries will seek to avoid as long as there is hope of securing better policies elsewhere.

It must be pointed out, furthermore, that the magnitude of the task of establishing a strong payments position which confronts countries with a tendency toward deficit in their international accounts will be importantly affected by the policies of countries with a tendency toward surplus. This applies most clearly to the commercial policies of the surplus countries. The deficit countries want to buy—and, in some cases, desperately need—the exports of the surplus countries; but, as the deficit countries have no monetary reserves to spare, they can pay for the exports of the surplus countries only with their own goods. If the surplus countries place or maintain onerous trade barriers on the receipt of these goods, the effect must be a general lowering of the level of world trade to the mutual impoverishment of both groups of countries.

Particular attention should be called to restrictions of the “escape clause” or “peril point” type—which, in effect, serve notice on countries endeavoring to increase their sales in the markets of the surplus countries using them, or endeavoring to break into such markets with new types of goods, that success in such efforts may result merely in an increase in trade barriers sufficient to restore the earlier (low) trade volume. Where such attempts involve substantial investment in specialized plant or equipment or specialized inventories or involve substantial advertising, the value of which would be lost if the attempts should fail, the existence of “escape clause” or “peril point” provisions may often be a sufficient obstacle to prevent serious attempts at materially increasing sales from being made at all.

In addition to policies with respect to trade barriers, the surplus countries’ policies with respect to stockpiling may make an important difference in the situations of countries with serious balance of payments problems. Changes in stockpiling policies, which may mean relatively little to the surplus countries pursuing them, may make a vital difference in the economies, and even in the social and political orientation, of hard-pressed raw material producing countries.

The investment policies of the surplus countries can also do much to ease the payments problems of underdeveloped countries. A flow of capital on a commercial basis from regions where it is relatively abundant to those where it is relatively scarce-and, consequently, of high productivity—is justified by investment considerations alone and is in the mutual interest of both the lending and the borrowing countries.

But most important of all are the policies of the surplus countries with respect to their domestic levels of activity. Experience has shown that, in the United States in particular, the level of industrial activity is a far more important determinant of import volume than is commercial policy. Even a moderate slump in the United States would place a substantial strain on the economies and balance of payments positions of other countries, particularly producers of raw materials. Some fluctuation in U.S. business volume is inevitable, and countries exporting to the United States must allow for it in their calculations of what they can “afford” to import over a normal cycle. But they cannot and should not be expected to make similar provision for a period of severe depression and mass unemployment in the United States. Just as no amount of reserves can be adequate to sustain a chronic deficit due to their own inappropriate policies, so no practicable amount of reserves can be adequate to maintain convertibility without discriminatory exchange restrictions in the event of a major depression in the United States. Provision against this contingency can be made only by the United States itself through domestic and international policies aimed at preventing the occurrence or continuance of the depression.

Let us consider a country which has established a balanced payments position. That is, through a period covering prosperity and depression—but not a deep or prolonged depression—its receipts are adequate to meet its payments. The exchange rate is correct, the monetary policy is correct, and restrictions and discriminations continuing throughout the cycle are not needed to shore up the payments position. For such a country, what is an adequate level of reserves? Four standards, each more rigorous than the preceding, can be suggested:

  • 1. Enough to enable a country in bad years, by resort to restrictions, to maintain its external debt payments and to purchase the goods and services necessary to avoid hardship to its population or dislocation to its economy and the possible emergence of an exchange crisis, i.e., to permit a reasonable distribution over time of the payments which it can afford to make over the entire cycle;

  • 2. Enough to maintain currency convertibility, barring a severe depression, but with occasional necessity to resort to trade and exchange restrictions for balance of payments purposes;

  • 3. Enough to maintain currency convertibility, barring a severe depression, but without the necessity for occasional resort to trade and exchange restrictions;

  • 4. Enough to maintain currency convertibility, even through severe depressions (but not through prolonged periods of international deflation such as occurred in the thirties), without either the necessity for occasional resort to trade and exchange restrictions or the necessity for resorting to domestic deflationary policies for the purpose of restraining imports, even if this involves a substantial drain on reserves.

It may be helpful to list some of the principal factors which must be taken into account in determining the “adequacy” category in which a given amount of reserves (expressed as a proportion of its trade) may place a country pursuing appropriate exchange rate and domestic financial policies. Without attempting to arrange them in order of importance (which would, in any event, vary greatly from country to country and from time to time), these factors may be listed as follows:

  • 1. The normal seasonal variation in the country’s imports and exports and in the service items in its balance of payments;

  • 2. The extent to which the volume of its imports and exports is subject to extraordinary variation because of natural or other factors, e.g., crop failures, political or economic changes elsewhere, etc.;

  • 3. The variability in the prices of its imports and in the prices of and demand for its exports;

  • 4. The extent to which the country is dependent on imported raw materials, equipment, and essential foodstuffs to avoid dislocation of its economy or undue hardships to its population;

  • 5. The size of its inventories of export goods and their components, and of import goods and their products, and the extent to which these inventories could be compressed without hardship in the event of pressure on the country’s reserve position;

  • 6. The extent, if any, to which the country may expect adverse changes in its reserve position to be offset by “equilibrating” movements of short-term credit;

  • 7. The prospect that the supply of reserves can be supplemented by grants-in-aid or long-term loans from other countries;

  • 8. The extent to which the use, for international purposes, of actual holdings of reserve-type assets may be prevented by legal or other restrictions.

The first three factors (each dealing with variations in the amount and value of a country’s imports and exports) and the fourth (dealing with its need for imports) are the most fundamental in the list, and can be altered by the country itself only by basic changes in the structure of its economy.

The fifth factor deals with inventories. It has already been suggested that stocks of goods readily salable on international markets might be considered to have an important bearing on the adequacy of a country’s holdings of the more conventional type of reserves. When used in this sense, the concept of inventories may be enlarged to include both stocks of materials entering into the production of export goods and import goods and their derivative products. All such inventories permit either exports to be expanded for a while or imports to be contracted for a while, in case of necessity, thereby easing strains on reserves. The reciprocal relationship between inventories and reserves appears most clearly during periods when reserves are being run down to build up inventories or during periods when reserves are being increased or maintained only at the expense of inventory run-downs. In such cases the combined changes in holdings of reserves plus inventories may give a better clue to a country’s real external position than either of these quantities taken separately.

The sixth factor enumerated above is short-term credit movements. At one time short-term credit movements were extremely important as means of supplementing the reserves of individual countries, and so as means for making smaller amounts of reserves go further. In the environment which has prevailed during most of the period since the beginning of the depression of the thirties, however, short-term credit movements have been, on the whole, of a disequilibrating rather than of an equilibrating character for most countries—although they still operate to the advantage of countries with substantial amounts of mobile capital, in the event of temporary stringencies in their payments positions. It should be noted in this connection that there has been a great shrinkage during the past generation in the amount of one of the most important types of short-term international credit; bankers’ acceptances created for the purpose of financing international trade, the outstanding amount of which ranged between the equivalent of $2 billion and $3 billion in the late twenties, have now very largely disappeared.

The seventh of the enumerated factors is the prospect that the balance of payments receipts of a country from other sources will be supplemented by long-term loans or grants-in-aid from other countries. Long-term loans are an important factor affecting reserve positions. Throughout most of the nineteenth century and well into the twentieth century, the United Kingdom and some other European countries were fairly consistent exporters of capital. When these countries were confronted with reserve stringencies they could often adjust their positions merely by cutting down on the outflow of long-term capital or by ceasing to export capital altogether. The capital exported by Europe was an important factor in the economic development of the newer countries. Long-term capital flows were not necessarily happy as far as their effects on the year-to-year reserve positions of the newer countries were concerned, however, as these countries often adjusted their levels of imports, exports, and reserves to an expected inflow of long-term capital and then suffered reserve crises whenever such inflows were suspended. But those newer countries with strong credit positions were often able to replenish their reserves in time of need by floating long-term loans for that purpose. The long-term capital movements brought about by such loans were decidedly equilibrating in character for the newer countries. Unfortunately, the possibility of floating such loans is much less today than it was even a few years ago, and the necessity of maintaining reserves is correspondingly greater.

The possibility of a deficit country receiving a grant-in-aid is principally a post-World War II development. Most grants-in-aid during the postwar period have been for the purpose of meeting balance of payments deficits arising from the physical devastation and disruption of trade and financial relationships caused by the war. Countries still in need of such grants are clearly in too weak a payments position to fall within the orbit of any of the categories of reserve adequacy used in this paper. Their problems are payments problems, not reserve problems. More recently, however, most grants have been for defense purposes. Such grants may be considered as part of the mechanism for financing the cost of a mutual defense system in which each country contributes resources, human and material, in proportion to its ability and situation. It seems proper, therefore, that the prospect of receiving such grants should be taken into consideration, along with other types of prospective balance of payments receipts, in determining the adequacy of the reserves of the recipient countries.

The eighth, and last, factor enumerated above is the extent to which the use for international purposes of the reserve-type assets actually held by the monetary authorities is restricted by law or custom. The laws of many countries require that the authorities hold reserve-type assets equal to a stipulated proportion of the outstanding currency or some other objectively determined criterion. The effect of such laws is to reduce the adequacy for international purposes of any given amount of total holdings of reserve-type assets. The same effect may be produced in the absence of law if the climate of public opinion in a country is such that the holding of some minimum amount of gold or of other reserve-type assets is considered a practical necessity by the monetary authorities.

Reserves and confidence

The discussion thus far has proceeded on the implicit assumption that reserves are meant to be used and that, except as qualified in the immediately preceding paragraph, all reserves are, in fact, available for use. Neither of these assumptions is strictly true in a world in which uncertainty is, and will continue to be, a major factor in all economic calculations. In practice, if they are to fulfill their functions efficiently, reserves must be considerably larger than would be indicated by any reasonable evaluation of the probabilities of their actual use.

Assume, for example, that $500 million is the most pessimistic estimate of the amount of reserves which a country might reasonably need to meet an existing current account deficit before the deficit would either halt of its own accord or could be halted by the adoption of appropriate policies. (It is assumed, for convenience, that capital transfers are controlled and that this control is tolerably well enforced.) Assume, also, that the country’s reserves are of just the amount necessary to meet the maximum expected deficit—namely, $500 million. This amount, despite its superficial appearance of adequacy, will prove inadequate if the pessimistic possibilities are actually realized. This follows from the fact that, in spite of prior estimates, no one will know how far the adverse balance of payments will actually run; consequently, if reserves run low, traders will lose confidence in their adequacy and will take steps to protect their positions. These steps—such as stockpiling beyond ordinary requirements, expediting payments for imports, and delaying the receipt of payments for exports—will involve additional reserve drains which would not have occurred at all if reserves had been truly adequate. As a consequence, a reserve run-down which would have amounted to only $500 million if reserves had been, say, $1 billion, may result in a serious exchange crisis if reserves are actually only $500 million.

It follows that, in order to avoid the intermittent imposition of trade and exchange restrictions, reserves must be larger than any allowable current account deficit in order to maintain confidence and so hold down outpayments to the actual amount of the deficit. To secure the required confidence, it is necessary that there always be available, even at the very bottom of the cycle, a substantial volume of additional reserves which are uncommitted and available for immediate use.

Confidence, however, is a two-way street. Just as larger reserves promote confidence in a country’s situation and so may make their use unnecessary, so confidence in a country’s situation—and in its willingness to pursue appropriate policies—reduces the amount of reserves necessary to sustain this confidence. In the long run, the effect of “underlying” confidence upon the amount of necessary reserves is probably more important than the effect of adequate reserves upon confidence. The classic example, of course, is the United Kingdom before World War I, when London was the undisputed financial center of the world and operated on a minimal reserve base. At that time, other countries were able to hold a large portion of their reserves in sterling with full confidence in the universal acceptability of sterling which made it the practical equivalent of gold.

Over-all evaluations of reserve adequacy

The factors that determine the adequacy of reserves are not, in practice, precisely measurable. Basically, therefore, the adequacy of reserves is a matter of judgment—depending on the country, on the time, and on the purpose for which the reserves are intended. Furthermore, the prevalent opinion of the international business community concerning the adequacy of each country’s reserves is itself a factor in determining their “real” adequacy—so that, in one sense, the reserves of a country are not adequate until the public thinks that they are adequate. Such opinions, it should be noted, are likely to be based as much on the trend in a country’s reserve position as on its absolute amount; a moderate reserve position, well maintained, is likely to give an impression of greater adequacy than a large reserve position which has been rapidly declining, with no end clearly in sight.

That the adequacy of reserves cannot be precisely measured gives rise to the corollary that significant decisions depending in part upon reserve adequacy—e.g., decisions to impose or to relax exchange restrictions, to tighten or to relax monetary and fiscal policies, or to alter exchange rates—are based on the opinions of the relevant authorities, national and international, concerning this adequacy. The opinions of these authorities are seen most clearly by their actions in the field of international financial policy. For example, the decision of the Canadian authorities in late 1951 to eliminate all exchange controls expressed more clearly than words their opinion that their payments position had become strong and could be maintained strong, with their level of reserves, by appropriate monetary policies and a fluctuating rate of exchange—an opinion amply justified by the developments of the succeeding period.

It is much more difficult to draw conclusions from the actions of the authorities in the fields of monetary and fiscal policy. This is because actions in these fields are often determined with greater reference to their domestic than to their international effects. For example, the restrictive actions of the U.S. monetary authorities in 1951 and 1952 (which commenced during a period of heavy gold outflow) were undertaken for purely domestic reasons and not because of anxiety concerning the adequacy of the international reserves of the United States. Such inferences may be drawn more reasonably, however, with respect to actions in countries where international trade comprises a larger proportion of total activity. For example, it is probably not inaccurate to say that the relaxation in the rigor of monetary policy in the Federal Republic of Germany, Belgium, and the Netherlands during 1952 reflected in large part a lower degree of concern by the authorities in these countries with respect to the adequacy of their monetary reserves.

Reserves and total resources

An adequate reserve position permits both the monetary authorities and the private traders of a country to look ahead and to plan their affairs with confidence. When reserves are inadequate, a country’s foreign trade may be subject to sudden starts and stops, as restrictions are imposed or relaxed, or its exchange rate may fluctuate sharply. In whatever way imports are suddenly restricted below the level suited to the economy under a strong payments position, the result may be a serious dislocation of the economy.

It must not be overlooked that reserves are real resources from the point of view of the countries holding them, and the holding of reserves is only one of the possible uses competing for the limited amount of resources at the disposal of each country. In a rich country, or in a country in which there is little prospect of economic development, the maintenance of an adequate reserve position may necessitate no practical sacrifice. In a poor country, however, or in one in which the tempo of economic development is greater than can be accommodated by available resources, the maintenance of an adequate reserve position may be at the expense of urgently needed industrial or agricultural equipment, or may even entail some hardship due to shortages of food or of other consumers’ goods which might have been imported by using a portion of its reserves. It is inevitable, therefore, that poor and dynamic countries are tempted to sacrifice their reserve positions in favor of other uses of their real resources which they consider more urgent. This may often be sound policy. Indeed, such a transfer of resources would occur as a result of the operation of natural economic forces in the absence of state intervention, as it is of the essence of economics so to economize on scarce resources that the last unit employed in each use has an equal utility. If a country can improve its over-all position by transferring a portion of even an inadequate supply of reserves to some yet more urgent use, it is fully justified in doing so. On the other hand, countries may underestimate the real losses incurred because of inadequate reserves and so may tend to hold less reserves than they should, in their own interest.

In this respect, the reserves of countries have been compared with those of individuals. The monetary reserves of individuals (principally cash balances) serve much the same purposes as those of countries. They protect the individual’s consumption from fluctuations in the amount and timing of his income, permit him to minimize his total outpayments by taking advantage of cash discounts, and allow him to prevent unfavorable developments in his situation from being magnified in their consequences because of the lack of adequate finances for dealing with them promptly. But, for individuals as well as for nations, monetary reserves are only one of a number of possible uses of resources competing for priority. Consequently, wealthy persons or persons with relatively few undertakings (although their incomes may fluctuate but little) are more likely than poorer or more active persons (although their incomes may fluctuate widely) to provide fully for reserves.

Therefore, it is normal to find, both for wealthy or more settled persons and for wealthy or more settled nations, that reserves are much larger in proportion to the apparent need for them than are the reserves of poorer or more dynamic individuals or of poorer or more dynamic nations. This tendency, at least on the international level, is often described as a “maldistribution of reserves”. However, a high degree of maldistribution is normal and would reassert itself even if the reserves were redistributed—for, the poorer or more dynamic countries would apply part of their newly acquired reserves to higher priority uses, and the reserves disposed of in this way would return to the more wealthy or more settled countries. Of course, it does not follow that any given degree of maldistribution of reserves is compatible with a stable structure of world payments. An extremely high degree of maldistribution can, however, be corrected by appropriate changes in monetary and fiscal policies in low-reserve countries. The adjustment can be made gradual, although protracted, if the newly mined gold is added to the reserves of the countries with the greatest reserve deficiency. But the period of adjustment can be shortened and its unavoidable cost in terms of deflationary pressure on the economy can be lightened by liberalization of commercial and external investment policies on the part of high-reserve countries.

Interaction of reserves and policy

As already noted, reserves and policy interact on one another, the strength of the interaction varying with the importance of foreign trade in a country’s total economy. Restrictive policies result in the accumulation of reserves, while adequate reserves tend to modify and soften policies. When world-wide inflationary and deflationary pressures are in balance, this interaction between reserves and policy tends to work out well and promotes a well-balanced distribution of the available reserves among the trading countries of the world in the light of their preference for reserves and other types of investment.

If no fundamental change in the basis of monetary standards is assumed, the world supply of reserves may be increased (1) by additions to the volume or value of the world monetary gold stock, or (2) by the creation of new international assets and contra-liabilities of such a character that the creditors will consider their asset holdings as part of their reserves, but the debtors will make no corresponding deduction of their liabilities in the calculation of their own reserve positions. Aside from changes in the world supply of reserves, all reserves gained by one country must be at the expense of another. Some year-by-year increase in the total stock of reserves is necessary in order to maintain an expanding volume of world trade and stable prices. An expansion of this magnitude in the world stock of reserves tends to promote sound policies, and countries pursuing sound policies tend to secure an appropriate share of the total available reserves. Indeed, a country can be said to have a strong payments position only when it is acquiring such an appropriate share of newly created reserves. On the other hand, a too rapid increase in the world stock of monetary reserves tends to promote inflationary policies generally and in individual countries, while an increase of less than the optimum amount (or a decrease) tends to promote deflationary policies.

These observations are, of course, true only when a number of years are taken into consideration. In a single year, or even for several years, characterized by general expansionary psychology, a stationary stock of reserves (or even a declining one) may be compatible with expanding trade and price stability. On the other hand, in a year, or series of years, characterized by general deflationary psychology, an extraordinarily large expansion in reserves may be necessary to support price stability and a continuing expansion in world trade.

Finally, it should be noted that the response of a country to an increase in its reserves or to an improvement in its balance of payments position is not likely to consist wholly in a relaxation or elimination of trade and exchange restrictions. It may consist wholly—and will probably consist partially—in a relaxation of its domestic fiscal and monetary policies. A general improvement in reserve positions during a time of world-wide inflationary pressures is likely, therefore, to reinforce those pressures.

Reserves and the growth of world trade

The necessary increment to reserves, if inadequacy of reserves is not to hamper the growth of multilateral trade, will depend primarily on the rate at which trade can grow. This in turn depends in large part on the growth of production throughout the world. Support of an appropriate rate of growth in world trade depends on the annual increment to the world’s monetary gold stock and on other types of reserve assets created by national monetary systems and through the instrumentality of international agencies.

Newly mined gold is the principal source from which increments to gold reserves must be made. Unless this gold is in large part accumulated by the monetary authorities, it will not be effective in enabling countries to meet their needs for reserves. The increment to monetary gold stocks has been low in most postwar years. Monetary and exchange policies that leave doubt as to the future value of national currencies tend to divert newly mined gold into private hoards rather than into central holdings. Furthermore, little will be accomplished in securing adequate reserves for most countries for the future if all newly mined gold is regarded as an easy means of meeting continuing balance of payments deficits. Under such conditions, the newly mined gold will simply be concentrated in the reserves of a very few creditor countries, while the reserves of the rest of the world will be inadequate. A basic condition for adequate reserves in the long run is the maintenance of monetary and exchange policies that will enable countries not only to balance their international payments, but also to add part of the newly mined gold to their monetary reserves.

Adequacy of particular types of reserves

As already noted, assets are useful for reserve purposes only to the extent that they are acceptable for the external payments which the reserve holding country must meet. Before the depression of the thirties—when most currencies were convertible either through the medium of buying and selling prices for gold or foreign exchange maintained by the monetary authorities of the issuing countries, or by the purchase and sale of exchange in the market place—most currencies could be held for reserve purposes, subject to the qualification that holdings of currencies with fluctuating exchange rates involved greater risk than holdings of currencies with fixed exchange rates. Since the onset of the depression, and particularly since the end of World War II, a large number of currencies have become inconvertible and can no longer be legally exchanged (either officially or through the market place) by the monetary authorities of the countries holding them for such other currencies as they may need to meet their external payments. As a consequence, the reserve problem—which once could be viewed as a whole—has tended to break into fragments, and a country may now be short of reserves in some currencies but have a surplus of them in others.

Reserves and the spread of depression

A function of reserves upon which considerable emphasis was placed in the planning for the postwar period is that of preventing the spread of depression from one country to another. A depression in any country will tend to reduce its imports, as these are related more or less closely to its national income. Hence, a depression in an important country will tend to reduce substantially the exports of other countries. If these countries maintain their imports, they will deplete their monetary reserves; if they do not, the exports of other countries will be reduced further and so the depression will tend to spread in an ever widening circle. One of the principal purposes of the International Monetary Fund is to combat this mechanism for the international spread of depressions.

The amount of reserves necessary to prevent the spread of a depression depends upon the duration and intensity of the depression in the country of primary origin and the importance of that country in world trade. Even a minor depression in an important trading country, such as the United States, may have serious consequences in some other countries. If the depression is deep and protracted at its point of origin, the amount of monetary reserves necessary to prevent its spread may become indefinitely large. If such reserves should be supplied entirely by the Fund and be subject to reasonably firm undertakings with respect to their repayment in the foreseeable future, they might not be able—however large the amount available—to check the spread of a severe depression, because many countries would probably contract their imports (and so other countries’ exports) substantially, rather than pile up large debts which they saw no prospects of repaying. The problem presented by such conditions is referred to later in this paper (pp. 342-43).

STATISTICS OF MONETARY RESERVES

A summary of monetary reserve statistics and a discussion of the methodology of their preparation are included in the June 1953 issue of International Financial Statistics, the monthly statistical publication of the International Monetary Fund. A reprint of part of that article is attached as an Appendix to this paper.

Monetary reserves are classified in that article as “gold”, “foreign exchange”, and “total”, i.e., gold plus foreign exchange. It would be desirable if the “foreign exchange” item could be further subdivided into convertible and inconvertible currencies. Unfortunately, no comprehensive statistics are available on this basis. As will be seen by reference to the Appendix, the bulk of the monetary reserves of the world consists of holdings of gold, dollars, and sterling.

The official gold reserves and the total official reserves of gold and foreign exchange combined for a large number of countries, for the principal international monetary agencies, and for the world as a whole for the years 1928, 1938, 1951, and 1952 are given in Table 1. This table does not include data on reserve holdings for countries which are members of the Soviet bloc or for the dependent territories of the United Kingdom and of the continental EPU countries. The countries in the Soviet bloc are omitted because of inadequate data; the dependent territories are treated, for the purposes of this paper, as parts of the economies of their respective metropolitan countries. The reserves listed in the table include those held by monetary authorities only. Therefore, special caution should be used in interpreting comparisons between the data for 1951 and 1952 and those for earlier years for countries in which central banks have been established since 1928 or in which monetary reserves have been concentrated in the hands of the monetary authorities since that time. In such countries—Canada and Australia are especially in point—official reserve holdings in earlier years were, of course, supplemented by additional holdings of reserve-type assets in the hands of commercial banks.

In one sense it may be said that gold holdings constitute a “core within a core” of monetary reserves, as there are no contra-liabilities against them and they alone are “incompressible” and so must continue to exist in the same physical amount irrespective of any changes in their ownership. But the proportion of the total physical stock of gold held by the monetary authorities, and so counted as reserves, may vary; and the monetary value of this stock may also vary as a result of changes in the official price of gold. By far the most important price of gold is that in U.S. dollars, and it is in this unit that the gold reserves of all countries are stated throughout this paper.

The principal reason for the dramatic rise in the value of official gold stocks between 1928 and 1938 is, of course, the increase in the price of gold in U.S. dollars. This rise in the value of gold stocks is a “real” one, however, as the purchasing power of each U.S. dollar (in which the gold is measured) rose between 1928 and 1938. Conversely, although the price of gold in dollars remained unchanged between 1938 and 1952, the purchasing power of the dollar fell.

Table 1.Official Gold and Foreign Exchange Reserves, by Countries 1(In millions of U.S. dollars)
Gold2Gold plus Foreign Exchange2
19281938195119521928193819511952
United States3,74614,59222,87323,2523,74614,59222,87323,252
Canada93186842885932201,7951,862
Latin American Republics985369031,9541,81031,160379033,02533,0253
Dollar countries70313031,0579303125316531,53531,6203
Bolivia932323953228
Colombia242448n.a.6229123152
Cuban.a.1311214n.a.2495460
Dominican Republicn.a.1212n.a.n.a.3032
Ecuador132223843144
El Salvador572629584244
Guatemala272727594043
Mexico6282071441042269273
Venezuela21n.a.37337321n.a.373434
Other4n.a.138383n.a.5310031103
Non-dollar countries9153560389788031,035362531,49031,4003
Argentina607n.a.268n.a.607n.a.n.a.n.a.
Brazil1493231731717759514525
Chile65304542120445971
Paraguayn.a.n.a.n.a.n.a.1918
Peru2220464647216056
Uruguay727222120783n.a.n.a.216
United Kingdom7482,8772,20051,50057482,87762,3741,958
Other Sterling Countries738553562762075431,17035,0554,4003
Australia10961121132002511,219979
Burma8888159n.a.
Ceylon8888218163
Iceland1111n.a.199
India20292749247247440948591,8881,729
Iraqn.a.n.a.22114129
Irelandn.a.101818n.a.59206219
New Zealand352332333543217183
Pakistan88273888639n.a.
Union of South Africa3922019017078259386382
Continental EPU Countries2,78536,06034,01034,48535,14036,50037,04537,9353
Austria2410n.a.n.a.12610n.a.n.a.
Belgium-Luxembourg1287806357043457801,0541,077
Denmark465331317777118142
France1,2542,75754811573112,5412,791800676
Germany12650n.a.28140776n.a.5031,165
Greece72741055n.a.n.a.n.a.
Italy266193333n.a.5832011,045913
Netherlands1759983165442631,037552936
Norway3984505050134151151
Portugal98626428625n.a.n.a.n.a.
Sweden63321152184121520484446
Switzerland1037011,4521,4221527641,5941,648
Turkey21291511432134217191
Other1,06039453950392031,40031,39533,66533,3503
Egypt1855174174178175957753
Finland82626262775216163
Indonesian.a.80280235n.a.n.a.511314
Irann.a.26138138n.a.38190177
Israel13n.a.n.a.3219n.a.
Japan541230n.a.n.a.598289n.a.n.a.
Lebanon1426314042
Philippinesn.a.n.a.7950n.a.246227
Spain4945255151512n.a.n.a.n.a.
Syrian.a.n.a.1114n.a.n.a.3338
Thailandn.a.1131134356358349
International Agencies
IMF15151,5301,69215157,2617,374
EPU151565159151568225
BIS151411519615146283442
Total, including international agencies and United States9,800325,900335,150335,500313,050327,600353,450353,8003
Total, excluding international agencies and United States6,050311,300310,600310,20039,300313,000322,950322,5003
Sources: For 1928, United Nations, Statistical Yearbook, 1948, and League of Nations, International Currency Experience (1944); for 1938, 1951, and 1952, International Monetary Fund, International Financial Statistics, July 1953, and data supplied by the Statistics Division, Research Department, International Monetary Fund.

The years used for comparison in the table were selected primarily on the basis of statistical convenience. The year 1928 was a good year in the twenties; the year 1938 was a fairly representative year in the thirties. It is true that 1938 was a low year for imports into the United States; however, it was not a particularly low year for U.S. exports or for imports into most other countries. It is, consequently, a satisfactory year for considering the reserve adequacy of most countries—and the adequacy of the reserves of the United States is not in question. The years 1951 and 1952 are the most recent ones for which comprehensive data are available. Particular years, of course, may not be representative for individual countries. Apart from the broad economic, industrial, and agricultural forces always operating to cause year-to-year variations, it should be noted that import levels are substantially affected by the reserve positions, the trade and exchange restrictions, the monetary and fiscal policies, and the exchange rates of individual importing countries, and by the convertibility of their own and other currencies.

Substantial changes have, of course, occurred in the reserve positions of individual countries and areas since the end of 1952, but they do not significantly change the long-term perspective to which this paper is directed. Data for the early months of 1953, as far as they are available, have been published in International Financial Statistics.

The foreign exchange reserves included in the figures for gold plus foreign exchange shown in Table 1 include holdings of “blocked” currencies. Consequently, for some countries (e.g., India) these total figures overstate the amount of reserves immediately available for settling adverse payments balances. For obvious reasons, special caution should be used in interpreting the world and regional totals for gold and foreign exchange combined. While gold is an asset in itself, with no corresponding contra-liability, foreign exchange other than gold is, in the nature of the case, both an asset to the holder and a liability to the issuer. The totals used in this table are, in every case, on a gross basis, i.e., the asset items are included but the liability items are ignored. This is the customary method of stating reserve statistics, and is, on the whole, more meaningful than an attempt to state them on a “net” basis, in which case foreign exchange would disappear completely as a reserve item for the world as a whole. The “double counting” involved in this procedure presents certain difficulties, however.

This “double counting” is important only for the United States and the United Kingdom, as dollars and sterling are the only currencies that other countries hold in substantial amounts as monetary reserves. The double counting results in overstating the reserve position of the United States, as the $10.5 billion of short-term liabilities to foreigners (including international institutions) outstanding on December 31, 1952 constituted, in an important sense, a first claim on the U.S. gold reserve of $23.3 billion on that same date.4 A good part of these foreign claims are required as working balances, however, and, in any event, the reserve and payments positions of the United States are so strong that there is no practical difficulty in treating its reserve position on a gross basis. The case of the United Kingdom is rather different. The external sterling liabilities of the United Kingdom, counted as reserves by others, substantially exceed its own reserves. Its real reserve position, therefore, is not nearly so strong as might be inferred from the gross figures given in this table. Furthermore, no meaningful figure can be obtained by adding the total reserves of the United Kingdom and those of other sterling countries to obtain a “sterling area total”, since the major portion of the reserves of the other sterling countries are comprised of liabilities of the United Kingdom. The amount of double counting in the table as a whole is, of course, substantially reduced by the omission of reserve statistics for the dependent territories of the United Kingdom and of the continental EPU countries.

Table 2 shows total imports on a c.i.f. basis for the countries for which reserve data are shown in Table 1. As in Table 1, members of the Soviet bloc and dependent territories of the United Kingdom and of the continental EPU countries are omitted. Table 3 shows the relationship which the official gold reserves and the total official reserves, respectively, of each country bore to its total c.i.f. imports in each of the reference years.

The relationship of reserves to imports serves as a common denominator on the basis of which reserves can be compared. It is the most comprehensive basis found practical to use in the general statistical comparisons in this paper. Strictly speaking, the most general basis for such comparisons would be total current account expenditures, but data on such expenditures are not available for many of the countries for many of the years. The necessary omission of invisible items has been repaired in part, however, by placing imports on a c.i.f. basis. The imports of each country are those from all other countries, including those from the country’s own overseas dependencies. It is true that imports into metropolitan countries from their own overseas dependencies may often be financed in ways that do not place a strain on metropolitan reserves. The metropolitan country usually has a corresponding obligation, however, to assist in financing imports into the dependent territories from the outside world. These imports (like all other imports of the dependent territories) are omitted from the statistics, and may be considered as at least a partial offset to the inclusion of imports into the metropolitan countries from their dependent territories.

In any event, it should be emphasized that, whatever might be the character of the denominators by which the reserves of different countries were divided to place them on a comparable basis, they would not provide ready-made comparisons of reserve adequacy. The reserve figures themselves make no allowance for penumbral reserve items; and, were such allowances made, they would merely provide the starting point for the application of the various criteria of adequacy discussed earlier in this paper. This is brought out dramatically by the incongruity between the import-reserve percentages for a number of the countries in the tables and the generally accepted evaluations of the over-all reserve positions of these countries based upon the size of their reserves and all of the factors affecting reserve adequacy.

Table 1 does not distinguish between the convertible and inconvertible currency holdings of the International Monetary Fund. It is helpful, therefore, to say that the Fund’s total holdings of gold and U.S. and Canadian dollars amounted to $3.1 billion at the end of 1951 and were equal to about 5 per cent of 1951 c.i.f. imports of all the countries included in the table, exclusive of the United States. By the end of 1952, the Fund’s holdings of gold and U.S. and Canadian dollars had risen to $3.2 billion (6 per cent of 1952 c.i.f. imports).

Table 2.Merchandise Imports, C.I.F., by Countries1(In millions of U.S. dollars)
1928193819511952
United States4,4272,46511,94611,633
Canada1,3647634,1954,458
Latin American Republics2,4531,5357,6197,074
Dollar countries8625683,2723,280
Bolivia232591742
Colombia16189416402
Cuba234119691667
Dominican Republic30136463
Ecuador16126465
El Salvador1896268
Guatemala31218176
Mexico185114823739
Venezuela81107719809
Other38359261317
Non-dollar countries1,5919674,3473,794
Argentina8074401,40028602
Brazil4412952,0112,010
Chile163103329371
Paraguay1393024
Peru7058261288
Uruguay9762316237
United Kingdom5,7954,60010,9429,747
Other Sterling Countries2,6702,2998,0547,554
Australia669557152,4231,979
Burma766797137192
Ceylon13986327358
Iceland17115756
India8376,85756,81,8161,672
Iraq3446143173
Ireland288203573482
New Zealand218225596739
Pakistan99534609
Union of South Africa3935031,4481,294
Continental EPU Countries11,1037,80422,16821,910
Austria45610657654
Belgium-Luxembourg8897652,5352,424
Denmark4413541,013962
France2,0971,3244,5514,431
Germany113,3352,4303,4943,818
Greece161131435346
Italy1,1735932,1672,313
Netherlands1,0788032,5672,251
Norway269292877873
Portugal120102330350
Sweden4585201,7761,730
Switzerland5123661,3641,202
Turkey114119402556
Other2,8131,9356,2046,550
Egypt249185667608
Finland202182676792
Indonesia403275805972
Iran76127912248165
Israel1333563434
Japan9907591,9952,028
Lebanon14136141
Philippines149153539477
Spain5804384518
Syria5137139143
Thailand805727223012
Total, including United States30,62521,40171,12868,926
Total, excluding United States26,19818,93659,18257,293
Sources: For 1928, League of Nations, Network of World Trade (1942); for 1938, 1951, and 1952, International Monetary Fund, International Financial Statistics, July 1953.

As stated previously, no comprehensive data are available separating foreign exchange reserves into those held in convertible and in inconvertible currencies. It is of interest, however, to present such data as are available with respect to reserve holdings of the major convertible currency—the U.S. dollar. These data are available from reports made to the U.S. Treasury by U.S. banks. They show that, for the world as a whole, holdings of U.S. dollars by official monetary authorities (excluding international agencies) amounted to $4.1 billion at the end of 1951 and to $5.1 billion at the end of 1952.5 Data for official holdings only are not available for individual countries. In order to preserve the confidential character of the balances of individual foreign institutions, these data are published by the U.S. Treasury on a country basis only as a total of official and bank holdings of dollars. The total amount of such holdings (excluding international agencies) amounted to $6.0 billion at the end of 1951 and to $6.6 billion at the end of 1952, and so exceeded by a considerable margin holdings of monetary authorities only.

Table 3.Ratios of Official Reserves to Total Merchandise Imports, C.I.F., by Countries 1(In per cent)
Ratio of Gold Reserves

to Imports
Ratio of Gold plus

Foreign Exchange

Reserves to Imports
19281938195119521928193819511952
United States8559219120285592191202
Canada72420207294342
Latin American Republics4045262647514043
Dollar countries823322815294749
Bolivia3912253139203538
Colombia15271239333038
Cuba1453227269
Dominican Republic1919314751
Ecuador625343550334868
El Salvador2878424328896865
Guatemala633333616434957
Mexico32525195373337
Venezuela265246265254
Other223383835
Non-dollar countries5858212365653437
Argentina751975
Brazil3411161640202626
Chile4029141174431819
Paraguay63
Peru3134181667362319
Uruguay7411670878691
United Kingdom1363201513632220
Other Sterling Countries14238828516358
Australia1615630445049
Burma116
Ceylon6746
Iceland692291616
India244814155384104103
Iraq488075
Ireland534293645
New Zealand16105416193625
Pakistan56120
Union of South Africa1044131320512730
Continental EPU Countries2578182046833236
Austria528
Belgium-Luxembourg141022529391024244
Denmark10153317221215
France6020812131212111815
Germany1914231424
Greece4211334
Italy23331550344839
Netherlands161241224241292242
Continental EPU Countries, cont.
Norway14296619461717
Portugal884808221
Sweden1462911261002726
Switzerland2019210611830209117137
Turkey1824382618295434
Other3849151450735940
Egypt73026297195143124
Finland4144313413221
Indonesia2935246332
Iran3356844877107
Israel576
Japan55306038
Lebanon19222930
Philippines12344648
Spain85131088
Syria8102427
Thailand42385498132116
Total, including gold and reserves of international agencies, and gold and reserves and imports of the United States321214952431297578
Total, excluding gold and reserves of international agencies, and gold and reserves and imports of the United States2360181735693940

For the various countries, the available data for holdings of gold and U.S. dollars by foreign monetary authorities and banks in 1951 and 1952, and the ratios of these data to the figures shown in Table 2 for the c.i.f. imports of each country, are given in Table 4. The comparisons here differ, of course, from those made earlier in this chapter in that they exclude holdings of all types of reserves other than gold and U.S. dollars and include holdings by banks as well as by monetary authorities.

COMPARISONS OF RESERVE ADEQUACY

To the preceding discussion of the factors affecting the need for reserves at any time and the statistics of actual reserve holdings in 1928, 1938, 1951, and 1952, it may be helpful to add a brief consideration of some changes in the need for reserves during the past few decades.

Table 4.Official and Bank Holdings of Gold and U.S. Dollars and Their Ratio to Total Merchandise Imports, C.I.F., by Countries, Excluding the United States
Official and Bank Holdings of

Gold and U.S. Dollars1

(million dollars)
Ratio to Imports

(per cent)
1951195219511952
Canada1,9532,0474746
Latin American Republics2,8382,7553739
Dollar countries1,5851,6314850
Bolivia40374450
Colombia13216023240
Cuba5184557568
Dominican Republic42426667
Ecuador3334735272
El Salvador44447165
Guatemala40434957
Mexico2942833638
Venezuela3994655557
Other44335531617
Non-dollar countries1,2531,1242930
Argentina48237023443
Brazil3773521918
Chile71922225
Paraguay53531718
Peru70702724
Uruguay2482357899
United Kingdom2,5302,0272321
Other Sterling Countries7988101011
Australia15115768
Ceylon19314364
Iceland535399
India3053081718
Iraq13314398
Ireland34334267
New Zealand37336365
Pakistan40352379
Union of South Africa1941901315
Continental EPU Countries5,8176,7532631
Austria102214221622
Belgium-Luxembourg715577152832
Denmark6992710
France7658551719
Germany4316881218
Greece43481014
Italy59962022827
Netherlands4437261732
Norway1261381416
Portugal2953298994
Sweden2182681215
Switzerland1,8511,929136160
Turkey1601474026
Other2,2862,3933737
Egypt2812304238
Finland525287
Indonesia4202955230
Iran1571506391
Israel241674
Japan710292023645
Lebanon415033035
Philippines3183045964
Spain60611612
Syria162531217
Thailand2072907696
International Agencies
IMF2,8542,980
EPU68226
BIS28364426
Total, incl. international agencies19,42720,4333336
Total, excl. international agencies16,22216,7852729
Sources: Holdings of U.S. dollars are from U.S. Treasury Department, Treasury Bulletin, April 1952, May 1952, April 1953, and May 1953. For other sources used, see Tables 1 and 2.

Reserve adequacy in 1928

Reserves in 1928 were adequate to support multilateral trade in the prosperous conditions prevailing at the time. It is futile to consider whether they would have continued to be adequate to support the newly established gold standard indefinitely through mild ups and downs in business conditions in the absence of deep depression. The fact is that the depression of the early thirties, spreading chiefly from the United States, but also from other leading industrial countries, placed the reserves of many countries, especially raw material countries, under great strain. At the same time, the loss of confidence in the exchange rates of the currencies of the reserve holding countries, especially the United Kingdom (due in part to inadequacies in their reserves), caused runs on these countries which induced them to contract their own credits, and so reduced the total amount of reserves available to other countries. A shortage of reserves was certainly not the principal cause of the depression of the thirties, but it did contribute to the scope, intensity, and duration of the depression because of the severe restrictions on trade and even because of the general deflationary policies that were instituted to protect reserves.

Effect of the low level of world trade on reserve adequacy in 1938

The situation in 1938 was quite different. The amount of reserves then available was doubtless adequate in the sense that a shortage of reserves was not the bottleneck restraining an expansion of trade, and probably would not have become one even if trade had expanded considerably. (Many countries—e.g., Germany, Japan, and some countries in eastern Europe, as well as some raw material producing countries—doubtless had inadequate reserves, but these countries were pursuing policies with respect to the disposition of their real resources which would have quickly dissipated some of their reserves even if somehow they had been made adequate.) It is probable that reserves in 1938 would have been adequate even if the total amount of world trade at that time had been at a volume corresponding to high level employment in, and the pursuit of liberal trade policies by, all or most trading countries. The important point is that the adequacy of 1938 reserves should be judged, not relative to actual 1938 trade but relative to the total amount of trade which would have been carried on under liberal trade policies and at a high level of employment. It follows that the shrinkage in the apparent adequacy of reserves relative to trade between 1938 and 1951 is not nearly so great as appears from the foregoing tables. This is true because the basis of comparison in one case is a volume of trade greatly shrunken by depression, and in the other case it is a volume which, despite illiberal trade policies, was at a high level.

Changes in the volatility of world trade

As pointed out previously, one of the principal factors affecting the need for reserves is the prospect of swings in the volume and prices of a country’s imports and exports. The possibility of a downward swing in the demand for a country’s exports increases its need for reserves and makes any given reserve holding less adequate.

There is some reason to believe that world trade is more volatile and the exports of most countries more vulnerable to sharp downward swings now than was the case in 1938. Before the war, economic conditions in the United States were generally subject to greater variation than those in most industrial countries. If this tendency should reappear in the postwar period (it has not thus far), an increase in the U.S. share of world trade would increase its over-all volatility. The ratio of U.S. imports (c.i.f.) to world imports decreased from 13 per cent in 1928 to 10 per cent in 1938, but again increased to 15 per cent in 1951 and 1952. It is possible, therefore, that the exports of other countries are somewhat more subject to sharp declines now than they were in 1938. Moreover, a larger proportion of the imports of the United States now consists of raw materials which are also produced in large volume in the United States, either directly or in the form of acceptable synthetic substitutes. The imported portion of these materials—copper and natural rubber are cases in point—represents a marginal supply which would be subject to sharp curtailment in the event of a U.S. recession. It appears, therefore, that, as far as trade factors are concerned, a larger amount of reserves relative to trade may be necessary now than would have been the case in 1938, in order to provide the same degree of relative adequacy.

RELATIONSHIP OF THE PAYMENTS AND RESERVES PROBLEMS IN THE POSTWAR PERIOD

The problem of assisting deficit countries to finance long-continuing, and possibly fundamental, disequilibria in their balances of payments is conceptually separate from the problem of building up their monetary reserves. The reserves problem of any country cannot be approached until its payments problem has been brought under control. But, in the last analysis, the funds obtained by each country are directly or indirectly transferable between the two uses, and the real character of any operation can be determined only ex post, after a study of the recipient countries’ reserve and payments positions.

Viewed in this light, it is seen that the funds obtained by each country since the war (or during any other period) may be considered as interim installments toward its combined payments-reserves problem, with the final apportionment depending upon the policies of the country and the forces with which it has to contend.

As shown in Table 5, during the period 1946 to 1952, inclusive, the United States supplied the “rest of the world” with $125.9 billion, of which $89.9 billion was either earned or obtained through private donations or private capital movements, and $36 billion was obtained through official grants and loans from the U.S. Government and international agencies. Uses of dollars during this period totaled $129.2 billion, leaving a deficiency of $3.3 billion which was made up by a net transfer of reserves to the United States.6 Gold production outside the United States during the same period totaled a little over $5 billion, which would have more than restored the reserves of the “rest of the world” to their original amount if it had all been added to monetary stocks—which, of course, was not the case.

During each of the past three years, the “rest of the world” has gained reserves from the United States, the amount being substantial in 1950. The proportion of the total dollar supply coming from official grants and loans (including military aid) has varied between 21 per cent and 24 per cent in the three-year period. During 1952, the total dollar supply exceeded the use of dollars by $0.8 billion (the net outflow of reserves from the United States). Official grants and loans (including military aid) totaled $5.2 billion and accounted for about 24 per cent of the total dollar supply of $21.7 billion in that year.

Military aid, which comprised a very small proportion of total official grants and loans prior to 1950, has increased rapidly since then, as shown in Table 6. In 1952, military aid comprised half of all official grants and loans of U.S. dollars. As suggested earlier in this paper, military aid, when considered as a means of financing the costs of a mutually shared defense system, may be viewed by the recipient countries in the same category as other current balance of payments receipts, rather than as a means of financing a deficit.

The significance of any given supply of dollars must, of course, be judged relative to the total needs which must be met and the purchasing power of each dollar. The dollar supply in 1952, exclusive of movements in reserves and of official grants and loans, and after subtracting an amount equal to the net investment income of the United States,7 was higher—both in real and in monetary terms—than it had been in any previous year. In real terms it was slightly greater than in 1950 and 1951, more than twice the amount in the thirties, and 60 per cent higher than in the twenties (see Chart 1 and Table 7). The dollars furnished by official grants and loans (including military aid) are in addition to this large supply from traditional sources. While the need for dollars has also increased since the twenties and the thirties, these figures make the dollar shortage seem much less hopeless than is sometimes assumed.

Table 5.Sources and Uses of U.S. Dollars by the Rest of the World, 1946-521(In billions of U.S. dollars, except for Col. 5)
SourcesUsesNet

Movements

in Reserves

(Col. 6

minus

Col. 10)
Official grants and loans
Exports

to U.S.
ServicesPrivate

donations

and capital

movements
AmountPer cent

of total

sources
Total

sources
Imports

from

U.S.
ServicesNet errors

and

omissions
Total

uses
(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)
19465.12.21.25.23813.710.25.00.215.4–1.6
19476.12.41.96.03716.415.15.01.021.2–4.8
19487.82.82.15.22917.813.14.61.018.7–0.9
19497.02.81.55.83417.212.34.20.817.22
19509.33.11.64.22318.210.64.20.215.0+ 3.2
195111.73.61.24.42120.915.54.70.620.82
195211.54.20.85.22421.715.94.80.220.9+ 0.8
Total58.521.110.336.029125.992.732.54.0129.2–3.3
Sources: 1946-51 data based on International Monetary Fund, Balance of Payments Yearbook, 1948, 1949-50, and 1950-51; 1952 data are estimated.
Table 6.Official Grants and Loans by the United States to the Rest of the World, 1946-52 1
Military AidOtherTotalMilitary AidOtherTotal
(billion dollars)
(per cent of total dollar supply)
19465.25.23838
19470.15.96.013637
19480.44.85.222729
19490.25.65.813334
19500.63.64.232023
19511.52.94.471421
19522.62.65.2121224

Chart 1.Annual Dollar Supply 1

(In billions of U.S. dollars)

1 See Table 7 and text.

The additional supply of dollars which has been furnished by official grants and loans has been an active factor in increasing the demand for dollars during the postwar period. This was, in part, inevitable, as an increase in the flow of dollars naturally relaxed the policies of the recipient countries and so caused them to make expenditures which they would otherwise have averted, although only at the cost of much hardship and political instability. It is also unlikely that so many dollars would have been furnished by the United States had a large portion of them been added to reserves. Indeed, most of the additional dollar expenditure was planned at the direct request of the United States, since one of the avowed purposes of the Marshall Plan was to stimulate investment in the recipient countries and thus strengthen their balance of payments positions in the long run. It would not be true, therefore, to say that the funds received from the United States in the form of official grants and loans could have been added to reserves, even in large part, had the recipient countries adopted more rigorous policies. But the grants and loans did avert what might otherwise have been a disastrous run on reserves and contributed in some degree to an actual increase.

Table 7.Annual Dollar Supply in Current and 1952 Dollars 1(In billions of U.S. dollars)
1927-29

Average
1936-38

Average
195019511952
Actual amount5.93.112.414.714.8
Amount adjusted to 1952 prices9.36.314.214.714.8

CONCLUSION

The preceding discussion has stressed three points which must be taken into account in any discussion of the adequacy of monetary reserves:

(1) Monetary reserves are meant to take care of swings between favorable and unfavorable payments positions. They are meant to cover recurrent balance of payments deficits that are temporary in character. No amount of monetary reserves is sufficient to finance a permanent disequilibrium in a country’s balance of payments.

(2) The magnitude of the monetary reserves of a given country tends both to affect and to be affected by that country’s domestic fiscal and monetary policies. The interaction between reserves and policies is stronger, the more important the role played by external trade in the economy of the country concerned. Rigorous fiscal and monetary policies tend to increase monetary reserves; strong reserve positions make the relaxation of fiscal and monetary policies possible. When world inflationary and world deflationary forces are in balance, this interaction is beneficial and helps both to promote sound policies and to achieve and maintain a viable distribution of monetary reserves throughout the trading world. When world inflationary forces are in the ascendancy, substantial accretions to world monetary reserves tend, through their interactions with policy, to increase these forces yet further; when world deflationary forces are in the ascendancy, substantial accretions to world monetary reserves tend to offset these forces. The foregoing should not be taken to imply that increases in reserves are per se undesirable even during periods of world inflation. Countries should be on guard in such situations, however, against relaxing their fiscal and monetary policies so far as to intensify domestic inflationary pressures.

(3) A world-wide distribution of monetary reserves in accordance with the apparent need for them is incompatible with the yet more fundamental consideration of the distribution of the real resources of each country in accordance with the highest priority for their use. If the monetary reserves of the world were completely redistributed in accordance with apparent need, they would soon be re-redistributed, as each country would soon (quite properly) rearrange the changed amount of real resources at its disposal in accordance with its scale of preferences. In such a re-redistribution, wealthy or less dynamic countries would soon reacquire reserves which they either desired or merely accepted passively, but which, in any event, they could hold without sacrificing other deeply felt needs, while poorer or more dynamic countries would soon dispose of part of their newly acquired reserves in exchange for other types of real resources which they needed more urgently.

It is a corollary of the first of these points that the subject of reserve adequacy can be discussed meaningfully only on the assumption that countries which have not already done so adopt policies adequate to balance their accounts over a normal economic cycle. Upon the assumption that countries adopt such policies, the following four categories or standards of reserve adequacy were distinguished earlier in this paper:

  • 1. Enough to enable a country in bad years, by resort to restrictions, to maintain its external debt payments and to purchase the goods and services necessary to avoid hardship to its population or dislocation to its economy and the possible emergence of an exchange crisis, i.e., to permit a reasonable distribution over time of the payments which it can afford to make over the entire cycle;

  • 2. Enough to maintain currency convertibility, barring a severe depression, but with occasional necessity to resort to trade and exchange restrictions for balance of payments purposes;

  • 3. Enough to maintain currency convertibility, barring a severe depression, but without the necessity for occasional resort to trade and exchange restrictions;

  • 4. Enough to maintain currency convertibility, even through severe depressions (but not through prolonged periods of international deflation such as occurred in the thirties), without either the necessity for occasional resort to trade and exchange restrictions or the necessity for resorting to domestic deflationary policies for the purpose of restraining imports, even if this involves a substantial drain on reserves.

The determination of the “adequacy” category into which any country falls, assuming that it meets the fundamental condition of payments balance over a normal cycle, is a matter of judgment. It is probable, however, that almost all countries, assuming the adoption of appropriate policies, would qualify for category 1, many would qualify for category 2, some would qualify for category 3, and a few would qualify for category 4.8

In determining the adequacy category into which any country falls, account should be taken of the availability of the resources of the Fund to extend temporary assistance to member countries which have achieved a fundamental payments balance. The provision of funds for the objectives indicated above—i.e., the avoidance of sharp declines in imports not required by a country’s fundamental payments position, the maintenance of currency convertibility, and the avoidance of restrictions—is in accordance with the purposes of the Fund. Assistance from the Fund in carrying out these purposes should, therefore, enable member countries to meet their reserve needs more effectively than would be possible on the basis of their own reserves alone. The role of the Fund in times of depression presents special problems which will now be considered.

Reserves for combating the spread of depression

None of the adequacy categories just discussed implies that a country would be able to endure a prolonged period of world deflation without the imposition of exchange restrictions implying at least a severe limitation on convertibility. However, as has already been suggested, this would scarcely be a fair test of reserve adequacy. Just as, at one end of the spectrum, the subject of reserve adequacy does not become relevant unless the country itself is pursuing appropriate policies, so, at the other end, no country can be expected to maintain reserves sufficient to sustain free and nondiscriminatory multilateral trade in the face of world-wide deflation.

The experts’ report, Measures for International Economic Stability, assumes that protracted depressions will be avoided by appropriate domestic measures, but that the U.S. economy, even on the assumption of a fairly rigorous anti-deflationary policy, is subject to short, sharp shocks, during which the rest of the world would need substantial reserves in order to maintain domestic anti-deflationary policies and a volume of imports from the United States corresponding to such policies, and thereby prevent the spread of the depression. The experts estimate that, in the event of a depression in the United States lasting for two years from its inception to its conclusion and involving a fall in industrial production of the same relative magnitude as that which occurred in the depression of 1937-38, the rest of the world would need to draw on its reserves to the extent of $8 billion to maintain its commodity imports from the United States at the level of those in the first half of 1951. To this, the experts add another $2 billion to cover anticipated accompanying declines in invisible current account payments by the United States and in private long-term capital outflow from the United States, and come up with an estimate that a total drain of $10 billion on reserves would be necessary to prevent the spread of a depression of the assumed magnitude. There is some reason to suppose that the assumptions of the experts may be unduly pessimistic. But they will not be investigated here, as no quantitative criticism of them would alter the conclusion of this paper that reserves are not, in general, adequate for combating the spread of a severe depression.

There are two essential questions implicit in the experts’ report: (1) What actions in the field of monetary reserves should be taken now to prevent the spread of future depressions? (2) What actions should be taken when and if a depression starts?

In regard to the first, it would appear desirable for countries to increase their reserves to the extent that is possible and consistent with a progressive relaxation of trade and exchange restrictions and the maintenance of internal financial stability.

When analysis shows clearly that a depression is developing, it should be dealt with promptly by measures directed toward the maintenance of an adequate level of effective demand. Demand should, of course, be maintained on both the national and the international level. The measures taken to assure its maintenance should be primarily positive, and not merely defensive, in character. The essentially defensive character of supplementary reserves obtained with firm assurances of repayment in the short-term or medium-term future has already been pointed out. Defensive measures are important, however; and, in order to prevent small depressions from growing into large ones, such supplementary reserves should be supplied early, on liberal terms, and in adequate amounts. In the event of a severe depression, additional means for maintaining demand at the international level might be required, and it may be expected that the Fund would consult with its members on the desirability of additions to its resources and would consider possible changes in its modes of operations to meet the emergent situation. But primary reliance for the avoidance and cure of depressions must be placed upon appropriate measures at the national level, especially in industrial countries.9

APPENDIX

This Appendix reproduces in part an article by G. S. Dorrance and E. Hicks, “Gold and Foreign Exchange Statistics in IFS”, in International Financial Statistics, June 1953, pp. vii-xii.

Problems of foreign exchange statistics

The statistics of foreign exchange are necessarily difficult to compile and difficult to use. Gold and foreign exchange statistics are intended to measure a country’s international liquidity and hence its ability to finance temporary balance of payments reverses without recourse to either secondary deflation or quantitative restriction and to measure by their period-to-period changes the monetary effects of financing the balance of payments. The gold element of the total involves relatively few problems. In most countries gold is held entirely or predominantly by the monetary authorities, and measurement of their holdings provides an unambiguous statement of the gold holdings of the country. Gold is a single physical commodity whose quantity can be measured by weight and unambiguously valued in terms of U.S. dollars or in the currency of the holding country at its par rate of exchange. Lastly, the measurement of gold holdings does not ordinarily involve any problem of net or gross measurement.

The foreign exchange element of the total, on the contrary, involves many problems: Firstly, no completely satisfactory line can be drawn to separate foreign exchange from related items that also contribute to a country’s international liquidity. Secondly, because foreign exchange is defined throughout International Financial Statistics as claims against foreigners rather than as claims in foreign currency, the foreign exchange holdings of one country are necessarily the foreign exchange liabilities of another, raising the problem of the extent to which foreign exchange liabilities are an offset to assets for a country, for an area, or for the world as a whole. Thirdly, the available international liquidity of a country is not limited to its holdings of foreign assets alone. International agencies, particularly the Fund and the EPU, provide additional sources of liquidity.

Foreign exchange and the similar items, other than gold, that make up a country’s international liquidity might be grouped on at least three scales according to their usability. Foreign claims could be arrayed by currency from U.S. dollars at the top through the other convertible currencies and then through the inconvertible currencies in the order of their usefulness for meeting obligations in any country or in the country liable for the claim. The holders of foreign claims could be arrayed from the monetary authorities at the top through the other banks, other parts of the government, business, and individuals in the order in which their holdings might be thought to be available to the monetary authorities in times of need. Lastly, the forms that foreign claims take could be arrayed from currency and demand deposits at the top through other claims on banks, short-term claims on governments, commercial claims, long-term claims to money, equities, and so forth, in the order of their ability to be converted into currency or deposits rapidly and without risk of capital loss. The compilation of foreign exchange statistics involves selecting criteria for cutting these various scales, each at some point.

The statistics published in IFS result from cutting the three scales very unevenly, partly from choice, partly by following convention, and partly from the limitations of the available data. They include as foreign exchange claims in all currencies, whether convertible or inconvertible, and value each at its established parity. It would be very difficult to do otherwise since most reporting countries do not differentiate their holdings by currency. Moreover, sterling constitutes most of the inconvertible currency held as foreign exchange; and the nature of the restrictions imposed on sterling would make any classification into “available” and “non-available” most arbitrary. Nevertheless, the usefulness of the data is limited by the inclusion in a single total of currencies of all degrees of convertibility. The only holders included are the national monetary authorities. That is, the statistics include as foreign exchange only the holdings of central banks, stabilization funds, treasuries, and similar agencies, and exclude holdings of the other banks and of business and individuals. The choice of monetary policy or exchange restrictions as an alternative to the use of reserves lies with the monetary authorities, and it is their holdings that are primarily available for policy use. This restriction of the data may limit their usefulness since the larger the foreign exchange holdings of the other banks and of business and individuals throughout the world, the more the monetary authorities might be able to induce them to move in settlement of temporary imbalances through appropriate monetary policies. As regards the form of foreign claims, the statistics follow the traditional definition of foreign exchange except that they have been extended to include long-term foreign claims. If the holdings of the other banks or of business and individuals were included in the data, the inclusion of long-term foreign claims would not be reasonable. The monetary authorities, however, are not likely to hold long-term foreign securities solely for their income or solely for the prospect of their appreciation. It is mostly the sterling area countries whose central banks hold long-term foreign securities, and their holdings probably represent their decision to hold interest-bearing paper rather than non-interest-bearing deposits or low-interest-bearing treasury bills for some or all of their sterling which cannot be currently used. The inclusion of these investments is consistent with the inclusion of inconvertible currency holdings.

The second problem of foreign exchange statistics as a measure of a country’s international liquidity involves the choice of net or gross statistics and the extent to which foreign exchange liabilities are an offset to foreign exchange assets. All of the foreign exchange data in IFS are reported gross insofar as possible, and liability statistics (also gross) are given for the United States and the United Kingdom only. One holder’s foreign exchange asset, however, is necessarily another’s foreign exchange liability. The world as a whole can have no net foreign exchange holdings.

It might seem, therefore, that data on foreign exchange should be reported net, with each country’s foreign exchange liabilities deducted from its foreign exchange assets and with a world total of zero. A number of considerations, however, indicate that it is preferable to define foreign exchange for statistical purposes as gross.

Statistically, gross figures are more easily handled whenever more than one classification is required (e.g., by currency and by holder) for the same reasons that make gross national product a more useful measurement than national income. Conceptually, as in the analysis of banking data generally, the importance lies in the gross magnitudes of the different liabilities and assets, many of which are similar (a 30-day Treasury bill on the asset side and its counterpart of demand deposits on the liability side) and all of which would always net to zero.

Moreover, there are important nonparallelisms in foreign exchange assets and liabilities arising from (a) the fact that, while there are many classes of holders and obligors, the statistics measure only the assets and liabilities of the monetary authorities, and (b) the fact that, while it is intended to define foreign exchange assets and liabilities as claims on or to foreigners, records of some holders and debtors in some countries probably measure instead claims and obligations in foreign currency.

Statistics covering the net asset and liability accounts of the monetary authorities would not be the most useful net figure for the monetary authorities. Their gross assets are the only one of six items (the assets and liabilities of the monetary authorities, the assets and liabilities of the other banks, and the assets and liabilities of business and individuals) over which they have control, but it is they who, in the absence of exchange restrictions, are responsible to see that the economy meets all its foreign liabilities, including those of the banks and of business and individuals. Most of a country’s foreign liabilities are obligations in national currency. For the obligor, whether official or private, meeting national currency obligations to foreigners is no more difficult than making payments to residents. But the problem of converting all such payments into foreign exchange must be met by the monetary authorities. The gross reserves of the monetary authorities are the principal means of assuring that their own and other obligations to foreigners can be met.

The net of all six accounts might provide a very useful figure, but information on private foreign exchange is insufficiently available to permit its calculation. Furthermore, the definition “claims against and obligations of foreigners” is probably not observed in the accounts of many of the private holders so that the true net figure would not be known even if all the accounts were consolidated.

A third problem in the compilation of foreign exchange statistics is that of accounting properly for the holdings and transactions of international agencies. Two of the international agencies (the Fund and the EPU) were established in part for the purpose of alleviating the reserve problems of their members. It would seem, therefore, that world reserve statistics should show an increase in the liquidity of members following the establishment of these agencies and should reflect their transactions in the accounts of the countries concerned in a clear and unambiguous manner. The complexities of the way the agencies operate and the differences in their methods of bookkeeping, however, make this impossible.

Members of the Fund make capital subscriptions to the Fund, partly in gold and partly in their national currencies. On this account the gold holdings of the members declined on the establishment of the Fund and the world’s liquidity, measured as the sum of country statistics, declined. The Fund’s holdings of gold and of the currencies of its members are, however, included in the world total. In this total the world’s gold holdings remained unchanged on the establishment of the Fund, and the world’s foreign exchange holdings rose by the sum of all members’ subscriptions paid in member currencies. The members of the EPU, on the other hand, did not make subscription payments to the EPU, but agreed to finance through the EPU, and up to specified limits, their surpluses with other members. There are, therefore, no foreign exchange holdings (other than small amounts of dollars) to report as the holdings of the EPU, and the establishment of the EPU does not show an increase in the combined liquidity of its members. In fact, since pre-existing payments agreements balances were consolidated when the EPU was established, the figures would show a reduction in liquidity through the creation of the EPU.

The accounting of transactions is also different. Members of the EPU earning surpluses in their transactions with other members advance credits to the EPU and add the amount of the credit to their reported foreign exchange holdings. This is in some ways comparable to the manner in which the creditor would have kept his accounts if, in the absence of the EPU, the same transactions had occurred, financed by the debtor through reserves or foreign loans. The method of bookkeeping thus shows an increase in the liquidity of creditors, in the gross assets of Europe, and in the gross assets of the world which is larger the more the payments transactions of Europe are cumulatively unbalanced. The IFS table, based on accounts of members and reporting gross assets, shows the same increases for creditors, EPU countries as a whole, and the world when European payments transactions are unbalanced. In the case of Fund transactions, members whose currencies are drawn from the Fund obtain in effect a claim on the Fund in some respects similar to that which creditor countries of the EPU obtain on the EPU, but they do not add the item to their reported foreign exchange holdings. Hence, Fund transactions have no effect on the statistics of total foreign exchange holdings after the drawing country has spent the currency drawn from the Fund.

The reconciliation of reported data on foreign exchange holdings and foreign exchange liabilities

An attempt has been made to reconcile the foreign exchange data with the reported data on the foreign exchange liabilities of the United States, the United Kingdom, the European Payments Union, and the Bank for International Settlements. The results are presented in Table A, which shows the total gross foreign exchange assets of the world and of each of the monetary areas and compares with them the data on liabilities reported by the United States, the United Kingdom, EPU, and BIS. The difference is labeled “errors and omissions”.

There are two principal disparities between the asset and liability data which, in addition to ordinary errors and omissions of many kinds, determine the size and sign of the “errors and omissions” line. Firstly, there are other currencies held and reported as foreign exchange but not reported in the liabilities section. Positive entries in the errors and omissions line may indicate the amounts of all such other currencies.

Secondly, the liability figures include some liabilities to other banks and to business and individuals, while the asset figures include official holdings only. All of the liability data published by the United Kingdom include liabilities to other banks and to business and individuals. Negative entries in the errors and omissions line may indicate the amounts of such liabilities.

The total of all U.S. liabilities to official agencies is available separately, so that this source of error is presumably excluded in the total world reconciliation. The figures as published by the United States, however, require two adjustments. For the year 1950 there is a large difference between the Bank of Canada’s reported holdings of U.S. dollars and the U.S. reports of its liabilities to official agencies and banks in Canada.10 Total U.S. liabilities were increased for 1950 by 619 million dollars to account for this difference. There is secondly a problem in the U.S. reports of liabilities to Japan. Japan publishes its official holdings of U.S. dollars. The amounts agree with U.S. reports of total liabilities to Japanese official agencies and banks, but apparently these amounts are included under liabilities to banks rather than under liabilities to official agencies in U.S. statistics.11 Total U.S. liabilities to official agencies for all of the years shown have therefore been increased by the amount of Japanese reported official dollar holdings. This adjustment increases the reported U.S. liabilities to official agencies by 669 million dollars in 1952, or 15 per cent of the U.S. total.

In constructing the monetary area reconciliations, however, other problems arise in the data on U.S. liabilities. There are available from U.S. sources data by country for only the total of U.S. liabilities to official agencies and other banks for 1950 and later years, and only the total of all U.S. liabilities including liabilities to business and individuals for earlier years. However, for five of the countries whose dollar holdings are especially important (Canada, Cuba, Japan, the Philippines, and the United Kingdom 12), national figures on official holdings of U.S. dollars are available and were used. U.S. liabilities to the official agencies of other countries were therefore estimated by multiplying the liabilities to official agencies and banks of these countries (all liabilities prior to 1950) by an adjustment factor C/F calculated in the following way:

Table A.Reconciliation of Gross Foreign Exchange Assets with Foreign Exchange Liabilities(In millions of U.S. dollars)
19481949195019511952
World Total1
Total Gross Assets13,30010,25012,90012,35012,350
Dollars22,9173,0714,5074,0625,133
Sterling311,4787,8568,1637,8706,506
Credit to EPU4026651,077
Balances with BIS52108250192364
Errors and omissions–1,147–785–422–439–730
Canada
Total Gross Assets6106361,170953977
Dollars5966311,162937975
Sterling1359162
Errors and omissions
Latin America
Dollar Countries
Total Gross Assets220290350435650
Dollars285359360405607
Errors and omissions–65–69–103043
Non-Dollar Countries
Total Gross Assets1,229820825595525
Dollars252282395227183
Sterling54422412616017
Errors and omissions433314304208325
Continental EPU Countries
Total Gross Assets1,9052,0452,7203,0303,450
Credit to EPU1776651,077
Total Net Assets1,9052,0452,5432,3652,373
Dollars9018691,1401,1501,717
Sterling1,4911,2291,1061,145899
Balances with BIS52108250192364
Errors and omissions–539–16147–122–607
United Kingdom
Total Gross Assets404402768174458
Dollars251338400135346
Credit to EPU225
Errors and omissions1536414339112
Other Sterling Countries
Total Gross Assets6,4044,1384,7474,4283,800
Dollars623899108133
Sterling7,2904,9595,5445,1104,488
Errors and omissions–948–859–896–790–821
Rest of the World
Total Gross Assets2,5401,9102,3352,7202,455
Dollars5705549511,1001,172
Sterling2,1401,4391,3781,4391,100
Errors and omissions–170–836181183

U.S. reported liabilities to all official holders plus adjustments for Canada and Japan........................................................ = A

Official holdings of dollars reported by Canada, Cuba, Japan, the Philippines, and the United Kingdom........................................................ = B

Estimated official holdings of dollars by other countries (A – B) ............................... = C

U.S. reported liabilities to all official holders and banks (total holdings prior to 1950) plus adjustment for Canada in 1950 ........................................................ = D

U.S. reported liabilities to official holders and banks (total holdings prior to 1950) in Canada, Cuba, Japan, the Philippines, and the United Kingdom ........................................................ = E

Liabilities to official holders and banks (total holdings prior to 1950) in other countries (D – E) ........................................................... = F

Adjustment factor for estimation of official holdings of other countries ......................... C/F

It is recognized that the table is not strictly a reconciliation table since in the cases discussed the same figures have been used on both sides of the reconciliation.

The reconciliation indicates that the basic data on foreign exchange are reasonably satisfactory and that most of the world’s holdings of foreign exchange represent, as would be expected, the liabilities of either the United States or the United Kingdom. For the world as a whole, reported liabilities exceed reported assets by some 750 million dollars. This excess of liabilities over assets results from the inclusion in the liabilities data of sterling liabilities to banks, business, and individuals, and to the inclusion of both sterling and dollar liabilities to the Soviet bloc and a few small countries for which no assets data are reported. These amounts are offset in part by the inclusion in the assets data of holdings of currencies other than dollars and sterling. Some measure of the importance of sterling liabilities to nonofficial holders is given in the errors and omissions line for Other Sterling Countries. Since this entry alone exceeds the errors and omissions for the world total, it is apparent that holdings of other currencies play a small but significant role. Holdings of other currencies apparently play their largest role in the non-dollar countries of Latin America. The error arising from the inclusion in the liability data of liabilities to the Soviet bloc and other unreported countries is reflected largely in the Rest of the World figures insofar as sterling is concerned. The corresponding error for the dollar figures is distributed between most of the areas owing to the method of their calculation.

The reconciliation table also indicates that the problem of gross and net assets is not as serious as it might be since most of the foreign exchange holdings of the world represent the liabilities of only two countries, the United States and the United Kingdom, and these are almost entirely denominated in dollars or sterling (i.e., foreign currency from the holder’s point of view). It follows from these facts that the net assets of the monetary authorities of most countries cannot be appreciably different from their gross assets, since if the monetary authorities of most countries had appreciable foreign liabilities the foreign assets of other countries would reflect them and lead to plus errors in the reconciliation table. And it follows directly from the facts that foreign exchange liabilities are largely claims against the United States and the United Kingdom and that these are largely denominated in dollars or sterling, that the statistics of foreign exchange of the monetary authorities must be approximately consistent with the definition “claims against foreigners” regardless of whether some countries use the definition “claims in foreign currency”.

The group included James W. Angell, Professor of Economics and Executive Officer, Department of Economics, Columbia University; G. D. A. MacDougall, Fellow of Nuffield College and Reader in International Economics, Oxford University; Javier Marquez, Alternate Executive Director, International Monetary Fund, formerly Professor of Economics, National School of Economics, Mexico; Hla Myint, Lecturer in Colonial Economics, Oxford University, formerly Professor of Economics, Rangoon University; and Trevor W. Swan, Professor of Economics, Australian National University.

This paper has been prepared under the supervision of Mr. Henry Murphy, Chief of the Financial Problems and Policies Division, Research Department. It was discussed in July 1953 at the sixteenth session of ECOSOC, held in Geneva. In the paper submitted to ECOSOC, the tables recorded figures for 1928,1938, and 1951. In the present paper, the 1938 and 1951 figures have been revised, figures for 1952 have been added, and a number of consequential amendments to the text have been made.

The reserve problems of the nonmetropolitan territories of a Fund member have special features which are not expanded in this paper.

The corresponding figures for December 31, 1951 are $22.9 billion for the gold reserve and $9.3 billion for total short-term liabilities to foreigners including international institutions.

In each case reported official holdings of U.S. dollars by Japan are added to the total reported by the U.S. Treasury. See Appendix, p. 346.

“The figures in Table 5 are obtained by reversing the signs on the data for the balance of payments of the United States, published in International Monetary Fund, Balance of Payments Yearbook. The item “net errors and omissions” has been classified for this purpose as a “use” of funds by the “rest of the world” on the ground that such errors and omissions probably represent, for the most part, unrecorded private capital movements to the United States.

This subtraction is made in order to show the amount of dollars at the “free” disposal of the recipient countries after paying interest, dividends, etc., to the United States.

International Monetary Fund, Annual Report, 1952, p. 6, states: “An aggravating factor in the recurrent balance of payments crises of the postwar years is the inadequacy of international reserves available to monetary authorities outside the United States. Although the gold and dollar holdings of countries other than the United States have risen to some extent since 1938, the increase has not been in proportion to the expansion of world trade, and their value in real terms has been actually reduced by inflation. These trends, combined with the abnormally wide swings in balances of payments, have often produced situations in which reserves have appeared to be dangerously low. The attainment of any particular level or ratio of reserves is not by itself a guarantee against balance of payments crises; nevertheless, a more adequate cushion against balance of payments disturbances is clearly desirable so that more time may be available to make the necessary readjustments.”

It should be noted that many of the countries to which reference was there made had not achieved a fundamental balance of payments equilibrium over a normal economic cycle. Each adequacy category used in this paper assumes that policies are always adequate to assure such a balance.

International Monetary Fund, Annual Report, 1952, pp. 45–46, states: “The Fund has also had under consideration the question of the part to be played by it in connection with the problems created by widespread recessions or depressions. The Articles of Agreement have entrusted to the Fund an important function in this field. The basic problem of depression cannot, however, be overcome by the availability of international short-term credit to be repaid in the next boom, whether this is credit from the Fund or from some other source. The cure for a depression will require national measures to maintain or stimulate effective demand, especially in the great industrial countries. It may take time, however, before these measures bring recovery. The Fund can assist members which in the meantime may be faced with serious balance of payments difficulties, and by so doing help to reduce the deflationary pressure on the world economy as a whole. A UN group of experts has recommended an enlargement of the Fund’s resources so as to increase the effectiveness of its activities in such circumstances. The Fund has for some time had under consideration the question of increasing its members’ quotas, having in mind such factors as the magnitude of possible balance of payments deficits in a depression and the fall in the purchasing power of money since 1946. It has, however, concluded that an increase in its resources is not a question for action at the present time. Its existing resources are by no means small as a source to finance a cyclical balance of payments deficits. The Fund’s resources, moreover, are secondary reserves and the ability of countries to maintain important demand in a depression will depend also on the size of their own reserves. It is important, therefore, that countries follow financial policies that will enable them to build up reserves in periods of prosperity which would provide a first cushion to absorb the shock of a recession.”

The difference presumably arose from Canadian purchases during 1950 of U.S. securities with original maturities slightly longer than one year. Cf. Federal Reserve Bulletin, March 1951, p. 232, in which Canadian holdings of U.S. securities with maturities up to 20 months are reported.

“If reported private dollar balances are adjusted to exclude Japanese holdings (which are technically reported as private, though in reality of an official character)….” See Federal Reserve Bulletin, March 1952, p. 231.

The U.S. dollar holdings of the monetary authorities of the United Kingdom can be estimated by deducting the U.S. Federal Reserve Board’s estimate of the U.K. gold holdings from the U.K. figure for gold and U.S. and Canadian dollar assets, on the assumption that Canadian dollar holdings are small.

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