Chapter

International Reserves and Liquidity

Author(s):
International Monetary Fund
Published Date:
February 1996
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In May 1957 South Africa requested that the staff should undertake a study of “the factors affecting the present state of international liquidity, including the world supply of monetary gold.” References to a possible inadequacy of monetary reserves were made by a number of Governors during the Annual Meetings, 1957. A staff working party subsequently wrote a report on the subject, which was published on September 16, 1958. This was a staff document, prepared under the personal supervision of the Managing Director. It is reproduced below.

International Reserves and Liquidity A Study by the Staff of the International Monetary Fund

(September 16, 1958)

FOREWORD

In the course of 1957, and especially at the Annual Meeting in September of that year, several governments requested that the staff of the Fund prepare a study on international liquidity. This study has now been completed and is herewith published as a staff document; it does not necessarily represent the views of the Executive Directors.

An attempt has been made to review present problems in the light of past experience. The study takes account of very recent developments, and it has therefore fortunately been possible to consider the implications for international liquidity both of the extreme boom conditions of 1956–57 and of the subsequent recession. The consideration of the problems for the future has thus benefited from very recent experience in contrasting economic conditions.

Per Jacobsson

Washington, D. C.

August 15, 1958

CHAPTER ONE: INTRODUCTION

The opportunity to examine afresh the question of international reserves and liquidity brings again to the attention of the staff of the Fund a number of problems which have, in varying degrees, attracted attention over many years. In one form or another, these problems have been discussed throughout the postwar period. In 1953, at the request of the Economic and Social Council of the United Nations, the Fund prepared an extensive report, “The Adequacy of Monetary Reserves.” 1 Since 1956, as a number of countries have had to draw extensively on their reserves and to supplement their reserves by borrowing, even more demanding questions have been raised about the state of international liquidity. The most convenient introduction to these questions is through a consideration of the role of reserves and credit in international trade and payments.

Imports of goods and services are ultimately paid for with exports of goods and services, and any difference between imports and exports may be balanced by a movement of long-term or short-term capital. If a balance still remains, it is then paid with the country’s own reserves or other cash holdings. The definition of international reserves must therefore be wide enough to include any kind of money which is acceptable in payment of foreign obligations. Reserves may consist of gold, dollars, and other convertible currencies, or of sterling, deutsche mark, and other currencies which are practically convertible. They may include inconvertible currencies when these are acceptable to particular trading partners. They may include balances due under payments agreements. In many cases, reserve assets are held not only by the official authorities but also by banks, business enterprises, and private individuals. Not infrequently, foreign obligations are met from private rather than from official holdings.

There is thus no unique definition of international reserves which is satisfactory for all purposes and for all countries. This makes the measurement of international reserves, and of changes in reserves from one period to another, peculiarly difficult. In fact, the measurement of reserves necessarily has qualitative as well as quantitative aspects.

Modern economic systems, moreover, operate on credit. Domestically, this takes the form of bank loans and overdrafts, consumer credit, and trade credit. Internationally, private credits may be obtained to finance imports and exports, and public credits may be obtained by one country from banks in, or governments of, other countries as well as from international organizations, such as the International Monetary Fund. As with individuals and business enterprises, the ability of a country (or of individuals in a country) to make payments depends not only upon the amount of cash in hand and the expected receipts of cash in the near future but also to some extent upon the ability to borrow on either short term or long term.

Thus, in appraising the adequacy of international reserves and the degree of international liquidity, account must be taken not only of all kinds of reserve holdings, public and private, but also of the credit-worthiness of countries and the ability of the international financial mechanism to extend credit under proper safeguards in good times and bad. In addition, the adequacy of reserves and the degree of liquidity depend upon the international environment, including, for example, the appropriateness of the structure of exchange rates, the extent to which balance prevails in international trade, and the presence or absence of that intangible, “confidence.” There is nothing unique or new in this recital of the elements that combine and recombine to create any given degree of international liquidity. For this reason, it is useful to approach the current problem of international reserves and liquidity in the perspective of the past.

During the heyday of the gold standard, immediately before the outbreak of World War I, monetary specialists were also concerned with the problems of the proper size, the distribution, and the rate of growth of international reserves. At that time, too, conflicting views were expressed. It would fall outside the scope of this inquiry to review those old controversies, which in many ways applied to conditions very different from those prevailing today. It is, however, certainly relevant to recall that at that time many countries, and particularly the United Kingdom, held reserves which seem to us now to have been astonishingly slender compared with the volume of trade and other transactions.

There are a number of reasons why this system operated as smoothly as it did in the generation preceding World War I. These reasons throw some light upon the present situation. In the first place, balance prevailed in international payments and economic relationships to a greater extent than has since been true for any extended period. The major use and need for reserves arise when balance is upset; the presence of economic balance and the feeling that balance will be maintained are perhaps more important than the actual size of reserves in creating a feeling that they are adequate. Moreover, day-to-day disturbances, and even seasonal movements, of international payments need make no great demands upon reserves when credits of various kinds can be arranged. There were widespread and effective facilities for granting credits in London and other centers. These facilities were available to governments and other official agencies as well as to overseas banks and foreign traders. London was responsible for the greater part of this financing, which not only supplemented international liquidity in a very important way but also gave London large sight claims on firms and banks in other countries. Changes in the amount of these claims, effected by means of changes in Bank Rate, buttressed with large long-term overseas investments, provided adequate supplements to London’s slim gold reserves. There was widespread acceptance of the gold standard system, and of stable exchange rates within it, as the only desirable monetary system. This implied, as far as individual countries were concerned, clear and agreed objectives for monetary policy and for fiscal policy, and the latter was less important then than now because the role of government was much smaller. For these and other reasons, a large degree of confidence prevailed.

In the years immediately preceding the outbreak of World War I, London was the leading financial center. Other centers were secondary and of markedly less importance. After the war, this situation changed and New York emerged as an important international center alongside of London. This development had important implications for the financing of world trade and for the movement of funds. It may well be that a multicentered world can function as well as a one-centered world in periods of calm, but in periods of stress, it is subject to wide and sweeping movements. Such movements may create severe strains in the financial structure. Developments since 1946 have further increased the importance of New York as a financial center but have by no means given New York the same importance relative to London and other financial centers that London before 1914 had relative to all other centers.

The development of the institutions and arrangements that created operating smoothness and stability before 1914 required both time and a favorable environment. The last important war in Europe had taken place in 1870–71. In comparison with twentieth century experience, neither this war nor any of the subsequent smaller wars involved any large economic dislocation. There were some conflicts outside Europe but, again, these were short and relatively small. Looking backward, we can see that in this general environment the shocks to the economic system were much smaller than they have been since 1914.

It is, however, easy to overestimate the stability and the long duration of the international financial structure that existed immediately before World War I and, by contrast, to underestimate the characteristics of the system that has gradually developed in the postwar period. Though it is customary to refer to the second half of the nineteenth century as “the golden age of the gold standard,” this overstates the case. The United Kingdom was on a gold standard as early as 1819, but the other countries of Western Europe and the United States were not until the 1870’s. With a few exceptions, all other countries at that time had either a silver standard or an inconvertible currency. Since the price of silver was falling, the exchange value of all silver standard currencies was depreciating. The variations in the exchange rates of silver standard and inconvertible (flexible rate) currencies were astonishingly large, even when measured against recent developments.

Measured in terms of the number of countries involved, the last half of the nineteenth century was a period of considerable monetary change, with many devaluations, inconvertible currencies, and floating rates. Measured in terms of their importance to world trade, however, there was a solid core of countries on gold after the 1870’s. These countries not only set the goal for monetary developments in all other countries, but they accounted for perhaps 70 per cent of the world’s exports. Toward the end of the century, the gold standard was adopted by more and more countries: by Austria-Hungary in 1892; Russia and Japan in 1897; India in 1899; and Mexico in 1904.

Also of interest is the fact that, especially in the early years of the period, there was concern from time to time that the world’s reserves of gold or silver or both were inadequate. There were also many criticisms (in the United Kingdom) that British reserves—that “thin film of gold”—were inadequate, and the reason often given for this state of affairs was that the Bank of England, as a private concern, was unwilling to tie up the necessary amount of assets in nonincome-earning form. To be sure, these criticisms decreased toward the end of the prewar period, as the United Kingdom acquired larger holdings of long-term and short-term investments, while the Bank of England developed increasingly effective techniques for dealing with monetary and exchange rate problems. It is not without interest, furthermore, that, from 1900 until 1913, in the face of large increases in trade, the gold holdings of the Bank of England increased by scarcely 10 per cent, so that the ratio of gold reserves to imports fell from 7 per cent to 5 per cent. For the world as a whole, the gold situation was greatly eased after 1890 by increases in gold output, especially in the Transvaal; and indeed, in some academic circles, the question was raised after the turn of the century whether gold production might not become too abundant.

Prices rose during World War I, and in the course of the 1920’s they settled down to a level which, on a gold basis, was about 50 per cent higher than in prewar years. There was consequently an increase in the value of world trade, and the question soon arose whether the available reserves would be sufficient in view of these changed circumstances. Some feared the emergence of a gold shortage, and proposals were put forward to guard against it. This question was one of the main subjects of deliberation at the Genoa Conference in 1921, and it continued to be discussed in the 1920’s. As a matter of fact, the ratio of reserves to the value of trade at the beginning of the 1920’s was higher than it had been in 1913, in part because of the incorporation into official reserves of gold previously in circulation.

It will be remembered that the resolutions of the Genoa Conference recommended, on the one hand, wider use of the gold exchange standard and, on the other, establishment of central banks in all developed countries. Both of these recommendations were realized. Exchange holdings were increasingly used as official reserves in the 1920’s. Though exchange holdings were reduced to very low levels in the 1930’s, they became, during and after World War II, a reserves component on a scale never anticipated in 1921 (for further discussion of this point, see Chapter II). Central banks have also been established in the large majority of countries, developed as well as underdeveloped, though it must be admitted that their full potentialities for stability and development have not been achieved in all cases.

For some years after 1921, it seemed that the new system could be made to work effectively. Within a very few years, one country after another stabilized its currency under conditions of full convertibility. There were, however, many deep-seated elements of maladjustment. Some were a consequence of the war, and certain additional ones emerged in the postwar period. With the aid of hindsight, it is clear that these maladjustments were not solely or even largely of financial origin and that they could not have been solved by financial means. In some respects financial decisions were helpful, but in other respects they contributed new elements of disequilibrium. Exchange rates used in currency stabilizations were not always set at the most appropriate levels. Sterling was stabilized at an ambitiously high rate in relation to gold, and the French franc was later set at too low a rate. Reserves were generally increased in the European countries but, in many cases, they were borrowed instead of being acquired with national savings. They were sometimes borrowed on short term and pyramided from country to country, making the situation even more unstable. Unfortunately, at that time, these and other developments could not be effectively measured because of the inadequacy of the statistics then available.

The hopes entertained for the successful re-establishment of a stable and growing international financial system were frustrated by the maladjustments of the 1920’s and finally shattered by the Great Depression and the devaluations of 1931–34. Three main conclusions can be drawn from this experience. The first is that considerable time and much effort are needed to restore a proper balance after a major war has caused widespread economic dislocation, inflation, and currency upheaval. The second is that when stabilization is attempted the exchange rate chosen must be appropriate and realistic, and if the rate is found to be incorrect prompt correction is necessary. The third is that once a crack starts in the exchange structure it is difficult to limit its effects. It may lead to the forced devaluation of major currencies—devaluations not dictated by the realities of foreign trade and competitive prices. Such a crack may start with a relatively minor currency, and yet gain such momentum that it ultimately sunders the whole international exchange structure. Thus, in the period between the two world wars, the failure of the Credit Anstalt in Vienna in 1931 led not only to considerable difficulties in the German banking structure but also to the devaluation of sterling and other currencies in the same year, and ultimately to the devaluation of the dollar in 1934 and of the gold bloc currencies in 1936.

After the devaluations of the 1930’s, the world’s financial system became increasingly fragmented. Although many countries maintained stable exchange rates in relation to the dollar, whose gold content was officially changed in 1934, and others maintained stable exchange rates through the sterling area, which was then more extensive than it is today, the dollar-sterling rate fluctuated. There was increased resort to trade restrictions, multiple currency practices, bilateral arrangements, and autarky. Closer examination of developments up to the outbreak of World War II suggests that there was a deterioration in the fundamental monetary position of parts of the sterling area, and that in general there were more difficulties in the day-to-day operations of foreign exchange markets than is often supposed. Growing political difficulties, in both Europe and the Far East, caused massive flights of capital, in large part to the United States. These took place on a scale much larger than before 1914, and from time to time they tended to gain a momentum of their own. Central banks and monetary authorities found it more difficult to know when and how to take a stand. Long-term capital movements dried up. Confidence decreased sharply—and there was good reason why this should have been the case. The basic conception of a world economy lost meaning, and the idea of separate, disconnected economies gained force.

World reserves increased sharply in the 1930’s, and the ratio of reserves to trade reached all-time highs. A number of factors were responsible for this development. The value of all gold stocks was raised in 1934 when the price of gold was increased. The production of gold was stimulated by the falling prices and unemployment of the depression and further stimulated by the higher price of gold. On the other hand, both the value and the volume of trade decreased. Even in 1937, when there had been a substantial, though in no way complete, recovery from the depression, the ratio of gold and exchange reserves to trade for all countries other than the United States was 63 per cent, in comparison with 35 per cent in 1928 and 17 per cent in 1913. The world had very large reserves, but it was troubled by the inability of leading countries to restore balance in their internal economies and, for some of them, also in their foreign trade relations.

The ratio of reserves to trade is discussed in Chapter II of this report, where the data for the postwar years are analyzed and compared with those for 1937–38, as well as 1928 and 1913. One general conclusion that must be drawn from this discussion is that the adequacy of international reserves cannot be judged in a vacuum and that adequacy is not a simple matter of arithmetical relationship. The adequacy of reserves is always related to the degree of efficiency of the prevailing international credit system, and it is affected by the realism of the existing pattern of exchange rates and by the appropriateness of domestic monetary and fiscal policies.

To the creaking and disorganized international financial and economic mechanism of the 1930’s, World War II added inflation, unparalleled destruction and economic dislocation, and sweeping changes in debtor-creditor positions.

While World War II was still being waged, ideas were put forward for a better monetary system. The principal objectives, once again, were to restore a properly working international monetary system with convertible currencies and with safeguards for the maintenance of exchange stability; to encourage a healthy and free flow of world trade; and to ensure financial assistance to individual countries to enable them to correct maladjustments without resorting to measures destructive of national or international prosperity. After much discussion, these main ideas were embodied in the Articles of Agreement of the International Monetary Fund. It was recognized, however, that special problems of adjustment would arise in what was called a “transitional period” and that certain existing restrictions would have to be permitted for part or all of this period.

Peace in 1945 brought problems of economic and financial reconstruction of unparalleled magnitude. There was actual inflation in practically all countries. There were accumulated shortages of consumer goods, of capital goods, and of working inventories at all levels of production. In most of Europe, there were the additional huge requirements growing out of wartime destruction and decapitalization. An enormous amount of investment was required to start an increase of production and then to raise it to high and efficient levels within a reasonable period of time. Domestic savings were generally not adequate to this task; consequently, there was an acute shortage of savings that tempted countries to rely excessively on credit creation, which contributed further to the inflationary pressure. As a matter of fact, the major part of the capital goods and working inventories required for these purposes could be obtained in large measure only from the United States. For Europe, these difficulties came to a head in 1947, when conditions were aggravated by widespread crop failures due to a very cold winter and a very dry summer. It was then that large-scale aid on a broad and imaginative scale was inaugurated by the announcement and implementation of the Marshall Plan.

Since the end of World War II, a large and growing supply of dollars, arising out of a steadily expanding volume of U.S. imports and payments for overseas services, capital exports, and aid, has been the dominant element in improving international liquidity. The European Payments Union (EPU) has provided additional liquidity by making it possible for intra-European payments to be settled partly in credits granted by the creditor members. The Fund made a substantial amount of resources available before the Marshall Plan went into effect. Subsequently, the countries that obtained Marshall Plan aid had no need to turn to the Fund, while the British Commonwealth countries were able to make use of the substantial sterling balances they had accumulated during the war, and many Latin American countries drew down dollar balances accumulated during the same period. At the beginning of the postwar period, the private credit system could not be relied upon to provide the required amount of commercial credit to finance international trade, but as time passed it began to play an increasingly important supplementary role. Gradually, and at times almost imperceptibly, there was a simplification of many exchange rate structures, and a reduction in restrictions and bilateralism.

In respect of international reserves and liquidity, there have been a number of developments. First, reserves of countries other than the United States increased from $22 billion at the end of 1948 to $30 billion at the end of 1957. The EPU countries as a group, which had had very low reserves at the end of 1948, substantially increased their holdings of gold and dollars, while a number of other countries that had accumulated large holdings of sterling or dollars during the war reduced their reserves. Most countries were able to show some improvement, but the improvement was distinctly uneven. The increases in reserves took place in those countries which invested part of their net savings in gold or exchange rather than in capital goods at home or in securities or businesses abroad. In fact, reserves can be increased only by applying to that end otherwise uncommitted savings, and the importance of having uncommitted savings is a matter to which further reference will be made in this study. Secondly, the methods whereby total reserves have been increased have been sound, and there has been no deterioration in the quality of reserves. As distinguished from the 1920’s, reserves have, on the whole, not been borrowed, either on long term or (what is still more dangerous) on short term. On the contrary, the increase has resulted principally from saving part of the receipts arising from trade and from aid. There has been little if any of the international pyramiding of credit so characteristic of the 1920’s. With the major exception of 1957, there have been few of the movements of “hot money” so feared in the 1930’s, though changes in “leads and lags” have at times exerted strong speculative pressure, especially against sterling. Some countries have drawn down their sterling or dollar balances, but this was done largely to pay for imports. Thirdly, the gold holdings of the United States have been reduced by more than $3 billion since 1949, which meant the reversal of a trend that had gone on, with a few short exceptions, for at least two generations. In addition, there have been large increases in both private and official holdings of dollars by foreigners. The increases in official holdings are included in statistics on international reserves, but the increases in private holdings, which also add to international liquidity, are not. In fact, since 1948 there has been a distinct improvement in the distribution of the world’s reserves of gold, and an even greater improvement in the distribution of the world’s reserves of gold and foreign exchange. The scope and significance of this redistribution can be appreciated only by reference to the writings of the 1920’s and 1930’s, which treated any movement of reserves to the United States as sterilized and irreversible.

The healthy and balanced growth of world trade depends upon adequate and rising reserves and an efficient international credit system, both private and official.

The level of reserves influences the domestic volume of money and credit, while gains and losses of reserves are one of the most important indications of the state of balance of the domestic economy in relation to the economies of other countries. In the days of the gold standard, gold circulated as coin and, through cover percentages, determined the volume of credit money in a manner that was largely automatic. These links between gold and money are now much weaker, and monetary management plays a much larger role. This is true for two reasons. First, holdings of exchange, largely dollars and sterling, are a very important supplement to gold as a reserve against both the domestic money supply and fluctuations in the balance of payments. The growth of reserves now depends not only upon the additions to the stock of monetary gold from new production and dishoarding but also upon the additions to the world’s holdings of dollars, sterling, and other currencies. These additions depend, in turn, upon the creation of domestic money by the United States and other countries, and upon the willingness of the rest of the world to hold reserve assets in this form. The ability of countries to create exchange liabilities, whether by reason of large gold reserves or other factors, has been, and will continue to be, very important in increasing world liquidity. Secondly, the relationship between reserves of gold and exchange and the volume of domestic money, although still influenced by the amount of international reserves, is within broad limits largely determined by monetary management. This management is less a question of the cover percentages, which still form part of the monetary legislation of many countries, than of a proper appreciation by the monetary authorities of the limits to the permissible supply of credit which are suggested by reserve movements. Changes in reserves are one of the factors which the monetary authorities must consider in judging the measures required to maintain the exchange rates and the international positions of their countries.

Total international reserves have grown, and the total has become more effective through redistribution since the percentage of total reserves held by the United States has fallen. The system of international credit has been strengthened unobtrusively but steadily during the postwar period. Private commercial credit is now more readily available to finance the movement of trade. The role of the Fund as a second line of monetary reserves has become increasingly important. On the other hand, from 1947 to 1957, the value of world trade increased by 110 per cent, and its volume by 90 per cent. The prices of goods traded internationally increased by 140 per cent between 1937 and 1957. There have been a number of monetary crises in the postwar period; sterling and other major European currencies are still not legally convertible; and many countries still employ multiple currency practices and exchange restrictions. For these and other reasons, there have been questions about the adequacy of reserves, from the standpoint of both their total and their distribution, and about the appropriateness of the system of international credit, with account taken of the existing level of reserves.

CHAPTER TWO: THE LEVEL AND COMPOSITION OF RESERVES

Before examining the question of the amount of reserves that may be considered adequate for any individual country, it is of interest to review the level and composition of reserves as they are at present, together with comparable figures for previous years.

Changes in Total Reserves

International reserves are here taken to be a country’s official holdings of gold, dollars, sterling, and other foreign exchange assets on a gross basis, i.e., without taking account of short-term liabilities that might be considered to be offsetting. This is the most usual and at the same time the most practicable definition of international reserves, and the only one that can be used to deal with many countries over extended periods of time. Within its limits this definition makes possible greater precision in comparison than any other. For certain purposes, and for certain countries, a broader treatment of international assets and liabilities is desirable and is therefore also used in this report. Private—or better, nonofficial—holdings of gold, dollars, sterling, and other currencies are a supplement to official holdings and in some cases are a substitute for them. Furthermore, the line between short-term and long-term assets is indistinct and shifting, and the conventional distinctions may not be appropriate in all cases. On the other hand, if account is to be taken of short-term liabilities, there is the difficulty of defining exactly what kind of short-term liabilities should properly be regarded as offsetting particular kinds of assets. The liabilities may be those of the central bank, the banking system, or the economy as a whole. Against some of these liabilities there are, in turn, short-term assets which are not included in official reserves, e.g., liabilities of foreigners on account of discounted acceptances. It is for these reasons that general and historical discussions of reserves use figures on a gross basis but introduce additional figures to deal with certain specific countries or problems.

At the end of 1957 the world’s stock of monetary gold, as shown in Table 1, was valued at $38.6 billion, of which $37.0 billion was held by countries and $1.6 billion by international organizations—principally the International Monetary Fund. Country reserves in the form of official exchange were $15.9 billion, so that total country reserves of gold and foreign exchange came to $52.9 billion. As may be seen from the table, the figures for 1957 constituted all-time highs. Country reserves by themselves, excluding reserves held by international organizations, are at present twelve times as high as in 1913, four times as high as in 1928, and nearly twice as high as in 1937–38. The dollar value of reserves declined in 1949, largely because of the devaluation of sterling; it also declined slightly in 1950–51, during the Korean crisis. However, since 1951 there has again been an uninterrupted increase in total world reserves.

Table 1.Gold and Exchange Reserves of Countries and International Organizations, Selected Years, 1913-571(In billions of U.S. dollars)
CountriesInternational OrganizationsTotal
YearGold

(1)
Exchange

(2)
Total

(1) + (2)

(3)
Gold

(4)
Exchange

(5)
Total

(4) + (5)

(6)
Gold

(1) + (4)

(7)
Gold and

country

reserves

(7)+ (2)

(8)
Gold and

all exchange

reserves

(3)+ (6)

(9)
19134.00.524.54.04.54.5
19289.83.112.99.812.912.9
193725.32.427.725.327.727.7
193826.01.827.826.027.827.8
194832.813.446.21.55.57.034.347.753.2
194933.210.543.71.55.77.234.745.250.9
195033.613.647.21.76.17.835.348.955.0
195133.612.946.51.76.07.735.348.254.2
195233.613.246.82.06.18.135.648.854.9
195333.914.148.02.06.88.835.950.056.8
195434.415.149.52.16.99.036.551.658.5
195535.015.650.62.36.58.837.352.959.4
195635.616.251.82.16.88.937.753.960.7
195737.015.952.91.67.69.238.654.562.1
Sources: For 1937 and 1950-57, International Financial Statistics (IFS), June 1958; for 1928, “The Adequacy of Monetary Reserves,” Staff Papers, Vol. III, No. 2 (October 1953), pp. 181-227; for 1913, Banking and Monetary Statistics (Board of Governors of the Federal Reserve System, 1943), Table 160; for 1938, IFS, December 1954; for 1948, IFS, February 1958; for 1949, IFS, August 1955. Data exclude countries in the Soviet bloc.

Gold is valued at $20.67 per ounce prior to 1934 and at $35 an ounce thereafter.

Estimate. The Bank for International Settlements estimated exchange holdings as “at least $400 million and at most $600 million” (The Gold Exchange Standard [1932]). According to another estimate, exchange holdings prior to World War I were $300 million [Felix Mlynarski, The Functioning of the Gold Standard (League of Nations, A Memorandum Submitted to the Gold Delegation of the Financial Committee, 1931), p. 10].

Sources: For 1937 and 1950-57, International Financial Statistics (IFS), June 1958; for 1928, “The Adequacy of Monetary Reserves,” Staff Papers, Vol. III, No. 2 (October 1953), pp. 181-227; for 1913, Banking and Monetary Statistics (Board of Governors of the Federal Reserve System, 1943), Table 160; for 1938, IFS, December 1954; for 1948, IFS, February 1958; for 1949, IFS, August 1955. Data exclude countries in the Soviet bloc.

Gold is valued at $20.67 per ounce prior to 1934 and at $35 an ounce thereafter.

Estimate. The Bank for International Settlements estimated exchange holdings as “at least $400 million and at most $600 million” (The Gold Exchange Standard [1932]). According to another estimate, exchange holdings prior to World War I were $300 million [Felix Mlynarski, The Functioning of the Gold Standard (League of Nations, A Memorandum Submitted to the Gold Delegation of the Financial Committee, 1931), p. 10].

It is estimated that in 1913, in addition to official reserves shown in Table 1, there was about $3.6 billion of gold in circulation. This gold was very largely absorbed by monetary reserves during and after World War I. By 1928, monetary gold not included in reserves is estimated to have been less than 10 per cent of the amount held in reserves. In the period before World War I, gold held outside reserves served an important function as a medium of circulation and of hoarding, but it had little importance as a means of settling deficits in the balance of payments. Nevertheless, even if the amounts of gold held outside reserves were added to the reserve figures for 1913 and 1928, the present official reserves of gold and foreign exchange would be more than six times as large as those in 1913, and nearly four times as large as those in 1928. (On the other hand, there are at the present time large holdings of gold and exchange outside of official reserves. Nonofficial holdings of gold are probably of the order of $10–12 billion, and nonofficial holdings of dollars and sterling may come to $7–8 billion. These are equal to at least one third of official country reserves of gold and exchange at the end of 1957. Moreover, all of those private holdings are owned outside the United States, so that it is more appropriate to compare them with the official reserves of those countries. For all countries excluding the United States, nonofficial holdings of gold, dollars, and sterling are equal to at least 60 per cent of their official reserves.)

All of these data on reserves are expressed in current dollars. For this reason, there was a substantial increase in gold reserves where the gold content of the dollar was reduced by 40 per cent in 1934. On the other hand, there have been decreases in the value of reserve holdings of sterling and other currencies because of devaluations against the dollar.

More attention will be given later in this chapter to the role of exchange holdings, when the question of the composition of reserves is examined. For the moment, it is sufficient to say that these holdings became more important in the 1920’s, but that this development was not always sound, since the increases were to a large extent the counterpart of short-term borrowings. Reserve holdings of exchange fell sharply after 1929, but then recovered somewhat in the middle 1930’s. After World War II, they reached an unprecedentedly high figure, reflecting the accumulation of net current earnings by many countries during the war. In contrast to the 1920’s, they therefore were really “owned” by the countries holding them. By the end of 1957, these holdings represented nearly one third of total country reserves.

Under existing legislation in most countries, gold and foreign exchange reserves are held as cover for notes and other central bank liabilities. But at the same time, of course, they serve as a means of settling balances that arise in relation to other countries. Foreign trade is the largest item in the balance of payments of the various countries. It is therefore natural that in the first place reserves should be compared with a country’s trade figures. Table 2 shows the ratio of gold and foreign exchange reserves to imports of all but the communist countries for the years 1913, 1928, 1937, 1938, 1948, and 1950 to 1957. Because of the large size of the U.S. gold holdings, both absolutely and in relation to U.S. imports, the table also shows the figures for all countries other than the United States (and other than the communist countries).

Table 2.Ratio of Reserves to Imports, All Countries Excluding the Communist Bloc, Selected Years, 1913-57
CountriesCountries and

International Organizations
YearImports

(billion dollars)
Gold

as per cent

of imports
Gold and

exchange as

per cent of imports1
Gold as

per cent of

imports
Gold and

exchange as per cent

of imports1
World
191321.019211921
192830.632423242
193727.39310193101
193823.6110117110117
194860.055775780
195059.357806082
195181.441574359
195280.242584461
195479.643624665
195589.039574259
195698.136533855
1957107.035493551
World Excluding the United States
191319.214171417
192826.223352335
193723.753635363
193821.154635463
194852.016421945
195049.722492552
195169.515341836
195268.515341837
195468.618402143
195576.617382041
195684.416351838
195792.815321634
Sources: For imports—1913, Industrialization and Foreign Trade (League of Nations, 1945), pp. 157-67; 1928, “The Adequacy of Monetary Reserves,” Staff Papers, Vol. III, No. 2 October 1953), pp. 181-227; 1938, International Financial Statistics (IFS), August 1955; 1948, IFS, February 1958; 1937 and 1950–57, IFS, June 1958. For reserves—1913, Banking and Monetary Statistics (Board of Governors of the Federal Reserve System, 1943); 1928, “The Adequacy of Monetary Reserves,” op. cit.; 1938, IFS, December 1954; 1948, IFS, February 1958; 1937 and 1950–57, IFS, June 1958. Gold is valued in 1913 and 1928 at $20.67 per ounce.

Exchange refers to exchange reserve holdings of countries and does not include those of international agencies.

Sources: For imports—1913, Industrialization and Foreign Trade (League of Nations, 1945), pp. 157-67; 1928, “The Adequacy of Monetary Reserves,” Staff Papers, Vol. III, No. 2 October 1953), pp. 181-227; 1938, International Financial Statistics (IFS), August 1955; 1948, IFS, February 1958; 1937 and 1950–57, IFS, June 1958. For reserves—1913, Banking and Monetary Statistics (Board of Governors of the Federal Reserve System, 1943); 1928, “The Adequacy of Monetary Reserves,” op. cit.; 1938, IFS, December 1954; 1948, IFS, February 1958; 1937 and 1950–57, IFS, June 1958. Gold is valued in 1913 and 1928 at $20.67 per ounce.

Exchange refers to exchange reserve holdings of countries and does not include those of international agencies.

In the following paragraphs, the terms “all countries” and “the world as a whole” will be taken to exclude the communist bloc countries. It will be seen that for the world as a whole gold and exchange reserves in 1957 were equal to 49 per cent of imports, compared with 21 per cent in 1913 and 42 per cent in 1928. On the other hand, the high ratio of reserves to imports in 1937–38, when it averaged about 109 per cent, was due largely to the increase in the price of gold in 1934 and to the shrunken volume of world trade in those years. For the years after World War II, it may be noted that the amounts held by international organizations can be considered as increasing international liquidity. For the world as a whole, the addition of these amounts to official country reserves in 1957 would increase the ratio of reserves to imports in that year from 49 per cent to 51 per cent. This difference in ratios is, of course, very small, but it understates the importance of these organizations for international liquidity. No similar adjustment is required for the prewar figures, because such organizations either did not exist or played only a minor role.

When the United States is excluded, some significant differences emerge, although the relationship between the various years remains broadly the same. On this basis, the ratio of gold and foreign exchange to imports in 1957 was 32 per cent, compared with 17 per cent in 1913, 35 per cent in 1928, and 63 per cent in 1937–38. Again, if gold holdings of international organizations are included, the 1957 figure is raised to 34 per cent, while the others remain the same. The present ratio is therefore about twice as high as in 1913, about equal to that of 1928, and still significantly lower than in 1937-38. These are obviously key years, and insofar as historical comparison may be of value, they are the years which, together with the period since 1951, have to be examined in greater detail.

Reserves and Trade in 1913

Comparisons with a period as far back as 1913—more than two generations from the present time—must of course be made circumspectly because of the many fundamental changes that have taken place in the meantime. Even so, an understanding of the situation that prevailed during this period may be instructive in many respects. In 1913, for the world excluding the United States, gold reserves were equal to 14 per cent of imports, and gold and exchange reserves to 17 per cent of imports. Even if gold in circulation is included, the ratios are much lower than for the years 1928, 1937–38, or indeed for 1957.1 By the standards of these more recent years, reserves were so low in 1913 that it now seems difficult to imagine how they were considered adequate at the time.

The figures for the United Kingdom are especially striking, the ratio of reserves to imports in 1913 amounting to only 5.3 per cent (Table 3). Before World War I, however, the United Kingdom had very substantial support for its reserves in the form of short-term bills discounted in London, payable by countries all over the world. For example, after the outbreak of hostilities in 1914 many of these bills were called in, with the result that even in the autumn of that difficult year the pound was particularly strong in relation to other currencies, including the dollar.2

Table 3.Ratio of Reserves to Imports, Eight European Countries, 1913 and 1928
1913 11928
CountryGold as per cent

of imports
Gold as per cent

of imports
Gold and exchange as

per cent of imports
Denmark9.41017
France41.760121
Germany10.81923
Italy37.72350
Netherlands3.81624
Sweden12.01426
Switzerland8.32030
United Kingdom5.31313
Sources: For 1913, Felix Mlynarski, Gold and Central Banks (1929), p. 117; for 1928, “The Adequacy of Monetary Reserves,” Staff Papers, Vol. III, No. 2 (October 1953), pp. 206-7.

Total gold reserves of these countries were about $1.6 billion. All of them had exchange reserves except the United Kingdom. The world total of exchange reserves was perhaps $300-600 million. If these countries owned all of this—which is most unlikely—the percentage of reserves to imports for all of them could, at most, have been from one fifth to one third greater.

Sources: For 1913, Felix Mlynarski, Gold and Central Banks (1929), p. 117; for 1928, “The Adequacy of Monetary Reserves,” Staff Papers, Vol. III, No. 2 (October 1953), pp. 206-7.

Total gold reserves of these countries were about $1.6 billion. All of them had exchange reserves except the United Kingdom. The world total of exchange reserves was perhaps $300-600 million. If these countries owned all of this—which is most unlikely—the percentage of reserves to imports for all of them could, at most, have been from one fifth to one third greater.

The ratio of gold and exchange reserves to imports was higher in 1928 than in 1913, not only for the United Kingdom but also for each of the seven other European countries shown in Table 3. Some of the reasons for the stability and relatively efficient working of the international monetary system before World War I were outlined in the introduction to this study, but it is useful to analyze them here in greater detail:

(1) The economies of the various countries, after a long period of peace, were in relatively good balance in relation to one another at the existing rates of exchange.

(2) If an imbalance occurred, the authorities and the public were prepared to apply strong monetary and fiscal measures to re-establish the appropriate equilibrium. Changes in official discount rates had undoubtedly a considerable effect when, as at that time, the public sector was relatively limited, rarely representing as much as 10 per cent of the economy, compared with 15 per cent to 25 per cent at present. In other ways, too, there were fewer obstacles in the pre-1914 system to making the changes required to restore equilibrium.

(3) The strain of seasonal and other imbalances rarely fell wholly on official reserves. A large part was carried by the international credit system. There was unquestioned confidence in sterling, whose gold convertibility dated back to 1819. There was great confidence in the stability of the other major currencies, which were almost all convertible at the existing rates of exchange. London was by far the most important money market in the world for both long-term and short-term capital. Particularly from the point of view of providing short-term credit, this was a one-centered world. As such, it was inherently more stable than the multicentered world that developed after World War I. Under these conditions, changes in interest rates could be counted upon to bring about equilibrating movements of funds fairly rapidly. In particular, an increase in the London rate could rapidly strengthen sterling by shifting financing to other centers and by stimulating repayment by foreigners of the large amount of outstanding current liabilities. Indeed, the stability of currencies was taken so much for granted that in the years 1919–22 it took a great deal to destroy confidence even in currencies that were affected by violent inflation.

(4) The leading monetary nation—the United Kingdom—was a free trade country. The commercial policies of other countries were generally stable, and many countries were tied together by commercial treaties containing most-favored-nation clauses. The result was that in a depression the deficit countries did not have to face the additional difficulty of increased barriers to trade.

(5) Gold production was large enough to provide the resources for a more or less regular increase in reserves and to give an impetus to an expansion in the volume of credit. This was particularly important at the time when, through the operation of cover percentages and in other ways, the internal credit policy of the various countries was largely tied to changes in the gold reserves. The general opinion was that the gold supply was abundant and that reserves were adequate.3

Reserves and Trade in 1928

While there had been a great deal of discussion in the 1920’s about a possible gold shortage, and steps had been taken to economize gold, 1928 was still a year of great optimism. World trade was increasing, the gold standard was being re-established in more and more countries, efforts were being made to settle the reparations problem permanently, and prices had remained relatively stable for several years. Indeed, there were many who held the view that the financial structure had been soundly re-established, and that the world could look forward to years of expanding production and trade under conditions of general prosperity and rising standards of living.

These hopes were soon disappointed. In retrospect, we are able to see more clearly the many maladjustments which before long made themselves felt. While it cannot be said that there is any general agreement about the causes of the Great Depression and their relative importance, there is much support for the view that the boom of 1927–29, which was not in itself exceptional, was followed in 1930 by what could well have been a more or less normal reaction. It was, however, when business activity began to decline that the existing maladjustments, together with the results of mistaken policies, made themselves felt and hampered the forces of recovery. As a result, the world was caught in a prolonged and severe depression.

These maladjustments were of various kinds. In some cases they were the result of adopting prewar parities for more or less conventional reasons. Other maladjustments were connected with much unwise lending and borrowing, especially on short-term account. There were, moreover, the massive flow of gold to France, which was related to the undervaluation of the French franc in 1926, and the attraction of funds to the short-term markets in New York. In addition, there remained the uncertainties regarding reparations and the payment of war debts, aggravated in many cases by high barriers to trade. It is interesting to record the view of the Gold Delegation of the League of Nations that the causes of the Great Depression did not have their origin in reserve positions; but that these causes combined to expose the international monetary and credit system to pressures which before long proved irresistible. It is consistent with this view that the weakness became concentrated in certain places. The Bank of England and the Reichsbank, especially, found it difficult to perform their useful functions as lenders of last resort and guardians of the exchange position. With larger reserves they might have held out longer, but even the sizable credits arranged in the summer of 1931 proved insufficient. It is indeed questionable in retrospect whether any amount of reserves would have been large enough to stave off the troubles in the existing exchange structure. To the extent that the difficulties stemmed from this source, the remedy was to adjust the exchange structure to reality, rather than to prop it up with additional reserves, particularly when these were borrowed. Indeed, it may be argued that, if countries had had from the first to earn the additional reserves they wanted, the difficulties in the exchange structure would have been exposed much more clearly and corrective action would have been taken much earlier. And, as later became clear, even the substantial reserves of the United States did not in the end protect that country from reducing the gold content of the dollar.

In fact, recent analysis has increasingly emphasized—in addition to the many maladjustments that developed outside the United States—the importance of the cyclical movements in that country. With the increasing importance of the economy of the United States in world affairs, the sudden stoppage of its capital exports and the sharp decline of its imports during the depression created a great many problems in other parts of the world.

It is now generally accepted that a high and rising level of world trade is impossible without a high and rising level of economic activity in the major industrial countries, and principally in the United States. In fact, as the contraction gathered momentum, the structure of reserves, the ways the reserves had been created, and to some extent the amount of reserves undoubtedly proved to be unstable factors in the situation, reinforcing the contraction.4

Reserves and Trade in 1937–38

Never have total reserves been more abundant in relation to trade than in 1937–38. The average ratio for those two years reached a high figure of 109 per cent for the world as a whole, and 63 per cent for the world excluding the United States. This high ratio was due to two main factors: (1) Falling costs after 1929 stimulated the output of gold, and the increase in the U.S. price of gold in 1934 stimulated it even more. The latter factor also led to a higher value for existing gold holdings. (2) World trade was depressed, being no greater in volume in 1937–38 than it had been in 1928.

Increased reserves failed to stimulate world trade. In fact, this was a period of economic disintegration, with a fluctuating rate between sterling and the dollar, and increasing bilateralism on the Continent of Europe. The movements of funds which took place were often not of an equilibrating character. Rather, they represented a flight of capital—reflecting political and monetary realities and fears—and had the effect of intensifying the disintegration. In the latter part of 1936 and at the beginning of 1937, the possibility of reducing the price of gold came to be widely discussed.5 There was serious comment about excessive liquidity and of the difficulties and the increasing expense of sterilizing the large additions to gold reserves.6 There were large amounts of “hot money”; and this in turn created a demand for gold reserves to handle the transfers of hot money.

Clearly it had not been the lack of international liquidity that had stood in the way of a larger volume of trade and an improvement in the level of employment. The situation provides a further illustration of the proposition that the environment in which a monetary mechanism operates is of greater importance than the level of available reserves.

Developments in 1951–57

It has already been noted that the ratio of reserves to trade is much lower now than in 1937–38. This reduction took place in two steps, the first during and immediately after World War II, and the second during the Korean War. Thus, for all countries other than the United States, the ratio of reserves to imports fell from 63 per cent in 1937–38 to 45 per cent in 1948. Though the value of reserves almost doubled in this period, the value of trade increased even more, the increase reflecting changes in prices and not growth in volume. From 1948 to 1950, the value of trade decreased slightly (the volume of trade increased by 20 per cent, but the decline in prices more than offset this), while the total of reserves increased. The ratio of reserves to imports therefore increased to 52 per cent in 1950. It is interesting to note that world reserves increased despite the fact that the dollar value of sterling exchange holdings was written down by 30 per cent in the devaluation of 1949, or by perhaps $4 billion. During the Korean War, the reserve ratio again fell sharply. World imports (excluding those of the United States) rose from $50 billion to $70 billion, or by 40 per cent; import prices rose by approximately 30 per cent; and the ratio of reserves to imports fell from 52 per cent in 1950 to 36 per cent in 1951.

Since 1951, liquidity has remained fairly constant and reserves have grown as rapidly as trade. For all countries other than the United States, imports increased from $70 billion in 1951 to $93 billion in 1957, or by one third, and the ratio of reserves to imports fell from 36 per cent to 34 per cent, having in the meantime reached a high of 43 per cent in 1954. There is considerable significance in the fact that the reserve level has remained fairly constant in the face of a growth of volume of trade of 5 per cent per year—a rate of growth that is high by historical standards and probably higher than can be maintained in the future.

So far in 1958 there has been a large flow of gold from the United States to the rest of the world, which has more than offset the flow to the United States in 1957. The value of trade has fallen somewhat, suggesting that in 1958 the ratio of reserves to imports for the world excluding the United States will undoubtedly be higher than in 1957.

A summary of the discussion up to this point would suggest that, for all countries except the United States, the ratio of reserves to imports has been fairly constant since 1951, and that the present ratio is much lower than in 1937–38, about the same as in 1928, and considerably higher than in 1913. It is clear that there is no one best year for comparison, and that in every case the level of reserves must be interpreted within the broad framework of many factors: the functioning of the international economic system, the extent of balance in individual national economies and in the relationship among them, the appropriateness of the structure of exchange rates, the operations of the international credit system, and other major factors. The statistical data do not by themselves suggest that the present level of reserves is inadequate. Any such conclusion, however, is essentially negative. It will be useful to go further and to consider whether the present situation is inherently unstable.

The question may be asked whether there are now, as in retrospect there were in 1928, actual and potential dislocating factors that may create pressures eventually leading to a disruption of the exchange system. This is always, of course, a most difficult question. Nevertheless, it is one that is particularly appropriate at this time considering, specifically, the present state of production and trade and, more generally, the question whether a recession today is likely to be overcome more easily than in the years after 1929.

In some important respects, the prospects now appear to be definitely more encouraging, even though in other respects there may be new difficulties.

Among the favorable circumstances in the present situation, the following may be mentioned:

(1) The economies of the majority of countries in the Western world are now in a state of fairly good balance, one with the other. Since the postwar devaluations of 1949, developments in credit and money volume in most of these countries have largely been of a nature to improve and consolidate a position of equilibrium. An important factor in this process has been the more general application of monetary measures, including the return to a flexible credit policy. One reflection of this improvement is to be seen in the fact that monetary reserves have been strengthened in many countries.

(2) While there have been periods since 1949 of acute exchange tension, with movements of funds taking the form to a large extent of changes in leads and lags, granting international credit for commercial purposes appears to have been developing on a more normal basis. In contrast to the 1920’s, there is no longer an excessive amount of short-term credit subject to sudden recall, at least not on the scale experienced in 1928. At the same time, international trade is increasingly being financed through normal commercial channels. Finally, intergovernmental debts do not present the problems that reparations and war debts posed in 1928 and the early 1930’s. There is, therefore, no doubt that the international credit system is more firmly based than it was in 1928.

(3) Postwar recessions have been mild. This probably reflects not only the strengthening of the economic and financial structure in the more important countries, but also a better understanding of the problems involved, and a greater readiness to take corrective measures. It is, of course, dangerous to reason from the past to the future, but the present high degree of optimism is probably not wholly unfounded.

On the other hand, there are elements in the present situation which are less favorable than they were in 1928.

(1) The exchange holdings of the monetary authorities are now larger than ever before, and consist mainly of dollar and sterling balances. There is always the possibility—slight though it may be—that there may be a run to convert dollars into gold, and sterling into dollars or gold. The large gold reserves and the strong economic position of the United States are a protection against a run on the dollar. Dollar balances have grown even in the current recession. Such conversions into gold as have occurred have on the whole been in conformity with the postwar practices of the monetary authorities in dealing with their current net earnings of dollars. Sterling balances represent a more difficult problem in relation to the magnitude of the British gold and dollar reserves. But it is encouraging to note that recently these reserves have been increasing at the same time as sterling liabilities have been declining. Although pressures may again set in from many countries holding reserves in sterling, a considerable part of the balances now represents no more than is needed as working capital for the proper handling of settlements in sterling, together with (in some cases) the necessary cover against domestic money.

(2) The public sector has become more important in most countries, and this often makes economies less flexible. This is particularly apparent where ambitious development plans have been adopted and are being carried out. Low prices of primary products, or even fluctuating prices around a high point, may create situations which are extremely difficult for many countries.

(3) In many cases, foreign trade since 1945 has grown more rapidly than domestic gross national product. In such a situation, if monetary or other fears arise, changes in payments positions resulting from shifts in leads and lags (apart from speculative capital movements) may become very important.

(4) Finally, in a period of international tension, the possibility cannot be ignored that events of a nonmonetary nature may take place which adversely affect the payments situation. In such cases, it is important that remedial steps be able to be taken promptly in order to prevent any major crack in the exchange structure.

On balance, these elements do not suggest pessimism, but they inevitably demand caution in drawing overoptimistic conclusions. Whatever balance is struck, however, there is no doubt that individual countries cannot be expected to rely entirely on themselves to meet all adverse circumstances. In case of need they must have the assurance of recourse to a second line of reserves. This was one of the reasons why the Fund was established. It has already been helpful in several difficult situations, and is now an integral part of the international financial structure. The financial assistance of the Fund is of course of a short-term character, mainly intended to bridge the gap while the countries themselves take whatever measures may be necessary to restore equilibrium. In view of the historical comparisons which have been drawn, and the assessment that has been made of the favorable and unfavorable elements in the present situation, any answer to the question whether present reserves are adequate must, necessarily, be conditional. If the need for flexible fiscal and credit policies continues to be accepted in many countries, if further steps are taken to strengthen the international credit system, if overambitious investment plans beyond the power of available financing are avoided, and if the international institutions are able to fulfill the role assigned to them, there is nothing in the over-all reserve position to indicate that present reserves are inadequate. Of course, dislocating factors may arise which are so overwhelming that even substantial reserves may suddenly appear insufficient. The environment in which monetary authorities operate is therefore as important a part of international liquidity as the size of their reserves.

One major change in relation to public policy has still to be noted. Since the Great Depression there has been a marked swing toward government policies aimed at securing and maintaining a high level of employment. To the extent that these efforts are successful in the United States and in other major countries with large reserves, trade cycles in these countries are likely to be shorter and shallower in the future than they were before World War II. Success in these countries will affect general business conditions in the world as a whole. This should make it easier for other countries to mitigate fluctuations in their business activity and level of employment without undue strain on their reserve positions. To this extent, any given ratio of reserves to imports in all other countries is likely to be more adequate now and in the future than it was in the past. This does not mean that difficult problems will not sometimes arise for countries whose reserves are slender. Countries will have to weigh the policies of maintaining external balance and defending their exchange rates, which may require a contractionary policy, against the repercussions of such a policy on the price and employment situation at home. There is no simple formula by which these problems can be solved, but the difficulties of coping with a recession are, of course, eased to the extent that countries are able to accumulate sufficient reserves during periods of expansion to bear some of the strains of contraction.

Composition of Reserves

In the disturbed period up to 1938, total exchange holdings fell to an amount of only $1.8 billion, equivalent to 6 per cent of the total gold and exchange reserves of all countries. During the war substantial purchases, especially by the United Kingdom—but to some extent also by the United States—led to the building up of sterling and dollar balances. While sterling balances were reduced in dollar value by the devaluation in 1949, dollar balances continued to increase. By the end of 1950 total exchange holdings were equal to about 30 per cent of total reserves, a proportion that remained almost unchanged up to and including 1957, when total exchange holdings were equal to $15.9 billion, compared with total reserves of $52.9 billion. However, the United States does not hold reserves in the form of exchange, so that the data for all other countries is perhaps of greater interest. Since 1949, the percentage of their reserves kept in the form of exchange has fluctuated within the narrow range of 53–56 per cent, and was 53 per cent at the end of 1957. This level was 10 per cent below that in 1948, largely because the devaluation of sterling reduced the dollar value of sterling exchange holdings in 1949. The percentage of reserves kept in the form of exchange in 1949–57 was more than 50 per cent larger than in 1928 and about three times as large as in 1937–38 and in 1913, as can be seen from Table 4.

Table 4.Gross Reserves and Foreign Exchange Holdings of All Countries, Excluding the Communist Bloc, Selected Years, 1913-57
All CountriesAll Countries Except United States
YearReserves

(billion dollars)
Per cent in

foreign

exchange
Reserves

(billion dollars)
Foreign

exchange

(billion dollars)
Per cent in

foreign

exchange
19134.5112.70.518
192813.0259.33.235
193727.7914.92.416
193827.7713.11.814
194846.42922.113.762
194943.62419.110.555
195047.02924.213.656
195146.52823.612.954
195246.72823.413.256
195348.02925.914.154
195449.53027.715.154
195550.63128.815.654
195651.83129.716.255
195752.93030.015.953
Sources: All years except 1913 are shown in Appendix Table 2. Data on gold reserves for 1913 are from Banking and Monetary Statistics (Board of Governors of the Federal Reserve System, 1943), Table 160.
Sources: All years except 1913 are shown in Appendix Table 2. Data on gold reserves for 1913 are from Banking and Monetary Statistics (Board of Governors of the Federal Reserve System, 1943), Table 160.

At the close of World War II, sterling balances represented a very high proportion of the gross national product of the United Kingdom. The British authorities made it clear that they wished to avoid any further increase in these balances and that they hoped, if possible, to reduce them. In fact, sterling balances (official and private) as measured in sterling were not reduced between 1945 and 1951, remaining at £3.6 billion, though they were reduced almost 10 per cent between 1951 and 1957, when they stood at £3.3 billion. (There were, however, great changes, which will be discussed later, in the countries that held sterling.) In terms of dollars, the movement of sterling balances is indicated by the corresponding figures: 1945, $14.4 billion; 1951, $10.0 billion; and 1957, $9.1 billion. On the other hand, all dollar balances, official and private, doubled in the postwar period, and the data for the same years are as follows: 1945, $6.9 billion; 1951, $7.7 billion; and 1957, $13.6 billion.

From 1949 to the end of 1957, countries other than the United States increased their exchange holdings by $5.4 billion and their gold holdings by $5.5 billion. Increases of this magnitude over a period of several years must have offered many countries the opportunity to change the composition of their reserves substantially if they had wished to do so. The fact that as a group they added to their exchange holdings to such an extent that there was no change in the relative importance of exchange holdings in their total reserves shows that on the whole there was no such wish.

With the exception of the United States, nearly all areas maintained a larger percentage of their reserves in the form of exchange in 1957 than in either 1937 or 1928 (Table 5). The postwar developments in the period 1948–57 may be summarized by noting that Canada, Non-Dollar Latin America, and Sterling Area countries other than the United Kingdom decreased the percentage of reserves in the form of exchange; Dollar Latin America and Continental EPU increased their percentage; the Rest of the World remained practically unchanged. The position of the United Kingdom fluctuated irregularly, so that the percentage of its reserves in the form of exchange was lower in 1956, but higher in 1957, than in 1948.

Table 5.Percentage of Gross Reserves Held in Foreign Exchange, by Area, Selected Years, 1928-57
Area19281937194819561957
Canada10604340
Latin America: Dollar Area4417265556
Latin America: Non-Dollar Area1217593933
Continental EPU Countries4612404745
United Kingdom201733
Other Sterling Area4965928583
Rest of the World 12433777975
Source: Appendix Table 2.

Does not include the United States.

Source: Appendix Table 2.

Does not include the United States.

A more detailed examination of these regional trends is instructive. Canada increased its reserves fivefold from 1937 to 1948, and at the same time increased the percentage of its reserves in foreign exchange from 10 to 60 (Table 6). From 1948 to 1957 it increased its reserves by 80 per cent, but reduced the percentage in exchange by one third, to 40 per cent. These changes reflect an increase in gold holdings, and a decrease in exchange reserves (largely U.S. dollars). The increases in total reserves in Dollar Latin America are strikingly similar to those in Canada, but the percentage in exchange, which decreased slightly from 1938 to 1948, doubled in the postwar period, and stood at 56 per cent in 1957. The countries in Non-Dollar Latin America7 in 1948–57 decreased their gross reserves (from $1.7 billion to $1.0 billion), and, since they preferred to hold on to their gold reserves, which could be, and from time to time were, pledged as collateral against loans, they decreased the percentage of their reserves in the form of exchange from 59 to 33.

Table 6.Gross Reserves and Percentage Held in Foreign Exchange, Canada and Latin America, Selected Years, 1928-57
CanadaLatin America, Dollar AreaLatin America, Non-Dollar Area
YearReserves

(billion dollars)
Per cent in

exchange
Reserves

(billion dollars)
Per cent in

exchange
Reserves

(billion dollars)
Per cent in

exchange
19280.10.1441.012
19370.2100.2170.717
19380.2150.2290.612
19481.0601.1261.759
19491.1571.2271.652
19501.8671.4271.853
19511.8541.5311.436
19521.9531.6421.332
19531.8461.6451.635
19542.0451.7501.427
19551.9411.8531.325
19561.9432.3551.439
19571.8402.7561.033

Continental EPU countries in 1928 held 46 per cent of their reserves in the form of exchange (Table 7). This percentage fell sharply in the 1930’s but was restored during and after the war. It stood at 45 per cent in 1957. Reserves increased by almost 150 per cent from 1948 to 1957, but the proportions held in gold and in exchange were fairly constant.

Table 7.Gross Reserves and Percentage Held in Foreign Exchange, Sterling Area and Continental EPU, Selected Years, 1928-57
United KingdomOther Sterling AreaContinental EPU Countries
YearReserves

(billion dollars)
Per cent in

exchange
Reserves

(billion dollars)
Per cent in

exchange
Reserves

(billion dollars)
Per cent in

exchange
19280.70.8495.146
19374.11.4656.812
19382.91.2546.58
19482.0207.3925.940
19491.8234.7886.238
19503.7215.6896.943
19512.475.2887.545
19522.0234.6868.648
19532.5105.08810.150
19542.895.08611.451
19552.254.78512.949
19562.2174.58513.447
19572.4334.08314.645

The United Kingdom’s reserves, and the percentage of these kept in the form of exchange, have shown considerable fluctuation since the war. Its reserves were at a postwar high of $3.7 billion in 1950. Since then they have fallen irregularly. They were $2.4 billion at the end of 1957 (and more than $3 billion at the end of June 1958). The percentage in the form of exchange does not appear to be correlated with fluctuations in the total. In contrast, the Other Sterling Area countries show a slowly declining trend in the percentage of reserves held in the form of exchange since the war.8 In 1948 it stood at 92. Since then it has been reduced gradually, and at the end of 1957 was 83. This percentage is much higher than that which prevailed before the war.

The Rest of the World 9 has, since 1949, steadily kept approximately three fourths of its reserves in the form of exchange holdings. This is three times as great as the percentage so kept in 1928, and more than double that in 1937–38. Of the countries in this group, Israel had all of its reserves in the form of exchange; Japan, 97 per cent; and the Philippines, 87 per cent.

Some countries, when drawing on their reserves, appear to follow the practice of using their exchange holdings first, leaving their gold holdings more or less intact. For the world as a whole, such reductions in exchange reserves as have from time to time been made in individual countries have, however, been more than made up by increases in others. Thus, the holding of foreign exchange has become an integral part of the system of international reserves and materially facilitates the problem of ensuring a volume of reserves adequate for the world’s needs.

The rapid growth of the dollar as a reserve currency, both absolutely and in relation to sterling, is a major development of the postwar period. Data recently made available by the U.K. Treasury classify area holdings of sterling for 1945, 1951, and 1957 as between central bank and other official funds, on the one hand, and nonofficial funds, on the other. Official holdings of sterling by all countries excluding the U.K. colonies (and for comparative purposes the Treasury data include Ghana and Malaya under this caption) stood at about $10.4 billion in 1945. By 1951 these holdings had been reduced to about $6.2 billion, and by 1957 to about $4.2 billion. If these data are compared with official dollar holdings they suggest—and the comparison must necessarily be rough—that in 1945 official sterling holdings were about four times as large as official dollar holdings. In 1951 they were 50 per cent larger than official dollar holdings. At the end of 1957, official sterling holdings by all independent countries, including Ghana and Malaya, may be estimated at $4.8 billion on the basis of the Treasury data and other information. This was equal to about 60 per cent of the reported official dollar holdings on that date, or $8.3 billion.

More detailed data on the composition of gross foreign exchange reserve holdings for 1947–57 by area, and by type of reserve holding, are shown in Table 8, which is based upon a reconciliation prepared by the Fund of reported foreign exchange assets and liabilities. Since, as already noted, the distribution between official and nonofficial holdings of sterling balances has been made available for only two of the years covered by this table, it has been necessary to use the published data on all sterling balances, official and nonofficial. In this table, therefore, official sterling holdings are overstated relative to all other types of exchange asset. (This and other errors are, of course, included in Errors and Omissions.) The official reserves represented by credits extended through EPU amounted to $1.3 billion at the end of 1957, and constituted more than 8 per cent of the exchange reserves of all countries. The amount of reserves kept in the form of deposits with the BIS increased from $8 million in 1947 to $465 million in 1954. Although it has decreased somewhat since that time, this amount has not fallen below $400 million.

Table 8.Composition of Gross Foreign Exchange Assets, 1947-57(In millions of U.S. dollars)
YearTotalDollarsSterlingEPU

Liabilities
BIS

Deposits
Errors and

Omissions
194713,9001,85012,1478–105
194813,9002,90010,77452174
194910,8503,0507,414108278
195013,6004,4507,775402250723
195113,0004,0507,646665192447
195213,3005,2506,3281,077364281
195314,2506,0506,8251,272352–249
195415,2507,0006,9801,108465–303
195515,7507,9006,591994412–147
195616,4008,6006,2201,08642470
195716,0508,3005,8331,269409239
Sources: For 1950–57, International Financial Statistics (IFS), July 1958; for 1947-49, Fund estimates on the same basis.
Sources: For 1950–57, International Financial Statistics (IFS), July 1958; for 1947-49, Fund estimates on the same basis.

The structure of the changing relationship between sterling and the dollar is clearly identifiable. Countries that have traditionally held exchange reserves in the form of dollars continue to do so, and when their total reserves increased their dollar holdings also increased. Canada and the Dollar Latin American countries which have held practically no sterling had $1 billion of dollar assets in 1948 and $2.1 billion in 1957. The countries in the sterling area held less sterling in 1957 than in 1948 because their total reserves had fallen. It is true that their dollar holdings increased from $50 million to $200 million, but even the latter figure was only 6 per cent of total reserves. The most striking change, as may be seen from Table 9, occurred in the non-dollar non-sterling countries. Their dollar holdings in 1957 were three times as large as in 1948, while their sterling holdings were about one third as large.

Table 9.Sterling and Dollar Reserves in Selected Areas, Selected Years, 1948-57 1(In billions of U.S. dollars)
Area194819491950195219561957
Continental EPU Countries
Dollar holdings0.80.81.11.73.93.7
Sterling holdings1.51.20.90.70.50.7
Non-Dollar Latin America
Dollar holdings0.30.30.40.20.30.2
Sterling holdings0.50.20.120.10.1
Other Non-Dollar Non-Sterling3
Dollar holdings0.60.51.01.31.91.4
Sterling holdings2.21.41.41.10.80.7
Total Non-Dollar Non-Sterling
Dollar holdings1.71.62.53.26.15.3
Sterling holdings4.22.82.42.11.41.5
Sources: For 1948, International Financial Statistics (IFS), February 1958; for 1949, IFS, February 1957; for other years, IFS, July 1958.

In this table there may be some overstatement of sterling holdings, since the figures may include nonofficial holdings.

$25 million.

Sixteen countries: China (Taiwan), Egypt, Ethiopia, Finland, Indonesia, Iran, Israel, Japan, Korea, Lebanon, Philippines, Spain, Syria, Thailand, Viet-Nam, and Yugoslavia.

Sources: For 1948, International Financial Statistics (IFS), February 1958; for 1949, IFS, February 1957; for other years, IFS, July 1958.

In this table there may be some overstatement of sterling holdings, since the figures may include nonofficial holdings.

$25 million.

Sixteen countries: China (Taiwan), Egypt, Ethiopia, Finland, Indonesia, Iran, Israel, Japan, Korea, Lebanon, Philippines, Spain, Syria, Thailand, Viet-Nam, and Yugoslavia.

Private credits finance most of the world’s international business; and private exchange holdings, together with private credits, play a role in settling international balances. Nonofficial exchange holdings are thus a complement to official holdings and in some cases may be a substitute for them. The total figures for all sterling and dollar balances, official and nonofficial, are compared in Table 10.

Table 10.Comparison of All Dollar and All Sterling Liabilities, Selected Years, 1937-57(In billions of U.S. dollars)
Sterling Liabilities
YearDollar LiabilitiesTotalTo coloniesTo others
19371.94.00.413.6
19456.914.41.712.7
19466.014.51.912.6
19474.814.11.912.2
19485.812.72.110.6
19496.08.81.57.3
19507.19.82.07.8
19517.710.02.67.4
19529.09.02.96.1
195310.09.83.16.7
195411.210.43.47.0
195511.710.03.66.4
195613.59.63.66.0
1957213.69.12.56.6
Sources: International Financial Statistics (IFS), July 1958. Data for years not published there are from revised figures in IFS files.

Estimated as 10 per cent of all sterling liabilities.

The sterling holdings of Ghana and the Federation of Malaya are included under Liabilities to Other Sterling countries rather than Liabilities to U. K. colonies.

Sources: International Financial Statistics (IFS), July 1958. Data for years not published there are from revised figures in IFS files.

Estimated as 10 per cent of all sterling liabilities.

The sterling holdings of Ghana and the Federation of Malaya are included under Liabilities to Other Sterling countries rather than Liabilities to U. K. colonies.

Dollar balances were reduced in the first years after the close of World War II, but have increased steadily since 1947. By 1957, they were almost three times as large as they had been a decade earlier. Sterling liabilities to the U.K. colonies grew steadily after 1945, and have doubled. (The decrease in 1949, as shown in Table 10, is the result of revaluation in terms of dollars.) Liabilities to the independent countries of the sterling area have decreased by about 15 per cent since 1951, and those to India, by about 60 per cent. Liabilities to the non-sterling countries have declined persistently since the war. From 1945 to 1957, they declined from £1,170 million to £568 million, i.e., from $4.7 billion to $1.6 billion.

It must be expected that the substantial balances held by the U.K. colonies will be drawn down in the future as these colonies expand their development expenditures. On the other hand, the amount of sterling held by various other countries using sterling as a trading currency may well increase with expanding world trade and a strengthening of the monetary position of sterling itself. If account is taken of the fact that the level of commodity prices in terms of dollars has increased by almost 150 per cent since 1937, it will be seen that the total of sterling liabilities by the end of 1956 was in real terms somewhat smaller than it had been in 1937.

It seems probable that a number of countries, which in recent years have suffered a reduction in their total reserves, to a greater or lesser extent in the form of a reduction in dollar balances, will wish to replenish their reserves, and presumably largely in the form of dollar balances. However, a number of countries have probably already been successful in increasing their reserves to a point which they consider adequate. A continued rapid increase in their reserves, including dollar balances, is therefore less likely in the years to come. It is perhaps vain to speculate what will be the net result of these conflicting tendencies, but it seems certain that exchange holdings, as a more readily usable form of asset than gold holdings, will continue to form an important part of any accumulation of reserves.

CHAPTER THREE: THE ADEQUACY OF INDIVIDUAL COUNTRY RESERVES

The preceding chapter reviewed the level and composition of reserves. It discussed the historical development of reserves, analyzed the relationship of reserves to trade on the basis of certain historical comparisons, and pointed out that the adequacy of reserves cannot be measured by a few percentage figures relating reserves to trade. International liquidity depends upon a combination of factors: country reserves, international borrowing and commercial credit operations, and the international financial structure. Two conclusions were reached: first, under certain fairly specific and broad conditions, the total amount of gold and foreign exchange reserves now held by the monetary authorities may prove to be adequate; and secondly, the existing composition of reserves permits the monetary authorities to hold the kind of reserves they wish.

This chapter considers more particularly the level and the adequacy of reserves of individual countries. Generalizations about individual country reserves are necessarily limited by the great variety of country reserve practices and policies, which in turn reflect differences between their economic situations, stages of development, and policy objectives.

The Meaning of Adequacy

The adequacy of reserves must be judged in relation to the aim that is envisaged. There is both a domestic aim and an international aim. The monetary legislation of most countries requires that the central bank or some other monetary authority maintain a given amount of gold, or of gold and foreign exchange, in support of the supply of domestic money. This reserve or cover may be a stated amount or, more usually, a percentage of the currency and deposit liabilities of the central bank. To be adequate, country reserves must therefore be at least large enough to meet these domestic legal minima, with some margin for operating purposes. These minima can be, and have been, adjusted by individual countries for their own purposes.

The domestic purpose of a monetary reserve is essentially to regulate or to limit the quantity of domestic money, and yet allow sufficient flexibility so that changing seasonal or regional needs may be met smoothly. Reserves for strictly domestic purposes were essential even when large amounts of gold coin and gold notes (backed 100 per cent by gold) circulated in the community, because provision had to be made for possible internal or regional drains. Since 1914, however, monetary authorities all over the world have called in practically all the gold coin and gold notes that had been in circulation, and added them to central reserves. Simultaneously, the strict and inelastic link between domestic money and gold has been weakened or, perhaps more accurately, replaced within broad limits by monetary and credit management. In practically all countries, the ratio of reserves to the domestic supply of money has been falling for many years. Stated in another way, the amount of reserves required to support a given expansion of the domestic money supply is much smaller now than it used to be. And in those countries which have large excess reserves, the money supply can be expanded without any increase in reserves. As will be noted in the next chapter, this has important implications for the development of world liquidity.

But even when the domestic purpose of reserves was more important than it now is, the main purpose of reserves was international—to provide the means for settling deficits in the balance of payments, and at the same time to inspire confidence that the foreign exchange position, including the foreign exchange rate, could be properly maintained. These external considerations have become more important, so that, increasingly, the purpose of reserves is to help individual countries maintain a smoothly functioning monetary and exchange system. But reserves are not the only thing that help a country do this. The ability to borrow, the use of an appropriate exchange rate, the adoption of monetary and fiscal policies which lead to development with stability, are also important. And since international balance is a matter of the relationship of one country with all others, the effects of the wisest policy in any one country are often limited by inflation, contraction, or inappropriate exchange rates in other countries.

An individual country will have to consider all of these factors in forming its reserve policy. This will rarely depend upon monetary considerations alone. Usually it is the result of various and often conflicting influences. Not infrequently its decision is influenced by unrealistic assumptions as to the real effects of policies adopted, e.g., that highly complex systems of exchange restrictions can be made to work rationally and even perfectly; that development can be financed partly or largely with credit creation without any danger of inflation; or that a predetermined amount of deficit financing will have only a minor effect upon the balance of payments. Distinctions must therefore be drawn between (1) the level of reserves a country thinks it “should” or “ought to” hold; (2) the level of reserves a country may expect to hold as a result of the policies it is following, the actual importance it attributes to reserves, and conditions in the world at large; and (3) the level of reserves it will actually hold as a result of the policies it follows.

It is the sum total of individual country decisions to increase, decrease, or maintain reserves which determines whether total reserves are adequate or inadequate. From an over-all point of view (such as was adopted in Chapter II), a reserve situation can be characterized as adequate when the total of reserves is sufficient, its composition is appropriate, and the distribution of reserves is in accordance with effective country demands for them. The presence or absence of these conditions cannot be determined a priori; it must be inferred from the results of country actions. If reserves are adequate, countries are able to make the adjustments they wish without seriously disturbing the system and without initiating a series of deflationary or countervailing actions. Whether a given reserve situation is adequate therefore depends upon whether countries are taking effective action to change their positions and whether their measures are unduly upsetting to other countries. Since conditions are constantly changing, this implies that the adequacy of reserves cannot be determined once and for all and that a good system of reserves must have elasticity. As already noted, the satisfactory operation of an international credit system—official, international, and private—is very important in this connection. In judging the adequacy of its reserves, every country will want to know whether it will be able in case of need to obtain resources from abroad.

Any decision to increase reserves is important because it requires, as a counterpart, an equivalent amount of uncommitted savings.

Unwillingness or inability to increase reserves means that none of a country’s savings or of the proceeds of credits received from abroad has been applied to the kind of investment which results in an increase in reserves. It is of course obvious that below some minimum level an increase in reserves may become a major policy issue, while above some maximum level, reserves may serve to encourage a policy of expansion or they may play a more or less passive role. Within these limits, which will vary widely from country to country, the level of reserves generally has the character of a residual and is the net result of other policies. Thus a country may not be greatly concerned about raising its reserves from, say, 30 per cent of imports to 40 per cent, though it may attach considerable importance to raising them from 5 per cent to 25 or 30 per cent.

Admittedly, a policy designed to increase reserves or to maintain them at a certain level may be difficult or even impossible to carry out in a short period. Crop failures and declining prices resulting from gluts and other adverse circumstances may so severely reduce the flow of domestic savings that it becomes necessary to rely largely or even wholly on foreign credits to meet a balance of payments deficit. Errors and miscalculations in deciding economic policies or in carrying them out may have unanticipated effects upon reserves. It is therefore all the more important that the necessary steps be taken to set aside savings for restoring reserves in fairly prosperous years when foreign earnings are increasing.

Each country determines its reserve requirements in the light of its own situation, control policies, exchange rate, and alternative uses for the savings that would be used to acquire reserves. Generally, larger reserves are needed by countries with strong seasonal swings in their balance of payments, and of course also by countries with heavy short-term liabilities. Likewise, larger reserves will be needed by countries which are greatly dependent on international trade and which are thus likely to feel more keenly changes in foreign demand, often intensified by shifts in leads and lags. Countries with slender reserves have often relied on fluctuating exchange rates to balance their payments. Where the alternative to a fluctuating rate is likely to be the imposition of quantitative restrictions on imports or the proliferation of exchange rates, the adoption of a fluctuating rate system may well be the lesser evil, although it has grave disadvantages.

There have, of course, been countries which have sought to influence the reserve position by direct control of trade and payments instead of relying solely, or largely, on monetary and fiscal policies. Such attempts have not proved effective, for the imbalance which led to the imposition of controls is not overcome by the controls. Indeed, the consequent reduction in imports will usually tend to aggravate the imbalance, e.g., by ultimately reducing exports.

It is clear that there can be no one generally acceptable rule, valid in all cases, for the amount of reserves which can be considered adequate for an individual country. Account has to be taken of the particular circumstances, history, conventions, savings habits, and international banking position of each country. Indeed, the significance of all these particulars is that the term adequacy of reserves has a variety of meanings, different from country to country and from time to time. Reserves which are inadequate for one policy may be more than adequate for another; reserves which are inadequate in conjunction with one set of fiscal and monetary methods may be adequate with another set. Reserves which are insufficient when a country is facing a budgetary deficit and credit expansion may be sufficient when the government is running a surplus and credit is contracting. Reserves which are adequate where a country follows flexible policies may not be adequate when its policies are frozen or slow to adjust. Thus, in principle, it is difficult to determine the “real” adequacy of reserves in any one country, or to compare one country with another, without taking into account many factors other than reserves. To relate the reserve position to the volume of foreign trade is no doubt a useful method of approach, but it can give at best only a preliminary indication of adequacy. In all these matters, the element of convention in the determination of adequacy should not be overlooked. The level of reserves that a country has become accustomed to is often one that has gradually come to be considered adequate—partly, no doubt, because special credit arrangements have been concluded to provide relief for the reserves in periods of special strain.

It does not follow that a country whose reserves are inadequate in the judgment of outsiders—or even in its own judgment—is necessarily interested in trying to increase them. Many countries with inadequate reserves have, over a period of years, not carried out economic policies which are consistent with increasing them. It is not meaningful—and it may be misleading—to assume that a country with inadequate reserves is necessarily trying to add to them. This may be the case even though international circumstances are favorable and the volume and prices of its exports are high. In the last analysis, each country thus makes its own decision as to whether to retain or accumulate uncommitted savings in the form of reserves.

As to what assets should be considered as forming part of the reserves, it is now generally accepted (as already mentioned in Chapter II) that exchange holdings of convertible and widely transferable currencies should be included along with gold; indeed, these holdings are usually the most variable and therefore, to some extent, the most effective element of the total reserves. Practice varies as to whether net EPU creditor positions and surpluses in bilateral accounts are included in reserves. It is even more difficult to determine how much significance should be attached to total creditor positions. In the previous chapter, gross reserves have been used for the over-all comparisons of a mainly historical character, but where individual countries are concerned, account must often be taken also of the existence of short-term liabilities.

In some instances, as when gold holdings are pledged as collateral against foreign credits, exclusive attention to gross reserves would clearly give a distorted picture of the real situation. This is also the case where there are substantial short-term or medium-term commercial debts weighing on the exchange position, or large outstanding debit balances on bilateral accounts. Drawings from the Fund, since they are repayable within a few years, likewise affect the real exchange position. Furthermore, for the United Kingdom and the United States, there is the special question of the large amounts held by foreigners on deposit or in short-term securities in sterling and in dollars.

In view of these many qualifications, it is clearly impossible to lay down any simple rule in this matter. The particular conditions of a country or group of countries must be considered, and attention paid to past experience and behavior.

Analysis of the Level of Country Reserves

The basic statistical data on individual country reserves, imports, and the ratio of reserves to imports are shown in Appendix Table 1 for some 60 countries for 1928, 1937, 1948, and for each year from 1950 to 1957. It will be seen that the ratios vary widely from country to country, and that for some countries they vary widely from year to year. The table also reveals that the ownership of reserves is much more highly concentrated than trade. At the end of 1957, the United States alone held 43 per cent of the world’s reserves of gold and exchange (Table 11), and the United States and the Federal Republic of Germany together held more than one half (54 per cent). Eleven countries held 80 per cent of the world’s reserves.

Table 11.Countries with Gold and Exchange Reserves Exceeding $1 Billion at End of 1957
CountryReserves

(billion dollars)
Per Cent
United States22.943.3
Germany, Federal Republic of5.610.6
United Kingdom2.44.5
Switzerland1.93.6
Canada1.83.4
Italy1.52.8
Venezuela1.42.6
Australia1.32.5
Belgium1.12.1
Netherlands1.12.1
Japan1.01.9
All other10.920.6
World52.9100.0

The figure for the United Kingdom, the equivalent of $2.4 billion, reflects the reductions connected with the Suez events, the sterling-mark speculation in 1957, and short-term borrowings, including a drawing from the Fund. By the end of June 1958, the United Kingdom’s reserves had risen to over $3 billion. The largest increases in 1957 were shown by Germany (an increase of $1.2 billion) and Venezuela ($500 million). Large decreases were shown by Japan, India, and France.

Reserves for all countries excluding those in the communist bloc in 1957 were equal to 49 per cent of imports, or excluding the United States, 32 per cent. Although over-all figures do not add much to our knowledge of the adequacy of reserves for individual countries, it is of some interest to distinguish between industrial and other countries, since they are often subject to different influences. In addition to the United States and the United Kingdom, which will be discussed individually, there are 12 countries which may be considered industrial on the basis of their exports. These are the continental members of the EPU, except Greece and Turkey, plus Japan. Their ratios of reserves to imports are presented in Table 12.

Table 12.Ratio of Reserves to Imports, 12 Industrial Countries, Selected Years, 1928-57(Arranged in order of size of ratio, expressed as a percentage, in 1957)
Country19281937194819501951195219531954195519561957
Denmark1719121112151712111013
France1211654420232432442413
Norway1941191817171614151514
Sweden2695172427263227242119
Japan60265846543743544724
Netherlands24106182924475245402926
Belgium3989463840424441403533
Italy5029355946393943464142
Austria2827131916235963414245
Germany231015315258536575
Switzerland3018714315012013815014112410798
Portugal2171123172168162186187169156137

In the years studied, there were never fewer than three countries with a ratio of reserves to imports of less than 30 per cent, and never fewer than two with a ratio of over 50 per cent (Table 13). The number of countries in the middle range of 30 to 50 per cent was never less than one nor more than five; and, with a few exceptions (especially in 1937), it was the countries in this group which moved to below 30 per cent in some years and to above 50 per cent in others.

Table 13.Industrial Countries (Excluding the United States and the United Kingdom)1 Classified by Ratio of Reserves to Imports, Selected Years, 1928-57(Ratio of reserves to imports, expressed as a percentage)
Number of Countries with Stated Percentage

of Reserves to Imports
YearNumber of

Countries
Average

Ratio2
Less than

30
30-50Over 50
19281248723
19371170416
1948944522
19501242624
19511234732
19521241543
19531246345
19541248354
19551248354
19561243543
19571240633
Source: Appendix Table 1.

All continental members of EPU, except Greece and Turkey, plus Japan. Data for 1937 exclude Germany; data for 1948 exclude France, Germany, and Japan.

Weighted average.

Source: Appendix Table 1.

All continental members of EPU, except Greece and Turkey, plus Japan. Data for 1937 exclude Germany; data for 1948 exclude France, Germany, and Japan.

Weighted average.

Throughout the postwar period the Scandinavian countries have had reserve ratios which are low by European standards, and low even by Latin American and Asian standards. These countries had low ratios even before World War I. At the other extreme, Switzerland and Portugal stand out with the highest reserve ratios, a particularly large increase having taken place in Portugal since 1928, while Switzerland, with large short-term liabilities to foreigners, in the form of deposits or investments, has felt it appropriate to hold large reserves, almost exclusively in gold.

The other countries in general appear to have tried to achieve ratios of between 30 and 50 per cent, or perhaps 40 and 50 per cent, in the sense that if reserves were below these levels they tried to increase reserves, and if reserves rose beyond some such level, they saw fit to adopt a more expansionist policy. Germany is a particular case. Its ratio of reserves to imports in 1928 was 23 per cent, which was not large; but it had at the same time contracted large amounts of short-term foreign debt so that its position was in reality much weaker than the reserve ratio would indicate. By the end of 1951, reserves were still dangerously low, but in the following years substantial additions were made, and by the end of 1957 the German ratio was higher than that of any other of these countries except Portugal and Switzerland. The uncommitted savings required to improve the German exchange position were very largely obtained by budget surpluses, accruing as a result both of revenue growing more rapidly than estimated and of certain delays in effecting expenditures.

In 1957, there were 49 countries classified as nonindustrial on the basis of their exports, and for which data on reserves and trade data were available. These ranged in size from countries with annual imports of less than $50 million, to Canada with imports of $6.3 billion. In 1957, 21 of these countries had a ratio of reserves to imports of less than 30 per cent, and 31 had a ratio of less than 40 per cent (Table 14).

Table 14.Nonindustrial Countries1 Classified by Ratio of Reserves to Imports, Selected Years, 1928-57(Ratio of reserves to imports, expressed as a percentage)
Number of Countries with Stated Percentage of Reserves to Imports
YearNumber of CountriesLess than 3030-3940-4950-5960 and more
192825105136
193738174548
1948451555416
1950451333917
19514712135413
1952471886411
1953481694415
1954481687512
1955491988410
1956492076313
19574921104311
Source: Appendix Table 1.

Nonindustrial countries are defined as all countries except the United States, the United Kingdom, Japan, and the continental members of EPU, with the exception of Greece and Turkey.

Source: Appendix Table 1.

Nonindustrial countries are defined as all countries except the United States, the United Kingdom, Japan, and the continental members of EPU, with the exception of Greece and Turkey.

The reserve position of some individual countries changed substantially from one year to another in the postwar period, but the position of all of them together was comparatively stable. However, a comparison between the postwar years and the two prewar years, 1928 and 1937, reveals some interesting differences. Since there was a greater number of countries in the postwar period than previously, it is convenient to show the different situation of countries by means of percentages of the total number of countries (Table 15).

Table 15.Changes in Ratio of Reserves to Imports, Nonindustrial Countries, Selected Years, 1928-57
Reserve Ratio Less

Than 20 Per Cent
Reserve Ratio Less

Than 30 Per Cent
YearNumber of

countries
Per cent

of total
Number of

countries
Per cent

of total
19287281040
19378211745
19518171227
1953481633
19568162041
195713272143

For the world as a whole the ratio of reserves to imports was much higher in 1937 than in the postwar years; it therefore seems strange at first sight that for the non-industrial countries the tendency was rather the opposite. The explanation appears, at least partly, to be that the increase in the world’s reserves after 1934 came largely from the revaluation of gold, so that these countries which had generally only a little gold to begin with (either because they had only low reserves or because they kept a large proportion of their reserves in foreign exchange) naturally had relatively low reserve ratios in 1937. Moreover, after 1933 these countries did not generally share in the recovery from the depression to the same extent as the industrial countries, and therefore had less opportunity to accumulate reserves.

There are persistent differences between the reserve levels and the reserve behavior of the nonindustrial countries similar to those already noted with regard to the industrial countries. In 1951, for example, 12 nonindustrial countries had reserves equal to less than 30 per cent of their imports, and six years later 10 of them were still in the same position. One other country which, on the basis of gross reserves, moved out of this group had not really improved its position for it had been able to increase its gross reserves only by increasing its liabilities. On the other hand, 13 countries in 1951 had reserves equal to more than 60 per cent of imports. In 1956, 10 of these countries, and in 1957, 7, were still in the same position. In some countries, such as India, the reduction in reserves represented heavy spending on development. This continuity in the relative position of various countries reflects the profound differences in their own situations, in their policies, and in their operating procedures, as the following examples suggest.

Israel and Yugoslavia have low reserves, and their other commitments are such that an accumulation of reserves has a low priority. Canada, having strong basic resources and close access to the New York money market, reportedly considered a reserve level of about 30 per cent as high enough in 1957.1

In 1956 South Africa had reserves of $370 million, equal to 24 per cent of imports. There is nothing to suggest that this country is anxious to increase the ratio to 30 per cent and still less to 40 per cent, though it would in all likelihood consider the 1957 ratio of 17 per cent (with reserves of $288 million) too low. It is a rapidly developing country, usually able to attract capital, and able to count on the ready disposal at a fixed price of its main export product, gold.

Malaya’s ratio of reserves to imports was 23 per cent in 1957; it varied between 22 and 28 per cent in the years 1952 to 1957, compared with 27 per cent in 1937, and this seems to indicate that a ratio of this order has been found suitable for that country.

Most Latin American countries are anxious to develop their resources. Even in good years, when their products are selling at high prices, they do not substantially improve their reserve positions. If reserves increase one year, they will generally decline in a subsequent one.

On the other hand, there are countries that have maintained a high reserve level over a long period. Some of these countries, such as Egypt, accumulated substantial balances during the war. Others have benefited from the rapid development of oil and other natural resources, as did Iraq, Iran, and Venezuela.

The upward trend of world trade in the postwar period has provided opportunities for a large number of countries to improve their reserve positions. In fact, the countries which emerged from the war with practically no reserves have almost without exception been able to replenish them, although in some cases their reserves fluctuated widely during the period. This has been particularly evident in Europe. Aid from the United States and the operation of the European Payments Union have been of appreciable importance in these cases. On the other hand, other countries which accumulated reserves during the war spent heavily thereafter on supplies which had been unobtainable during the war and on goods required for development purposes. This spending, for example, in India and a number of Latin American countries, generally led to reductions in reserves. In some cases, these reductions have often gone farther than had been anticipated, and the decline has not yet been arrested.

As a group, all countries except the United States (and excluding the international agencies) increased their reserves from $22.1 billion in 1948 to $23.6 billion in 1951 and $29.7 billion in 1956. During the period 1948–56, reserves increased by $7.6 billion, or almost $1 billion per year. The rate of increase in this period was 4½ per cent per year, despite the reduction in reserves in 1949 which was caused by the devaluation of sterling. During the period 1951–56, which was one of comparative calm disturbed at the end by the Suez events, reserves increased by $6.1 billion, or $1.2 billion per year. The annual rate of increase in these five years was 5 per cent. These rates of increase are historically very large—and much larger than the rates of growth in the volume of trade over sustained periods. The situation in 1957 was disturbed by the inevitable liquidity stresses of the top of the boom, followed by the speculation in several key European currencies and the recession in the United States. There was in 1957 a considerable flow of gold to the United States. Even so, reserves of all countries except the United States increased by $300 million, though not without drawing on the Fund’s resources. In the first six months of 1958, the outflow of gold from the United States ($1,445 million) was almost twice as great as the inflow in the whole of 1957 ($799 million). The prospect is for a substantial increase in 1958 in the reserves of all countries other than the United States.

The improvement in the reserve positions of many countries could not have taken place had they not restored balance in their positions, both internally and in relation to other economies. The foreign exchange markets provide further proof of this improvement. Quotations on free and black markets have moved closer to the official rates, and in some cases now almost coincide with them.

In several places, reference has been made to the fact that uncommitted savings are needed if gold and foreign exchange reserves are to be increased. An increase in reserves represents an investment which must be financed from savings in the same way as any other investment. In many cases, these savings accrue almost automatically. As production and trade grow, the needs of the economy for cash also grow. The increase in domestic cash holdings represents, in part, one source of savings which may form the counterpart of an increase in reserves. Banks and the rest of the private sector may also increase their exchange holdings in line with the increase in trade. However, for a more rapid increase in reserves, additional savings are required. Where pressure on reserves stems from inflationary tendencies, this involves either a decrease in the community’s money income or a slowing down of the rate of its increase. Budget surpluses may be used to increase government deposits or (preferably) to repay government debt, particularly to the central bank. Part of the proceeds of foreign borrowing may be earmarked to increase reserves; and the proceeds of foreign aid may be sterilized for a similar purpose. In many cases, a reduction in private borrowing (or perhaps even the development of surpluses in the private sector) is required. The general theory, and even in some cases the specific measurements, of this mechanism are now well known and may be summarized very briefly. An inflationary increase in the money income of the community increases the demand for imports and it may also decrease exports; in any case, it leads to a decline of reserves. This increase in income may be the result of government borrowing, or private borrowing, or both. To stop the process requires a reduction in the rate of credit expansion; to reverse it requires a larger reduction. It is not necessary in most cases that credit not expand at all, for a growing and developing nation always needs some increase in its money supply.

It is in some respects instructive to examine what happened during the Korean crisis. As a result of the rise in prices, a number of countries, especially raw materials producing countries, were able rapidly to increase their earnings through larger exports. The immediate result was often a substantial increase in their foreign reserves. However, the increased earnings of the producers, traders, and others in these countries gave them a higher income which, when no special measures were taken, were gradually used for purchases of various kinds. After a certain lag, it was invariably found that imports rapidly increased, and often at a time when the export prices and receipts had begun to decline. As a result, the improvement in the reserve position was wiped out within a few years. When the increase in export incomes stimulated credit expansion to business or budget deficits by government the decline of reserves went even further. However, in some countries (especially some British colonies) steps were taken to pay the producers of the commodities exported only a part of the increased earnings resulting from the higher prices. The difference between the export price and the home price was accumulated in special reserves. In these cases there was no sudden increase in incomes leading to larger imports, and the exchange reserves which had been accumulated remained more or less intact.

There is now greater understanding of the conditions necessary for an improvement in the reserve position. For example, a recent statement by the Monetary Committee of the International Chamber of Commerce recommended that countries gradually reduce their debts to central banks, and thus strengthen not only their internal conditions but also their reserve holdings.

The Position of the United Kingdom

The role and the strength of sterling and the reserve position of the United Kingdom have been major financial concerns of the world in the postwar period and will continue to be such in the foreseeable future. This is a natural consequence of the importance of sterling in the world economy. A large part of the world’s trade is financed in sterling; sterling assets constitute a substantial proportion (about 10 per cent) of the world’s international reserves; the convertibility of sterling is a prerequisite for the convertibility of several other major currencies; and all these circumstances are involved in any assessment of the prospects for further moves toward the liberalization of trade.

In the postwar period, the United Kingdom has, with the exception of only a few years, had a surplus on the current account of its balance of payments. For the period 1948–56, the net surplus on current account amounted to a total of £1.2 billion, equivalent to almost $3.4 billion. The fact that the United Kingdom was nevertheless affected by several postwar financial crises has to be related to the following considerations:

(1) The United Kingdom emerged from the war with greatly reduced foreign assets and greatly increased foreign liabilities, mainly in the form of sterling balances which could easily be drawn upon and which could affect confidence in sterling. At the end of the war, sterling liabilities stood at $14.4 billion, compared with $4 billion in 1937. By 1948, these had been reduced to $12.7 billion, and after the devaluation of sterling, they amounted to $8.8 billion at the end of 1949. In 1957 they stood at $9.1 billion. But this stability covers important changes. In the meantime, a number of countries that had accumulated large sterling balances during the war (e.g., India) had drawn them down substantially, and a number of other countries that for various reasons wished to reduce their sterling balances had also done so. On the other hand, the British colonies (which for most of the postwar period included Malaya and Ghana) increased their balances substantially. Although a number of countries will undoubtedly wish to use their sterling balances for development in the next years, the total of all balances is certainly more stable than at any time since the war and, in real terms, no higher than in 1937. Nevertheless, the total of sterling liabilities is large in relation to reserves, so that the threat of any substantial movement is worrisome, especially when added to that of other elements.

(2) The foreign trade of the United Kingdom is large in relation to its national product and its reserves. Shifts in payment leads and lags may therefore cause important movements of reserves, and may well have involved movements of funds exceeding $500 million within periods as short as a few months.

(3) Such movements may, furthermore, be accentuated by changes in the extent to which use is made of sterling credits to finance trade not directly connected with the United Kingdom’s own imports and exports.

(4) The surpluses arising on the current account of the balance of payments have been substantial, and they have not been used to increase reserves. Instead, they have had their counterpart mainly in the granting of foreign credits, investments abroad, and other foreign capital transactions, including repayment of debt.

Under these conditions, any adverse circumstances are likely to affect confidence in sterling and to lead to substantial changes in sterling reserves.

The fact that there has in most years been a surplus on the current account of the U.K. balance of payments would tend to show that sterling, at least since the devaluation of 1949, has not been overvalued. As to the use made of the balance of payments surpluses, the following figures are taken from a statement made by Sir Oliver Franks to the annual meeting of Lloyds Bank in January 1958.2 In the five and a half years from January 1952 to June 1957, the total available from international transactions for foreign investment, repayment of debt, or addition to reserves was £1,051 million. This amount had its counterpart in the following transactions:

(1) Net capital investment in sterling countries to the amount of £359 million (representing a gross investment of £648 million, partly offset by an increase of £289 million in sterling balances);

(2) Repayment of sterling balances of non-sterling countries to the extent of £372 million;

(3) Other capital transactions with non-sterling countries to the amount of £304 million;

(4) As a net result, reserves in this period increased by only £16 million.

In considering these results, it is important to remember that the savings which were the counterpart of these surpluses on the current account of the balance of payments were made mainly by private firms and individuals. Frequently, they were in the form of profits ploughed back in the countries in which they were earned by U.K. firms operating abroad. The use to which the savings were put depended therefore to a great extent upon a large number of separate decisions, which in a period of expanding trade would naturally lead to expanded investments of various kinds. It would, of course, have been possible by direct controls to inhibit some of the transactions, and in 1957 some controls were in fact imposed on U.K. investment outside of the sterling area. On the other hand, the fact that the British financial system has been able to continue working without too many restrictions has been valuable in itself. The amounts used for these transactions in a large measure added to the earning capacity of the British economy, and they also benefited those areas in which investments were made.

The reserve problem of the United Kingdom is complex, and is the result of many developments over many years. After World War II, the United Kingdom had to adapt itself to a changed world and, compared with its situation before the war, it had to do this with lower reserves, much smaller overseas investments, much larger short-term liabilities, a great deal of wartime damage and obsolescence which had to be made up, and a pressing backlog of domestic demand for both capital and consumer goods. Although the course of the reserves problem reflects international developments, it also reflects the British decisions, implicit or explicit, about the priorities to be assigned to each of these complex demands upon its economy. As has been suggested, it would simplify the problem unduly to suggest that all, or even a much larger part, of the national saving on current account could have been turned into reserve holdings of gold and dollars. This might have unduly weakened the long-term position of the United Kingdom and it would in any case not have been easy to shift investment from overseas assets to reserves of gold and dollars. This might have required an extensive reorientation of trade, with perhaps a lower over-all level of employment and national income for a time. It would have had serious implications for the cohesiveness of the sterling area. On the other hand, in the longer run this investment in overseas assets would bolster future export markets for capital goods, provide future income, and perhaps (directly or indirectly) enable the sterling area to increase its exports to the non-sterling area and/or reduce its imports from it.

But perhaps even this way of looking at the reserves problem of the United Kingdom is too narrow. The gross national product in the period 1950–57 was almost £140 billion, or roughly $400 billion. Redirection of this gross product to increase purchases of gold or dollars by $2 billion in eight years would be equivalent to a change of ½ per cent in final product composition. Such redirection might not have been easy, considering the large number of competing alternatives (including the rise in defense expenditure as international tension increased), but it cannot be considered outside of practical possibilities.

In evaluating the total of, and the changes in, the reserves of the United Kingdom, account must always be taken of the movements in short-term sterling liabilities. An increase of reserves that accompanies, or results from, an increase in sterling balances may not signify any real improvement in reserve position. This has been the case on a number of occasions in the postwar period, and particularly in 1950 when at the height of the Korean boom reserves rose to $3.7 billion. The improvement in sterling reserves since the third quarter of 1957 has a different significance. It is to be regarded as the result of higher priority given to strengthening the international position of sterling. At the end of September 1957, in which month Bank Rate was increased from 5 per cent to 7 per cent, and a series of other important financial measures were taken, reserves stood at $1,850 million; by June 1958 they had increased to $3,180 million.3 On the other hand, sterling liabilities at the end of the third quarter of 1957 stood at $9,433 million; by March 1958 (the latest date for which data are available), they had been reduced to $9,055 million.

These recent developments in reserve holdings and in sterling liabilities have undoubtedly improved the monetary position of the United Kingdom significantly, especially as they have not been accompanied by a reduction in raw materials and other inventories. It would appear, in addition, that this position improved gradually in the postwar period, even though this was not reflected in an increase in reserve holdings. The competitive position of British export industries has been strengthened as domestic backlogs have been worked off and the pressure of domestic demands moderated. The large foreign investments that have been made inside and outside the sterling area have improved the position of the United Kingdom, while their costs in terms both of goods and of their effects on reserves have largely been paid. Nevertheless, there is always the possibility that some countries will begin or continue to draw on their sterling balances for development and other purposes. If these drawings are sudden and large, and particularly if they are of a speculative character, they can cause financial inconvenience or even crisis. On the other hand, if they are moderate and for development purposes—and British export industries remain competitive—they should up to a point support the British balance of payments.

Part of the present sterling balances do not represent savings which have been made with the prospect of eventually financing future development, or backing for various national currencies, but rather working balances for the conduct of international trade. If world trade continues to increase and confidence in sterling is maintained, it is not unlikely that a number of countries will need to add to their sterling holdings. The net result of these various movements on the position of sterling cannot be foreseen. Even less is it possible to foresee political or international crises which may have an equally important impact on sterling. With the improvement in the British position which has already taken place and which can be expected from a further net accumulation of reserves, the prospects for a continued relaxation of exchange controls are better than they have been in previous years. Sterling is, however, subject to large influences from all over the world, and it has therefore not been surprising that in the United Kingdom stress has been laid upon the importance of having a secondary line of defense available in case of need.

The Position of the United States

The gold holdings of the United States increased during and immediately after World War I, but were then comparatively stable for about ten years. From 1934 onward (when they were $8.3 billion) they again grew rapidly, and they continued to grow during World War II. By 1945 gold reserves were equal to $20.1 billion. By 1949, the all-time high point, gold holdings totaled $24.6 billion, or 74 per cent of the world’s stock of monetary gold. In the following years there were variations in the level of gold reserves, but on balance there was a decline, so that by the end of June 1958 the amount of gold held by the United States was $21.4 billion, equal to 55 per cent of the world’s monetary gold stock. If gold and foreign exchange reserves are taken together, the United States at the end of 1956 held about 40 per cent of the world’s reserves, or approximately the same proportion that U.S. industrial output bears to the industrial output of the world (excluding here, as elsewhere, the communist countries).

The Federal Reserve System is required to maintain a gold reserve of 25 per cent against its deposit liabilities and paper currency issues (Federal Reserve Notes). This requirement has been in effect since 1945, and represents a reduction of about one third from the previous legal requirements of 35 per cent against deposits and 40 per cent against Federal Reserve Notes.

The Federal Reserve System has had large gold holdings in excess of legal requirements for many years. In the 1920’s, for example, slightly more than half of its gold holdings were in excess of its reserve requirements, and this percentage increased sharply in the next decade, particularly after the price of gold was increased in 1934. In the period 1950–57, “free” gold in excess of requirements averaged $10.7 billion, or about 48 per cent of total gold holdings.

There is thus a large margin, according to present reserve requirements, for expanding the money supply of the United States or, alternatively, for reducing gold holdings. In addition, the money supply can be expanded in relation to gold if the reserve ratios of commercial banks are reduced, since these reserves consist of deposits in the Federal Reserve Banks. The combined effect of the reserve requirements of the Federal Reserve and the commercial banks was such that in 1957 gold was equal to 17 per cent of the money supply of $139 billion. This percentage may be compared with 20 per cent in 1947 and 43 per cent in 1937. Given the magnitude of the present margin of excess reserves, it is unlikely that the United States would exercise its power further to reduce the reserve requirements of the Federal Reserve System. The System also has authority temporarily to suspend reserve requirements,4 but, for the same reasons, it is unlikely that it would do this.

The state of the gold reserves of the United States must also be considered in the light of its short-term liabilities. These have grown rapidly in recent years: they were $1.9 billion in 1937, $7.2 billion in 1948, and $14.8 billion at the end of 1957. Although these balances are not legally convertible into gold, the United States for many years has followed the practice of converting all official balances (almost two thirds of the total) upon request, and, as a practical matter, all dollar balances may be treated as convertible. This situation has led to questions in some quarters whether the United States has enough gold to meet its domestic reserve requirements as well as possible drains upon its gold supply that might follow from conversion of dollar balances. The data on gold holdings, gold in excess of reserve requirements, and dollar liabilities are given in Table 16.

Table 16.U.S. Gold Reserves, Domestic Reserve Requirements, and Short-Term Foreign Liabilities, Selected Years, 1922-57(In billions of U.S. dollars)
YearGold

Reserves
Domestic

Reserve

Requirements
“Free” Gold:

In Excess

of Reserve

Requirements
Foreign

Short-Term

Dollar

Balances
Per Cent of

All Gold to

Foreign

Balances
Per Cent of

“Free” Gold

to Foreign

Balances
19223.51.71.81.0350180
19254.01.62.41.2333200
19264.11.62.51.6256156
19274.01.62.42.615492
19283.71.62.12.514884
19293.91.62.32.714485
19304.21.62.62.3183113
19334.02.21.8.41,000450
19348.32.75.6.71,038700
193510.13.66.51.3777500
193611.44.17.31.6712456
193712.84.28.61.9674453
193814.65.19.52.2664432
194022.07.914.13.9564362
194520.110.99.27.1283130
194620.710.710.06.5318154
194722.911.311.67.1323163
194824.411.912.57.2339174
194924.610.813.87.6324182
195022.811.011.88.4271140
195122.911.711.28.3276135
195223.312.111.29.9235113
195322.112.010.110.820594
195421.811.710.111.918385
195521.811.99.913.016876
195622.111.910.214.615170
195722.911.911.014.815574
Sources: Data on gold reserves, domestic requirements, and dollar balances for 1922-52 are from Annual Report of the Secretary of the Treasury, 1954, Exhibit 47; later data on gold reserves are from Federal Reserve Bulletin. Domestic reserve requirements were calculated from data published in Federal Reserve Bulletin table on “Statement of Condition of the Federal Reserve Banks.” Short-term dollar balances are from International Financial Statistics and include holdings of government bonds and notes.
Sources: Data on gold reserves, domestic requirements, and dollar balances for 1922-52 are from Annual Report of the Secretary of the Treasury, 1954, Exhibit 47; later data on gold reserves are from Federal Reserve Bulletin. Domestic reserve requirements were calculated from data published in Federal Reserve Bulletin table on “Statement of Condition of the Federal Reserve Banks.” Short-term dollar balances are from International Financial Statistics and include holdings of government bonds and notes.

There is, of course, always the possibility of a “run” on the dollar, in the same way as there is the possibility of a “run” on any other currency. If this were to take place, the pressure on the dollar could come from many sources other than the sale or conversion of short-term dollar holdings, a large part of which must represent working balances. Foreign holdings of stocks, bonds, and other securities which could be sold or pledged were valued at almost $9 billion in 1956. The pressure resulting from a change in “leads and lags” of foreign trade amounting to $25 billion a year, and the speculation against the dollar which might be financed with borrowed funds by both foreigners and U.S. citizens, must also be considered. In fact, as has already been noted in connection with the level of reserves in general and the reserves of individual countries in particular, the financial strength of a country depends upon many other factors besides its reserves. That the United States has huge gold holdings, equal to 55 per cent of the world’s gold stock, and that it has large gold holdings in excess of its domestic reserve requirements, do not change this basic fact. Large reserves, of course, give the United States great opportunity for maneuver and for the exercise of monetary policy in dealing with speculative and other adverse developments. But the ultimate financial strength of the United States rests on its strong international position and the fact that it is an extremely important market, a dominant supplier of economic and other kinds of aid, and a major source of long-term and short-term capital. It would therefore be natural for the rest of the world to maintain large holdings of dollars for working balances, investment, and other purposes.

It is interesting to note that in each of the postwar periods of recession the level of dollar liabilities has remained very stable. The large outflow of gold in 1958, for example, did not reflect the conversion of dollar balances, but rather the normal reserve practices of countries with surpluses on the current account of their balances of payments.

Under the rules of the gold standard, it was the general practice to wait for an influx of gold before easing credit conditions. Today the U.S. authorities, thanks to the substantial gold holdings at their disposal, are able to relax credit even where there is an outflow of gold. It has been an element of strength that the United States has been able to face the task of preventing excessive fluctuations in business activity without being hampered by an insufficiency of monetary reserves. From the point of view of world liquidity, too, the expansion of credit and the decline of interest rates in U.S. markets, in the face of a recession, have been of importance. This has made it increasingly possible for other countries to ease their own credit conditions, for account has to be taken not only of the absolute interest level in any one country but also of that interest level in relation to those in other economies and, especially, in the international financial centers.

The Distribution of Monetary Reserves

Some countries habitually hold comparatively low reserves, while others over the years have held more ample reserves. If, by and large, these differences continue, there is little significance in any discussion of the redistribution of reserves. On the other hand, it is probable that the countries with very large reserves will not think it necessary to set aside substantial savings for the purpose of increasing their reserves, and it is desirable that countries with low reserves should improve their positions. It is, therefore, of some interest to outline what additional amounts of gold and foreign exchange would be required to raise reserves to, say, 30 per cent of imports for all countries that are below this level.

After exclusion of the United Kingdom, which is in many respects a special case, the additional amount required to raise to 30 per cent the reserve ratios of all countries that were below it in 1956 would be $1.8 billion of reserves. To reach a minimum of 40 per cent, $4.9 billion would be required.

These figures do no more than indicate the magnitude of the reserves that would have to be acquired if all countries which at present have low reserves were to try to acquire more over a reasonable period. But it is hardly likely that all these countries, whatever their wishes may be, will be prepared to take the steps necessary to improve their reserve positions to this extent. For the United Kingdom, as already mentioned, the amount of reserves has to be judged in relation to the movement of sterling balances. But if this country were to add another billion to its present reserves of $3 billion, and also all countries with low reserves were to try to reach a ratio of 40 per cent, the amount required over a number of years would be of the order of, say, $6 billion. To judge from developments in the postwar period, this would not seem out of the question. In the period 1949–57 reserves grew at the rate of almost $1.2 billion per year, and in the period 1951–57, at the rate of $1.0 billion per year. For the future, the addition to international reserves from current gold production at the present price of gold is likely to be $700 million per year, and, at a minimum, should be at least as large as the average addition in 1951–57, or about $550 million per year. There is no reason to assume that there could not be further additions to foreign-held dollar balances. Since it is perhaps also fair to assume that countries which now hold fairly large reserves see no urgent reason to add substantially to them, this annual flow of gold and other resources would largely be available to other countries prepared to take the necessary steps to improve their reserve positions.

Moreover, it is pertinent to recall that the amount of newly mined gold that has gone into private holdings since 1946, largely by reason of the lack of monetary confidence, has attained a total of between $3 billion and $4 billion. The amount of gold in private hoards is now estimated to be of the order of $10 billion to $12 billion, of which almost one half is held in Western Europe, and almost one third in France alone. If only one half of the newly mined gold that went into private hoards in the postwar period had been available for monetary reserves and had been acquired by the countries with the lowest reserves, it would have been enough to assure that every country had a ratio of reserves to imports equal to at least 25 per cent. A small amount of dishoarding was recently reported in France in connection with an issue of gold-indexed bonds. If dishoarding there and elsewhere should increase so that, on balance, there were no additions to gold hoards in the world at large, well over $700 million a year could be added to monetary reserves from current gold production, which has been increasing even with the present price of gold.

Thus the problem is not so much one of finding the resources in gold and foreign exchange which would be available for an improvement in the reserve position, but rather of the willingness of countries to take the necessary steps in the fiscal and credit fields to restore a proper balance within and among their various economies. It has often been emphasized that devaluation, useful as it may be in certain circumstances to attain a realistic rate of exchange, can lead to an effective solution of a country’s difficulties only if it is combined with proper fiscal and credit policies. Since the prevailing exchange rates of a very large number of countries are much more realistic than they were in the immediate postwar period, the emphasis must necessarily be placed on the maintenance of internal balance if further monetary progress is to be made. There is no way of escaping these basic efforts. If they are made, there seems to be no evidence that the solution of the problems relating to an all-round improvement in the reserve position of individual countries will be hampered by an over-all scarcity of reserves. This conclusion remains, however, conditioned upon the continuance of constructive efforts to strengthen the international economic and credit system.

CHAPTER FOUR: PROSPECTIVE RESERVES AND REQUIREMENTS

As already mentioned in previous chapters, official reserves of gold, and of dollars, sterling, and other forms of exchange, have two functions. In the purely domestic sense, these reserves may be a prerequisite for an increase in the volume of domestic money—currency and bank deposits. In the international sense, they may be used to finance swings in the balance of payments. These two functions are interrelated. An excessive increase in the domestic money supply will make the balance of payments unfavorable and lead to declining reserves; a gain in reserves may ease credit policy and encourage an increase in the supply of domestic money.

Under the orthodox operation of the gold standard (which was never so strict in practice as it was often defined in theory), increases in the gold holdings of the banks of issue were, in general, a prerequisite for an increase in the volume of currency and deposits. Since an expansion in production and trade would need more credit, it was not unnatural to regard it as essential that gold output should keep pace with potential economic growth in the world at large. It is still true that changes in monetary reserves influence credit developments, both by their direct effects on the volume of money and by their influence on credit policy. But it is also true that for a fairly large number of countries, changes in monetary reserves no longer have the paramount importance that they previously did.

There are several reasons for this. First, many countries have weakened the link between the amount of reserves and the amount of domestic money in order to obtain more flexibility in their monetary operations. There has been a pronounced trend for reserves of gold and exchange to become a smaller and smaller percentage of the domestic money supply. In some cases this is the result of reducing the cover percentages of the central bank; in others, of reducing the reserve ratios of commercial banks or of permitting the growth of financial intermediaries whose effective reserve ratios are lower than those of commercial banks. In addition to these longer term developments, many countries, both developed and underdeveloped, are using changes in commercial bank reserve requirements as a supplement to the traditional weapons of discount rates and open market operations. Secondly, the link between the amount of reserves and the amount of domestic money has been weakened in all countries that have not made a stable fixed rate of exchange an overriding objective of monetary policy. An increase in the supply of domestic money may not lead to a loss of reserves if the exchange rate is allowed to depreciate but the declining value of the currency is, of course, a source of weakness in itself, which cannot be tolerated for long. Thirdly, as has already been pointed out above, a number of countries, and particularly those with large monetary reserves, can carry out credit policies relatively independently of changes in their reserve position. Indeed, the credit systems of several countries are now able to generate their own liquidity with a fairly high degree of freedom. These countries can adopt policies which may lead to a decline of gold reserves or to the growth of foreign holdings of their money. The liquidity of these countries is thus of outstanding importance for the liquidity position of the world. To a considerable extent, international liquidity can now be produced without the limiting factor of the gold base. Thus, the liquidity position of the world was greatly eased by the credit expansion in the United States in 1957–58 at a time when its gold reserve was declining.

In short, the growth of the domestic money supply in most countries is no longer so closely tied to the growth of international reserves as it was in the days of the gold standard. The required increase in the domestic money supply of individual countries no longer creates as large a proportional demand for gold cover as it did in the days of the gold standard. In addition, a number of countries are able to create additional liquidity on the basis of their existing reserves, and this adds to world liquidity.

The Growth of Reserves and Reserve Requirements

The preceding chapters have discussed the amount and the distribution of reserves and have related the level of reserves to the level of trade in various years. To the extent that this was possible, the amount of reserves was interpreted in terms of the adequacy or the inadequacy of reserve levels, and the qualifications that must surround any such judgment were made clear. In this section, the analysis will be pushed forward to take account of the probable development of reserve levels on the assumption—or perhaps, better, the requirement—of a continued growth of world trade. Here again it is necessary to emphasize the basic consideration that the adequacy of reserves depends very much on the environment in which the monetary system operates—the balance attained in the relationship of the various economies with one another, the readiness to take corrective measures when an imbalance occurs, the effectiveness of the private credit system, tariff policies, etc. Since developments in these fields play such a decisive role, there can be no fixed mathematical relationship between the growth of reserves and the expansion of production and foreign trade. It should not be assumed that an increase in reserves will more or less automatically induce an increase in the volume of trade—and indeed, there have been periods, as in the 1930’s, when very substantial increases in reserves were accompanied by restrictionism and stagnant trade. Neither should it be assumed that the potential increase in the volume of trade can necessarily be no greater than the increase in the volume of international reserves.

It is of interest to consider what increase in production, and more particularly in foreign trade, is in prospect in, for example, the next decade, and how the world’s reserve position is likely to develop. For this purpose, Table 17 shows the rates of increase of world trade and manufacturing production for various periods from 1876–80 to 1957.

Table 17.Average Annual Rates of Growth of Trade and Manufacturing, Selected Periods(In per cent; compound basis)
Trade1
PeriodPrimary

products
Manufactured

products
Manufacturing

Activity2
From 1876-80 to:
1901-053.32.84.1
19133.43.34.1
1926-292.62.43.5
19302.62.23.3
1936-382.31.83.5
From 1901-05 to:
19133.54.74.2
1926-292.02.13.1
19302.01.72.7
1936-381.51.13.1
From 1921-25 to:
1926-296.37.16.8
19304.93.84.1
1936-382.21.34.4
From 1938 to 19480.03.7
From 1948 to 19567.56.1
From 1950 to 19566.55.7
From 1950 to 19576.35.1
From 1951 to 19575.45.0

These rates of growth were calculated from the following basic data: (1) Data for 1876-80 to 1936-38 are from League of Nations, Industrialization and Foreign Trade (1945), and include the U.S.S.R. Trade covers exports and imports. There is no combined index of trade of primary products and manufactured articles, though trade in the latter was about 60 per cent as great as that in the former. (2) Data beginning with 1938 are from Special Table A in United Nations, Monthly Bulletin of Statistics, November 1957, January 1958, and June 1958. These data refer to total exports and exclude the countries in the communist bloc.

These rates of growth were calculated from the following basic data: (1) Data for 1876-80 to 1936-38 are from League of Nations, Industrialization and Foreign Trade (1945), and include the U.S.S.R. (2) Data beginning with 1938 are from Special Table A in United Nations, Monthly Bulletin of Statistics, January 1958 and June 1958, and exclude countries in the communist bloc.

These rates of growth were calculated from the following basic data: (1) Data for 1876-80 to 1936-38 are from League of Nations, Industrialization and Foreign Trade (1945), and include the U.S.S.R. Trade covers exports and imports. There is no combined index of trade of primary products and manufactured articles, though trade in the latter was about 60 per cent as great as that in the former. (2) Data beginning with 1938 are from Special Table A in United Nations, Monthly Bulletin of Statistics, November 1957, January 1958, and June 1958. These data refer to total exports and exclude the countries in the communist bloc.

These rates of growth were calculated from the following basic data: (1) Data for 1876-80 to 1936-38 are from League of Nations, Industrialization and Foreign Trade (1945), and include the U.S.S.R. (2) Data beginning with 1938 are from Special Table A in United Nations, Monthly Bulletin of Statistics, January 1958 and June 1958, and exclude countries in the communist bloc.

A number of economic investigators—Cassel, Kitchin, and others—calculated that the rate of growth in the world economy was about 3 per cent per annum in the fifty years before 1914. It will be seen from the table, which is based upon the most recent data for the period, that the increase in manufacturing activity (which may have risen more rapidly than gross national product) was 4.1 per cent per year, while the increase in trade was somewhat less than 3.4 per cent per year.

The largest rates of growth occurred in the immediate postwar years after World Wars I and II. For the periods from 1921–25 to 1926–29, or roughly four and a half years, manufacturing activity grew 6.8 per cent per year; trade grew at a slightly lower rate. For the years from 1948 to 1956, manufacturing grew 6.1 per cent, and trade 7.5 per cent per year. For longer periods, which include the years of war and depression, the rates of growth are naturally much smaller. Thus, from the years 1876–80 to 1936–38, manufacturing activity grew at the rate of 3.5 per cent per year, while trade grew at about 2 per cent per year. Correspondingly, from 1938 to 1957 the annual rates of growth were 4.6 per cent for manufacturing and 3.3 per cent for trade.

A particular characteristic of the period after World War II has been the fact that trade has increased at a faster rate than industrial production, while in earlier periods it grew no faster than industrial production, as in the 1920’s, or increased less than production, as was the case before 1914. There have been many special factors after World War II which have made for a rapid increase in trade. Certain countries had substantial reserves accumulated during the war which they were able to spend; special efforts were made to provide aid and credits, and this was reflected in an increased volume of trade; moreover, the rapid expansion in the output and use of oil led to a large increase in foreign trade of an unprecedented character.

Past experiences seem to show that periods of very rapid expansion are generally followed by periods of more moderate growth. It is of course impossible to forecast what the rate of growth will be in the years immediately ahead, but it would probably not be overoptimistic to retain the conventional “normal” annual rate of about 3 per cent for the growth of world trade. This would in itself assume some improvement over the rate of growth in the sixty years before World War II.

If reserves are also to grow at the rate of 3 per cent per year and maintain the ratio of reserves to imports that applied at the end of 1956, they would have to increase by $19 billion by 1966. Such an addition would assume, however, that even the countries which already have very substantial reserves, such as the United States, the Federal Republic of Germany, Venezuela, and Switzerland, would want to increase their reserves by more than one third. In fact, if these four countries were to increase their reserves at the rate of 3 per cent per year, they would absorb about $11 billion of the computed world requirement of $19 billion for the next decade. This is most unlikely. If the problem of increasing international reserves is therefore reduced to the dimensions of increasing the reserves of all other countries, the requirement for additional reserves is reduced to about $8 billion. It may be doubted whether all other countries would in fact wish to increase their reserves so much.

It is estimated that the increase of gold reserves from current gold production is likely at the present price of gold to be at least $700 million per year for the next decade, even after allowing for an increase in the present large gold hoards.1 Thus, gold production alone would go very far toward meeting the requirements for additional reserves. In addition, reserve holdings of foreign exchange are likely to rise if there is full employment in the industrial countries and the requirements for overseas spending by the United States in the form of imports, capital investments, defense, and aid of various kinds are maintained. All foreign short-term dollar balances increased from $7.1 billion in 1947 to $14.8 billion in 1957, and official holdings of dollars increased from $1.8 billion to $8.3 billion. All short-term dollar balances in the last decade therefore increased on the average by $770 million per year, and official balances alone increased by $650 million per year. Sterling balances in the past decade have naturally been reduced from the swollen heights they attained by the end of World War II. In terms of sterling, they have come down by 10 per cent, or from £3.6 billion at the end of 1945 to £3.3 billion at the end of 1957. In terms of dollars, the reduction was much greater because of the devaluation of sterling in 1949. Sterling holdings at the end of the first quarter of 1958 were about the same as they had been at the end of 1949. When all kinds of exchange holdings are taken together, the available data suggest that these reserves increased by a net total of about $2 billion in the past decade, or by $200 million per year.

The reserves problem that the world will face in the next decade does not, therefore, appear to be insoluble. This conclusion accords with the results arrived at in the preceding chapters, and it of course assumes the same comments that were made there about the relationship of reserves to international liquidity and the international environment.

The question may, however, be asked whether it is likely that the countries with relatively slender reserves will be in a position to increase them in the next decade by more than one third, or by approximately $8 billion. Clearly, some countries will add to their reserves. Others undoubtedly believe that they can safely draw down their reserves for development purposes, and this group includes countries whose reserves are already substantially lower than they were at the end of World War II. Even if these latter countries will not reduce their reserves further in the next years, they are not all likely to give priority to increasing them. Some countries have reserves which they have no reason to regard as insufficient, and they would probably not want to increase them as rapidly as their trade. Other countries have for a number of years operated with very small reserves, and in 1956 had ratios of reserves to imports much below the average for all countries. They will have good reasons to increase their reserves as trade grows, and probably up to a point will do so, but perhaps not in the same proportion as the growth of trade. There is also the most important question whether the United Kingdom, and all the countries of the sterling area, will wish to increase their reserves by more than one third in the next ten years. As far as the United Kingdom is concerned, the improvement of its reserve position can come not only from increasing its reserves but also from reducing its short-term liabilities, increasing the strength of London as a center for long-term and short-term capital, and (over the long term) by increasing its income from overseas investments. The priority that the United Kingdom will accord to increasing reserves thus depends upon many factors, and not least among them is the possibility of borrowing in periods of strain.

The likelihood is thus that some of the gold from current production will not be absorbed by those countries which now have slender reserves, but will be sold to countries which already have relatively large reserves.

Some central banks will wish to add part of their additional reserves in the form of exchange holdings rather than gold. To achieve this result, part of the current supply of gold will very likely be sold to the monetary authorities in the main financial centers. By this and other means, including the normal operations of the sterling area, these countries will make their own currencies available for increasing the reserves of other countries. While it is always difficult to foretell what will happen in the future, there is reason to believe that current gold production, plus the continued increase in exchange holdings, will provide opportunities for a substantial addition to the monetary reserves of those countries that wish to acquire larger reserves.

World gold production, at the current fixed price of $35 per fine ounce, has been increasing year by year, particularly since 1951. There is no reason to expect a reversal of this trend in the foreseeable future. With a continued strengthening of monetary confidence through appropriate fiscal and credit policies, it should be possible to ensure that most of the newly produced gold becomes available for normal industrial uses and monetary reserves. Considerable progress in this direction has already been made. In these circumstances, it cannot be argued that the current supply is inadequate for the requirements which can now be foreseen. There is no proven need for any abrupt increase in the volume of current gold production or in its monetary value by an increase in the price of gold. A measure of that kind might even detract attention from the real monetary problems of restoring and maintaining a proper balance in the individual economies, and in their relations with one another, and of strengthening the international credit system.

Monetary reserves are drawn upon for settlement of a country’s deficits on foreign account, but the actual financing of foreign trade is, of course, effected primarily by the commercial banks. These as a rule hold working balances in foreign currencies. If trade grows, these balances, especially those held in the main financial centers, may likewise be expected to increase. These balances are held not only by commercial banks, but also by private firms and individuals. In part they represent commercial borrowing in these same centers; in part they represent the accumulation of net foreign earnings and the proceeds of securities transactions. The total of these privately held balances is large. Of the outstanding dollar balances at the end of 1957, about 40 per cent, or about $5.3 billion, was privately held. The percentage of sterling balances held on private account is much smaller than this. It has recently been reported that at the end of 1957 private holdings came to £759 million ($2.1 billion), or about 23 per cent of all sterling liabilities of £3.3 billion (excluding the £645 million due to international organizations). Especially as regards dollars, it is fair to assume that a portion of the amount held privately is to some extent hoarded by individuals and firms, i.e., the turnover of these holdings is relatively small. But the major portion, even for dollars—and certainly for sterling—represents working balances which are required in the course of financing current business.

With an increase in monetary confidence and a relaxation of exchange controls (which have imposed severe limits on private holdings of foreign exchange), it is likely that there will be increasing movements of privately held balances and that, as was the case before 1914, equilibrating movements of funds will thereby be facilitated. This should, up to a point, reduce the strain on official reserves. For such a development to take place it is, however, necessary that the monetary authorities in the individual countries pursue flexible credit policies. This has been the tendency in recent years, and it seems to be increasingly agreed that the results obtained have been good.

Strengthening of the World’s Monetary Situation by International Organizations

The breakdown and subsequent disintegration of the world’s monetary system in the interwar period has shown that the over-all reserve position was not in itself of decisive importance. In 1928 the ratio of reserves to imports for countries other than the United States was 35 per cent, compared with 17 per cent in 1913. But high as it was, it could not stave off the monetary disruptions in the following years. Still less did the very high ratio of 63 per cent in 1937–38 act as a cure for stagnant trade. In the same way, the opportunities that are likely to exist for an over-all improvement in reserve positions in the years to come in themselves afford no guarantee of healthy monetary developments. These can be assured only by simultaneous constructive efforts in many fields. It may perhaps seem trite to remark that general political developments will be of decisive importance, and not only to the extent that a major war is avoided. But the world will never be altogether calm, and periods of financial tension will recur. It is, therefore, wise always to have available safeguards of a financial character.

International cooperation in financial matters is not new. Even before 1914 there were many instances of contact and assistance between central banks. In the interwar period the need for cooperation between monetary authorities became more fully recognized. This recognition first developed in connection with stabilization loans to various countries in the 1920’s, in many cases under the auspices of the League of Nations. In 1930, the Bank for International Settlements (BIS) was established, formally as a by-product of efforts to solve the German reparations problem, but essentially to foster international monetary cooperation. In addition to performing rather extensive banking and trustee functions, the BIS has continued to serve as a meeting place for the central bankers of the European countries. In 1936, the Tripartite Agreement was signed by the United States, the United Kingdom, and France; and later Belgium, the Netherlands, and Switzerland became associated with it.

During World War II, major efforts were made to establish monetary cooperation on a world-wide basis. These resulted in the formation of the Bretton Woods institutions—the International Monetary Fund and the International Bank for Reconstruction and Development. The International Bank for Reconstruction and Development provides long-term capital, under government guarantee, for specific projects. This type of financing provides an essential complement to the short-term credit facilities of the International Monetary Fund, and in effect helps prevent long-term capital problems from turning into short-term liquidity problems. The purposes of the Fund are set out in Article I of its Articles of Agreement as follows:

  • (i) To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.

  • (ii) To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.

  • (iii) To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.

  • (iv) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.

  • (v) To give confidence to members by making the Fund’s resources available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.

  • (vi) In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.

The Fund was provided with resources in gold and in the currencies of its members, with each member contributing in proportion to its quota. Quotas also regulated the rights of members to draw on these resources for short-term financing. On April 30, 1947, the Fund held $1.3 billion in gold and the equivalent of $2.1 billion in U.S. dollars and other convertible currencies. The first Fund transactions were made after this date (the Fund had declared itself ready for transactions on March 1, 1947), and by the end of 1948 there had been a substantial number of transactions totaling $676 million. In a number of European countries, however, the general economic and financial situation became critical, and in April 1948 special assistance was provided for these countries by the Marshall Plan. As part of the Marshall Plan arrangements, the Organization for European Economic Cooperation (OEEC) was set up in Paris, and, after some initial experiments with compensation plans, the European Payments Union (EPU) came into operation for the settlement of intra-European balances. At first, the settlement of these EPU balances was graduated to a maximum rate of 50 per cent in gold or dollars and 50 per cent in credit; in 1955, this was changed to 75 per cent in gold and dollars and 25 per cent in credit. The reduction in the credit element coincided with an improvement of the working of the private credit system and a general strengthening of the reserves of the member countries. Through the mechanism of the EPU, credit was extended to a maximum of $1.5 billion. Substantial swings within this total have from time to time greatly eased the liquidity of members. It is pertinent to note that a number of countries outside of Europe belonging to currency areas centering in Europe (e.g., countries in the sterling area, French franc area, Belgian franc area, and Dutch guilder area) have largely settled their European payments, and their payments with one another, via the EPU.

The sterling balances accumulated during World War II by almost every country in the British Commonwealth had provided these countries with considerable monetary reserves. Moreover, a number of Latin American countries had also been able, during the war, to add appreciably to their monetary reserves, mainly in the form of increases in their dollar holdings.

In this situation, characterized by special assistance to Europe and the possession of relatively large monetary reserves in other parts of the world, there was little reason for members to draw on the resources of the Fund. From the point of view of business activity, the years from 1949 to 1955 were lean years for the Fund. Total transactions in this six-year period came to only $542 million, or 20 per cent less than in the two years 1947–48. In 1950, there were no transactions; and in a number of years drawings were very small—$35 million in 1951, $62 million in 1954, and $28 million in 1955. However, these years were important in other respects. In this period the Fund’s working methods became fully organized, annual consultations were carried out under Article XIV with countries maintaining exchange restrictions, forms of technical assistance to member countries were developed, and policies and principles for the use of the Fund’s resources were agreed upon.

Through consultations and technical assistance, the Fund became intimately acquainted with the financial problems and the economic structure of the great majority of member countries, and it has been gratifying to find the readiness with which the member countries concerned have wholeheartedly participated in this work.

One of the provisions that safeguards use of the Fund’s resources by all members is the limitation that, unless there is a waiver by the Fund under Article V, drawings by any one member in any one year shall not exceed 25 per cent of its quota. As trade has grown and swings in the balance of payments have therefore widened, the Fund has increasingly used the waiver privilege in order to meet the realistic needs of its members for drawings. In fact, the granting of waivers has recently been more the rule than the exception (Table 18). The use of waivers on this scale may be taken as indicating that members’ quotas are now on the low side in relation to the intentions of the signatories of the Articles of Agreement at Bretton Woods in 1944, which in turn were based upon trade data relating to the 1930’s. This fact has been recognized in a number of individual cases, and increases in the quotas of nine smaller countries have been authorized in recent years.

Table 18.Use of Waiver in Fund Transactions, 1953-58
All TransactionsTransactions with Waivers
Calendar

Year
NumberAmount

(million dollars)
NumberAmount

(million dollars)
19538$ 2032$ 48
1954362248
1955328219
19561469312665
19573597731820
195811226511240
Total75$2,22860$1,840

Through July 31.

Through July 31.

Under the Articles of Agreement, members have automatic repurchase obligations which are broadly dependent upon the movements of their monetary reserves. In addition, however, the Fund has adopted principles under which members requesting a drawing or a stand-by arrangement are expected to undertake to repurchase within three to five years. Through these provisions the revolving nature of the Fund’s resources has been emphasized and strengthened, and it is interesting to note that, of the assistance granted by the Fund up to the end of May 1958, an amount of $1.2 billion has been repurchased.

The Fund can be of maximum financial assurance to its members by developing a coherent body of precedents and principles that govern drawings by members and by adopting practices that meet their needs. The development of principles relating to drawings in different “tranches” and the creation of the stand-by were important steps in this direction. In 1952 the Fund laid down the principle that governs drawings within the gold tranche, i.e., that portion of a member’s quota which can be regarded as the equivalent of its gold subscription. Within the gold tranche, members can expect to receive the overwhelming benefit of any doubt that may arise in connection with a request for a drawing. Subsequently, in connection with drawings in the first credit tranche, i.e., those drawings that raised the Fund’s holdings of a member’s currency above 100 per cent, but not beyond 125 per cent of quota, the Fund established the principle that members can confidently expect a favorable response to their applications provided they are making reasonable efforts to solve their problems. The criteria for larger drawings are still stricter, and include well-balanced and adequate programs to restore balance, to establish or maintain the enduring stability of the currency at a realistic rate of exchange, and to prepare the conditions for repayment of the drawing.

In 1952, for the first time, the Fund also approved an arrangement for a stand-by, i.e., an agreement that permits a member to draw up to a stated amount during a limited period of time, usually 6–12 months. Stand-bys are usually renewable unless either the Fund or the member determines that conditions have been basically altered so that the arrangement should be terminated. Since 1952 Fund members have made increasing use of stand-by arrangements. In the fiscal year ended April 30, 1958, stand-by arrangements were agreed or extended for 11 members, and since 1952 a total of 19 members have participated in one or more stand-bys.

The practices and principles which had been gradually formulated by the Fund proved of great value when, in the latter half of 1956, a new and more active phase began with regard to the transactions of the Fund. For the two years up to the end of April 1958, these transactions reached the total of $2.3 billion (including unused amounts under stand-by arrangements), an amount equal to nearly two thirds of all the transactions of the Fund since its inception. In comparative terms, this is equal to one quarter of the increase in all dollar balances during the postwar period, and to more than four years’ increase in gold reserves from new gold production. In all, from March 1, 1947, when the Fund declared itself ready for operations, to April 30, 1958, total transactions amounted to the equivalent of $3,016 million. The Fund sold currency to 35 members, of whom 28 used the Fund’s resources more than once. About 92 per cent of the currency sales was made in U.S. dollars, but there were also sales of sterling, Belgian francs, deutsche mark, Canadian dollars, and Netherlands guilders. In the same period, 37 members repurchased their currencies to the amount of $1,120 million. This total includes not only repurchases made by members in repayment of drawings, but also purchases by members who originally did not subscribe 25 per cent of their quotas in gold. In all, 18 members that originally paid in less than 25 per cent of their quotas in gold (out of a total of 32) purchased $136 million of their currency; and these purchases, added to their original gold subscriptions, put them in a position comparable to those members whose original gold subscriptions were equivalent to 25 per cent of quotas. This development is a significant commentary on the way the automatic repurchase provisions of the Fund Agreement help to ensure the revolving and liquid character of the Fund’s assets.

The extent to which members of the Fund have used its resources may be compared by relating the total of their drawings and unused stand-bys (if any) to their quotas. By this measurement, the five members that made the greatest use of the Fund in relation to quota were (in order) Brazil, Chile, Iran, the United Kingdom, and Turkey. Brazil’s drawings were equal to 137 per cent of quota, and Turkey’s to 113 per cent of quota. In all, there were 13 members whose drawings and/or stand-bys are equivalent to 99 per cent of quota and more.

It is of particular interest to distinguish the characteristics of the transactions undertaken by the Fund during the years 1956–58.

(1) The most conspicuous transaction was the granting of financial assistance to the United Kingdom in connection with the Suez events, involving a drawing of $561 million and a stand-by of $739 million. This assistance was given on the basis of a declaration by the British Government that strict financial and credit policies would be pursued, that quantitative restrictions would not be reimposed, and that the value of sterling would be maintained. Thanks to this prompt action by the Fund, which was supplemented by a loan of $500 million from the Export-Import Bank of Washington, the position of this key currency was reinforced at a crucial moment, and a crack was avoided in the international exchange structure.

(2) In the course of 1957, the world-wide boom was accompanied by a general pressure on liquidity (internal as well as international), and a number of countries made requests for the use of the Fund’s resources. The transactions included stand-by arrangements with Denmark, the Netherlands, Japan, and India. The drawings by these countries came to $428 million; the total, including stand-by arrangements granted but not drawn upon, was $570 million. In India, the strains on the reserve position reflected to a great extent the volume of expenditure under the Five Year Plan, but the boom conditions also played their part, and private investment and imports increased at a more rapid rate than had been estimated when the Plan was drawn up. In all these cases, at the time that the requests for drawings were considered, in accordance with the principles mentioned above, the governments made statements to the Fund concerning the monetary and other relevant policies they intended to follow: in the case of stand-by arrangements, these “declarations of intent” were incorporated into the provisions of the agreements themselves.

(3) The decline in the volume of business activity which began to make itself felt in the third quarter of 1957, especially in the United States and Canada, had an effect on conditions elsewhere, and particularly on the raw material producing countries, mainly through the continued decline in the prices of primary products. Imports into the United States, and the gross supply of dollars made available to the rest of the world by trade, aid, and capital movements, however, remained at a high level. As far as the industrial countries in Europe were concerned, business activity was well sustained. In France, in particular, the rate of expansion continued to be very high and, with other expenditures increasing, a substantial deficit had to be met in the balance of payments, causing a further decline in the monetary reserves. Early in 1958, the French Government presented to the Fund a rehabilitation program and obtained, on the basis of this program, Fund assistance to the extent of $131 million, in the range of the third credit tranche. Simultaneously, France obtained $250 million through the EPU and $274 million from various U.S. agencies (largely in the form of postponements of debt service).

(4) There were many drawings by Latin American countries in the years before the most recent period. Several of these involved stabilization programs and looked forward to some simplification of the exchange system. Thus financial assistance was granted to Mexico and Colombia in 1954. Under the impact of continuing difficulties, since 1956 new transactions have been entered into with several countries in this part of the world, including Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, El Salvador, Haiti, Honduras, Nicaragua, and Paraguay. Conditions within this group naturally varied considerably from country to country. Some of the countries (Cuba, Haiti, and Honduras) have been able to maintain convertible currencies—a result which has been facilitated by the assistance from the Fund, largely for seasonal needs. In regard to these countries, too, the policies which the governments intended to follow in the fiscal, credit, and exchange fields were outlined either as part of the stand-by agreements or in the form of special declarations. For several of these countries, assistance from other sources (including the U.S. Treasury, other U.S. agencies, and U.S. banks) has been arranged simultaneously with assistance from the Fund. In most of these cases, the Fund’s assistance has been within the first credit tranche. For Brazil, however, a stand-by arrangement of June 1958 covered the third credit tranche; the Brazilian Government had presented with its request a general rehabilitation program aimed especially at the containment of inflationary pressures in the fiscal and credit spheres. From 1956 to the middle of 1958, Latin American countries have drawn more than $200 million from the Fund, and had undrawn amounts available under stand-bys of more than $50 million.

Thus the Fund has been concerned with the problems arising both in the recent boom and in the following recession. It has been expected for many years that the greatest need for the use of the Fund’s resources would arise during periods of recession in the United States, leading to a drain on the monetary reserves of other countries, especially in Europe. These views were, of course, largely influenced by the difficulties that developed in the 1930’s. As a matter of fact, by far the largest total of Fund transactions to date arose in the boom period of 1956–57. It is true that this period included the emergency of the Suez events, but the currencies of the two countries in Europe most immediately affected—the United Kingdom and France—were already exposed to other strains and stresses. The stresses arising from the boom were particularly evident in the period of tension in the European exchange markets in the summer of 1957, intensified by rumors about the possible revaluation of the deutsche mark. At the height of the tension in September, a number of measures were taken in the United Kingdom, including an increase in Bank Rate from 5 per cent to 7 per cent, while the Bundesbank reduced its discount rate from 4½ per cent to 4 per cent. These measures, together with strong declarations made at the Twelfth Annual Meeting of the Fund that the parities of both sterling and the deutsche mark would be maintained, proved sufficient to restore calm.

It is perhaps too early to say anything very definite about the recession of 1957–58, but one outstanding feature has been that in the first six months of 1958 there was an outflow of gold from the U.S. monetary gold stock to the extent of $1.5 billion, which more than reversed the inflow of 1957. This, taken together with the fact that the two previous postwar recessions have both been shallow and have not caused any considerable movement of funds to the United States, indicates the need for reappraising opinions with regard to the effects of a recession in the United States. At this stage it appears that a recession need not necessarily lead to a reduction in the supply of dollars. Whatever the conclusions of such a reappraisal, however, apprehensions will probably not be fully discarded, for much depends upon spending, fiscal, and credit policies in the United States and U.S. willingness not to increase tariffs in a recession. It would, indeed, be rash to conclude on the basis of postwar experience to date that there will be no drain on other countries’ reserves in the event of a U.S. recession. Furthermore, it is clear that there are many ways in which disturbing movements of funds may arise, apart from a recession in the United States, and some of these may be difficult to handle.

The conclusion can only be that the Fund must remain prepared for diverse contingencies, many of which cannot clearly be defined in advance.

The Fund was able, when the Suez events occurred late in 1956, to extend financial assistance on a very considerable scale. This was due to the fact that the Fund had previously been inactive and the bulk of its resources in gold and U.S. and Canadian dollars was intact. The present situation is different. It may be that no similar grave situation needs to be envisaged, but it is desirable to see what resources the Fund would have available for an emergency today.

The Fund’s available resources of gold and U.S. dollars are now about $2.2 billion, or, including Canadian dollars and deutsche mark, about $2.6 billion. From these should be deducted $880 million callable under existing stand-by arrangements. Net available gold and U.S. dollars are, therefore, about $1.3 billion, or, including its holdings of the other two currencies, about $1.7 billion. Potential drawings against these holdings cannot, of course, be known, but comparison can be made with the experience of 1956–57, when gross drawings came to $1.8 billion (allowing for repurchases, net drawings came to $1.5 billion) and the amounts callable under stand-by arrangements also increased by $800 million.

The size of Fund resources available to members may also be looked at from the point of view of their drawing rights. The unutilized drawing rights of all countries—with the exception of the United States, Canada, Germany, and China—in the gold tranche and the first and second credit tranches, and in the third credit tranche to the extent that this is provided for by existing stand-bys, amounted to $2.5 billion in June 1958. These unutilized drawing rights are relatively modest and, as a matter of fact, are equal to only 4 per cent of the imports of the countries concerned. Yet they are larger than the Fund’s holdings of gold and U.S. dollars, and almost equal to these assets plus Canadian dollars and deutsche mark.

It is clear that there is no longer any great margin for the Fund to grant fully that financial assistance which, under its present practices and policies, should be available to its members.

It is also pertinent to note that the resources of the Fund constitute a much smaller proportion of international trade now than when the Fund was established. Exports in 1956 were four times as great as in 1937–38, and the size of quotas in relation to trade has fallen correspondingly. Only two countries had initial quotas equal to less than 10 per cent of trade in 1937–38, whereas in 1956, even after increases in a number of small quotas, there were 36 countries with quotas equal to or less than 10 per cent of exports (Table 19).

Table 19.Fund Quotas as Per Cent of Exports, By Area, 1956 1
Number of Countries
Median

Per Cent
Less than

5 per cent
5 to

9.9 per cent
10 per cent

and more
Total
Latin America839820
Europe727413
Other Sterling Area1034411
Rest of World1026614
Total10262258
Source: Based on data from International Financial Statistics, February 1958.

Excluding United States, Canada, United Kingdom, and China.

Source: Based on data from International Financial Statistics, February 1958.

Excluding United States, Canada, United Kingdom, and China.

It may perhaps be argued that those responsible for the calculation of quotas at Bretton Woods expected that trade would expand and took this factor into account. It is quite unreasonable, however, to think that they could have envisaged a fourfold increase of trade in 20 years. On the contrary, an examination of the views then generally held shows great fear of a postwar depression, which would be inconsistent with actual developments. In particular, it is unlikely that they could have foreseen that world export prices in 1957 (measured in U.S. dollars) would be almost 150 per cent higher than in 1937, and that wholesale prices in the United States would be 110 per cent higher. It is, therefore, probably fair to say that the Fund at the present time has less real resources than was contemplated at the time of Bretton Woods.

When the Fund was set up, the criticism was heard from some quarters that it might make its resources available to members too easily, and thus weaken the monetary discipline which was essential if its assets were to be truly revolving—and if countries were to make the necessary efforts to restore a balanced position internally and externally. Although thirteen years in the life of an institution such as the Fund is a short time, there would seem to be little doubt that this kind of argument would today be regarded as invalid. Instead, there is evidence suggesting that the possibility of having access to the Fund’s resources may make countries more confident in their attempts to restore balance. Countries may be willing to take stricter measures than if they had to rely solely on their own resources. They seem to be encouraged by the knowledge that a second line of defense is available. In practice, they may therefore exert more discipline than if there were no Fund to draw from and consult with.

From an even broader point of view, one may say that public opinion, which still has not forgotten the hardships of the 1930’s, will support the necessary disciplinary measures only if it can be assured that they are reasonable and that they will be effective. In this context, it is important that the Fund is not merely an additional source of reserve credit. It is coming to be recognized more and more as a source of credit which is available only to those member governments that have satisfied the Fund of their intention and their capacity to restore balance in their monetary affairs. The Fund thus helps to restore some measure of that international consensus and monetary discipline by which the gold standard maintained balance before World War I, and it can supply the credit to facilitate the adjustments that are required. The adjustments must still be made, but they can be made with less harshness and more rationality. If that were not the case, the granting of aid might prolong and worsen the unhealthy developments. The records are there to show that in practice the opposite has happened. Countries assisted by the Fund have shown a readiness to take corrective measures, often as part of a general program for restoring balance to their economies. The Fund thus affords an economical means of reinforcing the stability of international economic relationships in general, and of the exchange rate structure in particular.

The extent to which the Fund can discharge these most important responsibilities depends upon the consent of its members, the wisdom of its policies, and the amount of its resources.

CHAPTER FIVE: SUMMARY AND CONCLUSIONS

International liquidity is a concept with many facets. In assessing liquidity from the point of view of any individual country, account has to be taken of the various ways in which it may be able to meet, without great embarrassment, a strain on its balance of payments. This will depend not only on the degree of the strain and its available cash reserves, but also on the possibilities of mobilizing additional resources and on the effectiveness of the international credit system. The degree of strain will depend in part on general developments, such as world-wide fluctuations in business, and in part on the country’s own inherent balance and its readiness to take corrective measures, if for any reason that balance is upset. For such measures to take effect, time is needed, and therefore the amount of monetary or international reserves at the country’s disposal during the period of adjustment is a most important factor. Without neglecting these general considerations, a study of liquidity must therefore first direct its attention to the size of monetary reserves. While in the final analysis the reserves position of each individual country is important for the management of its affairs, it is useful to obtain an over-all picture by outlining the total of reserves available to all countries and relating them to the volume of world trade.

For all countries, except those in the communist area, the ratio of official gold and exchange reserves to imports in 1957 was 51 per cent. This is distinctly higher than in 1913, when the ratio was 21 per cent, or in 1928, when it was 42 per cent, but lower than in 1937–38, when it was as high as 100 per cent.

The effectiveness of reserves at these various dates is not necessarily indicated by the reserve percentages themselves, because conditions changed greatly during the period. Thus, reserves in 1913 were generally found to be adequate, even though they were very small in comparison with those in later periods. That was a time when there was a fair degree of balance among the various economies, when under the gold standard rules corrective measures were taken speedily, and when the international credit system was working with great effectiveness. In 1928, despite substantially higher reserves, the world economy was headed for a disaster: there were still many uncorrected maladjustments following World War I; dangerous credit policies had been pursued throughout the 1920’s, not least in the international field; and individual countries had a tendency to resort too readily to tariff measures and other hindrances to trade when difficulties confronted them. On the other hand, reserves in the late 1930’s, which stood at an unprecedentedly high level, were not in themselves able to give an impetus to production or trade. The world economy had been disintegrating in monetary and other respects, movements of funds were determined largely by political and monetary fears, and in many countries little scope was given to the dynamic forces of the economy.

The conclusion that can be drawn from a comparison with the past is, therefore, that the contribution of reserves to the achievement of full employment, to the increase of world trade, and to the genesis of both inflation and deflation is not a dominant one. Major world trends of production and trade are not determined solely by liquidity. The developments of the last forty years or so have been dominated not by changing liquidity ratios but rather by two major wars, several minor wars, vast expenditures preparing for wars, and large expenditures to repair the damages of wars.

In those periods, on the other hand, when war or warlike considerations are not the major factor, the broad cyclical or longer-run determinants of demand in the economically most important countries tend to dominate the world economy. If these factors are expansionary, production will rise and the value of world trade will also rise, whether world liquidity increases at the same rate or not. Therefore, the position of these larger countries is of outstanding importance, not least because the credit or fiscal policies they pursue and the role they play in the international credit system are vital factors for the trend of world liquidity in general. If their position is impaired, as it was in large measure in the 1930’s, even an historically unprecedented increase in the world’s stock of gold could not by itself reverse the situation.

The conditions prevailing in the late 1930’s can therefore not be regarded as a useful basis for comparison with present conditions, since too many adverse factors of a non-reserve character then dominated the situation. In regard to the other years with which comparisons have been made, it must be said that, so far as the over-all picture is concerned and on a purely statistical basis, the ratio of reserves to trade in recent years cannot be considered low in itself.

The effectiveness of reserves depends, moreover, not only upon the total for all countries, but also upon their distribution among countries. After the one-sided flow of gold to the United States in the interwar period (due largely to political fears) the reserves of that country rose to such an extent that by the end of 1949 it held 74 per cent of the world’s gold stock and 56 per cent of total gold and foreign exchange reserves. Since 1949 the trend has, however, run in the opposite direction. U.S. gold holdings have fallen and holdings of U.S. dollar exchange by the rest of the world have risen. This strengthening of the reserves of other countries, taken together with the fact that U.S. gold holdings are still sufficiently large to permit that country to pursue credit and fiscal policies in a large measure independently of the flow of gold, has clearly helped to improve world liquidity.

Another large country—the Federal Republic of Germany—has in recent years so strengthened its reserve position that it, too, now has great latitude in pursuing its fiscal and monetary policies. Recent statements of authoritative persons suggest that Germany has no particular interest in further increasing its monetary reserves.

For the United Kingdom, the effects of the war, and especially the accumulation by many countries of large sterling balances, have made the country’s monetary position in many respects more vulnerable to sudden movements of funds. Its balance of payments on current account has, with few exceptions, shown surpluses in the postwar years. While the funds thus becoming available did not lead to a net increase in the reserves, they nevertheless helped the work of the credit machinery centering in London, and they added to the long-term foreign assets of the United Kingdom. In 1957–58, however, stricter fiscal and credit policies, together with favorable terms of trade, led to a substantial increase in reserves, coinciding with some decline in sterling balances, so that the net position was appreciably improved. While balance of payments considerations still remain a major factor in the formation of British policies, there would now seem to be less danger of any acute exchange crisis. Nevertheless, it must be remembered that the credit system centering in London is by its very nature affected by major upsets of an economic and political character in all parts of the world, and that the strengthening of international liquidity is of interest to all who use sterling in their international transactions.

Many countries have been able to strengthen their reserve positions in recent years, though there are important exceptions. By and large, it may be said that it is the industrial countries which have either maintained or improved their reserve positions. On the other hand, many nonindustrialized countries have decreased their reserves. In some countries, these decreases were planned, and used to finance development—though some of the decreases were perhaps greater or more rapid than had been anticipated. In some countries, the decreases in reserves followed the declines in recent years in the prices of primary products or were the natural consequence of sharp or prolonged inflation. The types of change may be outlined with a few illustrations. Thus, between 1948 and 1957, the ratio of reserves to imports was reduced in Ceylon from 84 per cent to 48 per cent, and in India, from 195 per cent to 43 per cent; in fact, most sterling area countries drew upon the sterling savings which had been accumulated during the war. In Latin America, the reserve ratio percentage was reduced in Bolivia from 37 to about 1; in Peru, from 26 to 9; and in Uruguay, from 120 to 69.

While the nonindustrialized countries have the urgent problem of obtaining international financial assistance, they realize, of course, that internal balance cannot be restored without further domestic measures.

Given this situation, it is necessary to reckon with a demand for monetary reserves from countries that now have insufficient reserves. Moreover, it is likely that with the growth of their foreign trade a number of other countries will also wish to strengthen their reserve positions. Sometimes it seems to be assumed that in order not to hinder the growth of foreign trade the aggregate reserves of all countries must be increased in the same proportion as the average annual growth of foreign trade, say, something like 3 per cent per year. Examination of past experience suggests, however, that there is no such fixed mathematical relation between the growth of foreign trade and the increase in reserves. It seems more realistic to assume that countries with really large reserves will not find it imperative to increase their holdings—and it may unfortunately also prove to be the case that some countries which ought to augment their reserves will not carry out the policies that would make such an increase possible.

Since the amount becoming available for monetary purposes from current gold production, without allowing for any receipts from dishoarding, is likely at the present price of gold to be about $700 million a year, it would seem that gold output alone can make a very substantial contribution to satisfying the need for increased reserves. Since it is, moreover, likely that there will be some increase in exchange holdings, the reserve problem with which the world will be faced over the next decade does not seem to be too difficult, provided that further progress is made, by sensible policies, in restoring and maintaining balance in the individual economies, in avoiding increased obstacles to trade, and in strengthening the international credit system.

These provisos are important, since the adequacy of reserves, both for the world as a whole and for individual countries, can be judged only in a broad international context. For example, a given level of reserves will have one degree of adequacy when economic conditions between countries are in reasonable balance and when exchange rates are appropriate. If these conditions are not satisfied, the same reserves will have a different degree of adequacy. Similarly, from the point of view of any one country, reserves that may be adequate if the country is following a program of development with stability may appear totally inadequate when it has an unbalanced budget or active credit inflation. No amount of reserves is adequate to finance a continuous deficit in the balance of payments resulting from excessive spending or insufficient revenue. In these cases, the immediate task is clearly to adopt fiscal and monetary policies that will restore external and internal equilibrium.

Over fairly long periods, some countries have had relatively large reserves (e.g., the United States, Switzerland, Portugal, and Venezuela), while others (e.g., the Scandinavian countries) have traditionally held rather low reserves in relation to their foreign trade. One cannot escape the conclusion that in this matter tradition and convention play a considerable role. Several of the countries with slender reserves have, even in the generally favorable economic environment of the postwar period, been beset by difficulties which those with larger reserves could take in their stride. Many countries may state that their reserves are too low or wish that they might be larger, without being prepared to take the steps necessary to strengthen them. An increase in reserves is part of a country’s investments. It requires, like other investments, a counterpart in the form of uncommitted savings of one sort or another, as happens, for instance, when debts to the central bank are repaid from genuine budget surpluses.

At the end of 1957, the official reserves of all countries (outside the communist area) consisted of $37.0 billion in gold and $15.9 billion in foreign exchange, making together $52.9 billion. The quality of reserves is now undoubtedly sounder than it was in the late 1920’s. At that time, a large part of the foreign exchange holdings was the counterpart of short-term foreign credits; now, for the most part, countries holding reserves are also their beneficial owners.

The short-term lending mechanism, which is an indispensable element in the liquidity of any international monetary system, may not yet be as efficient as it was in the days of supreme monetary confidence before World War I, but it is certainly better than in the period between the two World Wars. Private holdings of foreign currencies, needed as working capital for the financing of trade and other international payments, have in a fair degree been reconstituted. About 40 per cent of the foreign-owned dollar balances in the United States are privately owned and, after some rather violent fluctuations in the course of 1956–57, sterling balances were very largely replenished in the first six months of 1958. With an increase in monetary confidence and a relaxation of exchange controls, it is likely that, as was the case before 1914, equilibrating movements of funds will be facilitated. These, up to a point, should reduce the strain on official reserves. The fact that the monetary authorities in most countries have again begun to pursue flexible credit policies, including fairly frequent changes in interest rates, should be very helpful in encouraging such a development. It is certainly too early to conclude that the shifts in leads and lags, which from time to time during the postwar period have given rise to such disturbing movements of funds, will not occur again. Nevertheless, the way in which appropriate credit policies in the last few years have been able to reverse those movements is a hopeful sign for the future. Financial assistance from international institutions, including both the European Payments Union and the International Monetary Fund, have been helpful in this connection.

The important contribution of international institutions to liquidity has been a new development in the period after World War II. The financial activities of the International Monetary Fund were at a low ebb for several years. During these years, many countries in Europe met their needs with the help of funds provided by the Marshall Plan, and many countries outside Europe were able to use the liquid resources they had accumulated during the war (sterling balances in the British Commonwealth, and dollar balances in the Latin American countries). In connection with Marshall Aid, a system of intra-European settlements gradually evolved into the European Payments Union, which made an important contribution to liquidity, especially at the time when the private credit system had not yet been restored to working order.

For the Fund, the years of little business activity, stretching from 1948 to 1955, were used to get its working methods fully organized; to start the system of consultations with countries maintaining exchange restrictions required under Article XIV; to develop forms of technical assistance to member countries; and, what has proved very important, to agree on the policies and principles to be applied to requests for the use of the Fund’s resources.

While requests for drawings of 25 per cent of a country’s quota, normally corresponding to its own gold subscription, are almost automatically approved, the principle has been established that for the next 25 per cent members are required to show that they are making a reasonable effort to solve their own problems. For drawings beyond these limits, more substantial justification is required: namely, that the drawings must be in support of a sound program likely to ensure enduring stability at realistic rates of exchange. These principles are also applicable to requests for stand-by arrangements, and they proved to be of great practical value when, in the autumn of 1956, there was a distinct upturn in the business activity of the Fund—beginning with the financial assistance granted to the United Kingdom in connection with the Suez events, and followed by drawings and stand-by arrangements with a great number of countries in various parts of the world. In all these cases, when requests for drawings and stand-by arrangements were considered, the governments made statements to the Fund concerning the monetary and other relevant policies they intended to follow.

It is important to remember that the Fund is not merely an additional source of reserve credit available to the monetary authorities of its members. It is recognized more and more as a source of credit which is available only to member governments that have satisfied the Fund of their intention and their capacity to restore balance in their monetary affairs. The Fund thus helps to restore some measure of that monetary discipline by which the gold standard in its way maintained balance before World War I, but it also supplies a measure of credit by which harshness may be mitigated.

Total drawings on the Fund from its inception to the end of July 1958 amounted to $3.1 billion; in addition, at the end of July 1958 undrawn balances under existing stand-by arrangements amounted to $800 million. But the Fund’s significance for international liquidity is greater than the amounts drawn would suggest, for several reasons: first, the Fund’s resources constitute a particularly efficient form of reserves, since their use can be pinpointed to particular areas of financial strain; second, as already mentioned, drawings are generally coupled with specific undertakings with respect to monetary and fiscal policy on the part of the countries concerned; and, third, the favorable technical judgment of a country’s economic and financial program, implied in the approval of a drawing by the Fund, not infrequently simplifies that country’s task in obtaining additional sums from other sources. Furthermore, the possibility of having access to the Fund’s resources, even when no assistance is actually granted, may make countries more confident in their attempts to restore balance—making them willing to take stricter measures than if they had to rely on their own resources alone. They may be encouraged by the knowledge that a second line of defense is available to them. In practice, they may therefore exert more discipline than if these opportunities did not exist.

It seems sometimes to have been assumed that the Fund would be called upon to render assistance particularly in periods of recession in the United States which, in accordance with the experiences of the 1930’s, were expected to put a strain on the balances of payments of other countries. As a matter of fact, by far the major part of the financial transactions of the Fund so far have occurred in the boom period of 1956–57. It is true that the largest of these transactions, the financial assistance to the United Kingdom at the time of the Suez events, was of an emergency nature not directly connected with the boom. Subsequently, some other important transactions were undertaken to bring temporary relief to countries with deficits in their balances of payments resulting from the strains of an exaggerated boom in their own domestic economies. There have recently been some transactions which can be associated with the recession that began in the latter half of 1957, but they have been for relatively limited amounts. While raw material producing countries have suffered from the decline in the prices of primary products, the fact that the 1957–58 recession in the United States has been accompanied by an outflow of gold from that country has helped many countries, especially in Europe, to strengthen their monetary reserves. It can, of course, not be concluded that a recession in the United States will always have similar results. Nevertheless, experience in the last two years clearly indicates that the need for assistance from the Fund may arise quite independently of any particular phase of the business cycle. Indeed, the Fund must be prepared for diverse contingencies, many of which cannot be defined in advance.

The Fund was able, at the time of the events of Suez, to extend financial assistance on a very considerable scale. This was due largely to the fact that in the previous years there had been very few transactions, so that the bulk of the Fund’s resources in gold and convertible currencies was intact. Since then, the many transactions undertaken by the Fund have considerably reduced its uncommitted holdings of gold and convertible currencies, which at the end of July 1958 amounted to $1.4 billion. On the other hand, some drawings have already been made in currencies other than U.S. dollars, such as deutsche mark, guilders, and sterling, and perhaps more use will be made of these currencies in the future. The Fund has authorized drawings to meet the balance of payments effects of changing levels of production and trade, to support stabilization programs, and to meet short-term strains in the balance of payments. It was able at the time of the Suez events to prevent a disruption of the exchange structure. Past experiences have shown that when cracks occur, they may not be confined only to the currencies immediately affected. The consequences of allowing such cracks to widen and spread may indeed be serious.

The question has been raised, for good reasons, whether the resources of the Fund are adequate for present tasks. The resources available to the Fund were determined at the Bretton Woods Conference in 1944, and most of the data on international trade available to the Conference related to the period before the war. The physical volume of world exports fell by 7 per cent from 1937 to 1947, but in the next ten years increased by 90 per cent, a rate of expansion almost unknown in the past. The prices of goods moving in international trade increased by 140 per cent between 1937 and 1957. Fluctuations in the balance of payments which may require use of the Fund’s resources are therefore potentially much larger now than when the Fund quotas were established. If any lack of confidence were to set in, the potential movements of funds connected with shifts in the financing of trade would likewise be larger. The Fund’s ability to provide assurance to its members and to act quickly on a massive scale if emergencies arise depends upon its having adequate resources, which have been made available in advance of any specific emergency. It is doubtful whether, in the circumstances of the world today, with world trade greatly expanded in volume and value, the Fund’s resources are sufficient to enable it fully to perform its duties under the Articles of Agreement.

STATISTICAL APPENDIX
Appendix Table 1.Gross Official Reserves (Gold and Exchange), Imports, and Reserves as Per Cent of Imports, by Country, Selected Years, 1928-57(Value figures in millions of U.S. dollars)
19281937194819501951
Country and AreaReservesImportsPer CentReservesImportsPer CentReservesImportsPer CentReservesImportsPer CentReservesImportsPer Cent
United States3,7464,4278512,7903,57335824,3998,05830322,8209,60123822,87311,882193
Canada931,3647200939211,0113,024331,7703,202551,8264,19444
Latin America1,1602,453478751,717512,7506,224443,1255,630562,9257,83137
Dollar Countries12586215150665231,0752,836381,4252,700531,5253,41145
Bolivia9233972429287937296445349934
Colombia621613920962184337251013652812541930
Costa Rica112854212446885614
Cuba234111461316591534186086949575466
Dominican Republic30311323157420195038308635
Ecuador8165051436286047374976316250
El Salvador5182881080304173414885436368
Guatemala5311682138466868377152408149
Haiti292283126103826134430
Honduras1112821375113928205338
Mexico101855301751778561142915565225482231
Nicaragua1714328113291093526
Panama1542421447360387054497664
Venezuela21812659110258378814463736675637376149
Non-Dollar Countries1,0351,591657251,052691,6753,388491,7502,930601,4004,42032
Argentina607807755394931095791,590366551,187555201,48035
Brazil1774414050335157581,134676661,098615172,01126
Chile12016374388943592692258247235532817
Paraguay131101062722132259182962
Peru477067265944441682654176316026223
Uruguay3839786756611424120012031220015622331072
Continental EPU Countries5,14011,103466,6008,680785,87514,519406,90016,473427,50022,03334
Austria1264562873269276249013914771910665316
Belgium34588939827928899382,046467331,942381,0192,53540
Denmark77441177036919847141297853111181,01312
France42,5412,0971212,7841,6891653,4431,3343,030449124,45720
Germany7763,335232,1962952742,697105183,49115
Greece55161343414054189364521874284413239833
Italy5831,17350212734295391,539358781,488591,0032,16746
Netherlands2631,078249388831063431,871186062,056296182,55324
Norway502691913232041141750191226791815187817
Portugal25120217510671509414123471274172555330168
Sweden12145826513541952331,377172891,182244841,77627
Switzerland152512307744141871,6601,1631431,5791,0561501,6441,375120
Turkey2111418499154192348552143116921740753
United Kingdom7485,795134,14165,082812,0098,370243,6687,305502,37410,93422
Other Sterling Area Countries7542,670281,4252,870467,2757,627955,5506,528855,2259,65254
Australia20066930332526631,2651,411901,4921,622921,1342,42247
Burma57559111417665119111107159137116
Ceylon5193590254301841912457821732766
Iceland1617611281371188382195716
India44083753590671883,3541,7161952,0001,1651721,8881,793105
Iraq342648541391837611710511111414380
Ireland2885921927209549382454465520657336
Malaya1023882722784227229952242621,55417
New Zealand35218169225336236450521724553821759636
Pakistan95555800312256507403126638549116
Union of South Africa7839320228572406521,61640476986483861,50126
Rest of World1,4002,813501,5252,273673,1754,273743,2004,312743,8006,85455
China (Taiwan)15120124914534
Egypt178249712181971111,408674209979583168957678141
Ethiopia153741142752204050
Finland272021373199377448815843882220967631
Indonesia4036628323207464453564408151187359
Iran763484402731671632522629619621193
Israel1033567971134164826229921333809
Japan12598990602971,13826684564974589241,99546
Korea2738
Lebanon88748384013330
Philippines50714934125400655612963847724755045
Spain5125808852511844682575390196038416
Syria5184214391913314
Thailand43780545249106217144151288209138359272132
Viet-Nam
Yugoslavia61119433831412172367213846
Sources: For 1928, “The Adequacy of Monetary Reserves,” Staff Papers, Vol. III, No. 2 (October 1953), pp. 181-227. For other years, International Financial Statistics (IFS), February 1958 and following issues; footnotes to the summary trade and reserves tables therein apply to this table.

Reserves not held officially.

IFS estimate.

Reserves data are gold and net foreign exchange. The nature of liabilities deducted from gross assets is unknown. Prior to 1951, forward exchange liabilities are also deducted. For 1955, gold only, since net foreign exchange is negative.

Reserves estimated by Fund staff.

Included with India.

Gold only.

Foreign exchange only.

Included with Syria.

Beginning with 1952, includes holdings of Issue Department only.

Official and banks.

End of November 1957.

Excludes gold under dispute.

Sources: For 1928, “The Adequacy of Monetary Reserves,” Staff Papers, Vol. III, No. 2 (October 1953), pp. 181-227. For other years, International Financial Statistics (IFS), February 1958 and following issues; footnotes to the summary trade and reserves tables therein apply to this table.

Reserves not held officially.

IFS estimate.

Reserves data are gold and net foreign exchange. The nature of liabilities deducted from gross assets is unknown. Prior to 1951, forward exchange liabilities are also deducted. For 1955, gold only, since net foreign exchange is negative.

Reserves estimated by Fund staff.

Included with India.

Gold only.

Foreign exchange only.

Included with Syria.

Beginning with 1952, includes holdings of Issue Department only.

Official and banks.

End of November 1957.

Excludes gold under dispute.

Appendix Table 1, cont.Gross Official Reserves (Gold and Exchange), Imports, and Reserves as Per Cent of Imports, by Country, Selected Years, 1928-57(Value figures in millions of U.S. dollars)
195219531954195519561957
Country and AreaReservesImportsPer CentReservesImportsPer CentReservesImportsPer CentReservesImportsPer CentReservesImportsPer CentReservesImportsPer Cent
United States23,25211,66219922,09111,79218721,79311,04719721,75212,36917622,05813,75116022,85714,174161
Canada1,8644,480421,8274,824381,9544,551431,9105,156371,9456,270311,8366,34629
Latin America2,9257,683383,2006,541493,0257,411413,1507,550423,6757,940463,7759,10041
Dollar Countries1,6003,563451,6503,578461,6753,898431,8504,135452,3254,621502,7255,20252
Bolivia29107272478311173156817484517031
Colombia155415371905473525767238136669201316572014547730
Costa Rica1668241874241680202087231291131210312
Cuba448745604815918145459976493633784797146744170662
Dominican Republic3211129289928369438361143237126294613634
Ecuador4470633975523812032341123032108303911035
El Salvador44696443726044875139924239105374011535
Guatemala437657418051398645541045270138517414950
Haiti135325104423114823846177501444010
Honduras216632226235245941196231186727157620
Mexico250807312188072720180025418885475001,07247419111,15536
Nicaragua15473216513113681914702076910118114
Panama15284625282634883584288484298432911625
Venezuela43484551477916524751,029465261,092489391,249751,4401,86877
Non-Dollar Countries1,3254,120321,5502,963521,3753,513391,3003,414381,3503,312411,0503,89827
Argentina4201,1793653279567524979544571,173403811,128343111,31024
Brazil5292,010266051,319464831,630304911,306386121,234504741,48932
Chile693701968335203934311833762276354214644110
Paraguay8362262821437116341882928133241
Peru56288194929317562502252300176736119344009
Uruguay323823710029119315125727494216225962032069915722669
Continental EPU Countries8,62521,8194010,10021,2874811,42523,7014812,87527,2004713,40031,1264314,57534,38442
Austria15265223320546594126536336188741406974425101,12845
Belgium1,0302,444421,0672,405441,0322,535411,1272,830401,1433,272351,1323,43233
Denmark142962151671,000171431,170121331,178111311,311101721,35913
France49874,326239563,942241,3694,221322,0764,739441,3565,553247756,17013
Germany1,1903,814311,9583,771522,6364,571583,0765,793534,2916,617655,6447,47875
Greece141346411912966519933060210382552184644719252537
Italy9182,336399522,420391,0412,439431,2372,711461,3083,174411,5323,62642
Netherlands1,0372,224471,2242,376521,2762,858451,2773,208401,0723,725291,0564,10526
Norway15187417142912161381,019141651,090151791,211151831,27414
Portugal563347162616332186655351187671398169693443156687502137
Sweden4461,730265071,579324781,776274701,997244732,209214562,42419
Switzerland1,6671,2081381,7681,1761501,8371,3001411,8461,4891241,8931,7661071,9181,96498
Turkey191556342135324020547843211498422304075731539779
United Kingdom1,9589,738202,5469,361272,7989,447302,15610,867202,17210,881202,37411,41221
Other Sterling Area Countries4,6258,954525,0257,298695,0007,924634,7008,817534,5259,093504,0509,96941
Australia1,0321,979521,3621,471931,1331,869618352,160399531,964491,3211,93168
Burma198192103211178119124204619218151121198619329731
Ceylon163358461143383416929358204307662213426518337948
Iceland95616166824206929147818149016168319
India1,7291,6961021,7651,2081461,7821,2971371,7911,4131271,3601,698808782,02243
Iraq129173751811929423320411429427310835432111026134376
Ireland220482462345114626050452243582422345124625851750
Malaya2731,265222701,058262911,026283151,249253241,357243281,43123
New Zealand183773242715385023968835179802221947512613883017
Pakistan92966304729635085328334983702901283734178929144066
Union of South Africa3821,350282951,386214161,436293661,482253721,524242881,69617
Rest of World3,5007,038503,2507,380443,5257,344484,0008,290484,0509,676423,40011,37530
China (Taiwan)4418724541922834211166120130791944110821251
Egypt75264011872851614173247215564153811956653510646552489
Ethiopia254358425379506182556881576390647882
Finland133792171455302721165632219769281748852017190019
Indonesia314948332127652824862939307604512548563022179728
Iran17712414318515611918623081205295269230335269245375265
Israel1030321933281126828724853252686364248140720
Japan121,1012,028548952,410371,0222,399431,3392,471541,5073,230471,0194,28424
Korea8310934731108241459632629993692711643227
Lebanon421383055144387617444862183988237379925239
Philippines23648449240534452075453815564124161597277172710
Spain6151812805961311761419151617248976712698628
Syria291382144131344717427481792762187335417132
Thailand3523041163023309227331288298334893113658532940481
Viet-Nam124263471322186113728947
Yugoslavia163734183955243397294417434749396616
Sources: For 1928, “The Adequacy of Monetary Reserves,” Staff Papers, Vol. III, No. 2 (October 1953), pp. 181 227. For other years, International Financial Statistics (IFS), February 1958 and following issues; footnotes to the summary trade and reserves tables therein apply to this table.

Reserves not held officially.

IFS estimate.

Reserves data are gold and net foreign exchange. The nature of liabilities deducted from gross assets is unknown. Prior to 1951, forward exchange liabilities are also deducted. For 1955, gold only, since net foreign exchange is negative.

Reserves estimated by Fund staff.

Included with India.

Gold only.

Foreign exchange only.

Included with Syria.

Beginning with 1952, includes holdings of Issue Department only.

Official and banks.

End of November 1957.

Excludes gold under dispute.

Sources: For 1928, “The Adequacy of Monetary Reserves,” Staff Papers, Vol. III, No. 2 (October 1953), pp. 181 227. For other years, International Financial Statistics (IFS), February 1958 and following issues; footnotes to the summary trade and reserves tables therein apply to this table.

Reserves not held officially.

IFS estimate.

Reserves data are gold and net foreign exchange. The nature of liabilities deducted from gross assets is unknown. Prior to 1951, forward exchange liabilities are also deducted. For 1955, gold only, since net foreign exchange is negative.

Reserves estimated by Fund staff.

Included with India.

Gold only.

Foreign exchange only.

Included with Syria.

Beginning with 1952, includes holdings of Issue Department only.

Official and banks.

End of November 1957.

Excludes gold under dispute.

Appendix Table 2.Reserve Holdings of Gold and Foreign Exchange, By Area, Selected Years, 1928-57(In millions of U.S. dollars)
AreaGoldForeign

Exchange
Total% Foreign

Exchange
GoldForeign

Exchange
Total% Foreign

Exchange
GoldForeign

Exchange
Total% Foreign

Exchange
192819371938
World9,8003,25013,0502525,3002,40027,700925,9501,80027,7007
World minus United States6,0543,2509,3003512,5102,40014,9101611,3581,80013,10814
Canada939318020200101863422015
Latin America9851751,160157251508751767510080012
Dollar Area70551254412525150171255017529
Non-Dollar Area9151201,03512600125725175507562512
Continental EPU Countries2,7852,3555,140465,9508006,750126,1255256,6258
United Kingdom7487484,1414,1412,8772,877
Other Sterling Area385369754495009251,425655346251,17054
All Other Countries1,0603401,400249754751,475339255001,39535
194819491950
World32,75013,70046,4502933,15010,50043,6502433,55013,55047,00029
World minus United States8,35113,70022,051628,58710,50019,0875510,73013,55024,18056
Canada4016101,011604866361,122575801,1901,77067
Latin America1,5001,2752,750461,6501,1252,775411,8751,3003,12541
Dollar Area8002751,075268753251,200271,0253751,42527
Non-Dollar Area7001,0001,700597758251,600528259251,75053
Continental EPU Countries3,5502,3255,875403,8502,3256,175383,9502,9756,90043
United Kingdom1,6054042,009201,3504021,752232,9007683,66821
Other Sterling Area5756,6757,275925504,1254,657886004,9505,55089
All Other Countries7252,4003,125777251,8752,600728002,3503,17575
195119521953
World33,65012,90046,5002833,55013,20046,7002833,90014,10048,00029
World minus United States10,77712,90023,6275410,29813,20023,4485611,80914,10025,90954
Canada8429841,826548859791,864539868411,82746
Latin America1,9509502,925331,8251,0752,900371,9251,3003,20040
Dollar Area1,0504751,525319256751,600429257501,65045
Non-Dollar Area9005001,400369004251,300321,0005501,55035
Continental EPU Countries4,1503,3507,500454,5254,1258,625485,1255,00010,10050
United Kingdom2,2001742,37471,5004581,958232,3002462,54610
Other Sterling Area6254,6005,225886254,0004,625866254,4005,02588
All Other Countries9752,8003,775749252,5253,475738502,3503,22573
195419551956
World34,45015,10049,5003034,95015,65050,5503135,55016,25051,80031
World minus United States12,65715,10027,7075413,19815,65028,7985413,49216,25029,74255
Canada1,0738821,954451,1347761,910411,1038411,94543
Latin America1,8501,2003,025391,8501,3003,150411,8751,8003,67549
Dollar Area8508501,675508759751,850531,0501,2752,32555
Non-Dollar Area1,0003751,375271,0003251,300258255251,35039
Continental EPU Countries5,6505,80011,425516,5506,35012,875497,1756,25013,40047
United Kingdom2,5502482,79892,0501062,15651,8003722,17217
Other Sterling Area6754,3255,000867004,0004,700857003,8254,52585
All Other Countries8252,6253,475768753,1253,975788503,1504,02579
1957
World37,00015,90052,90030
World minus United States14,14315,90030,04353
Canada1,1007361,83640
Latin America1,9001,9003,80050
Dollar Area1,2001,5502,72556
Non-Dollar Area7003501,05033
Continental EPU Countries7,9756,62514,57545
United Kingdom1,6007742,37433
Other Sterling Area7003,3504,05083
All Other Countries8502,5253,37575
Sources: For 1928, “The Adequacy of Monetary Reserves,” Staff Papers, Vol. III, No. 2 (October 1953), pp. 181-227; for 1938, International Financial Statistics (IFS), December 1954; for 1949, IFS, August 1955; and for 1937 and 1950-57, IFS, June 1958. Data for 1948 were prepared but not published in revised form. Totals may not equal sum of items because of rounding.
Sources: For 1928, “The Adequacy of Monetary Reserves,” Staff Papers, Vol. III, No. 2 (October 1953), pp. 181-227; for 1938, International Financial Statistics (IFS), December 1954; for 1949, IFS, August 1955; and for 1937 and 1950-57, IFS, June 1958. Data for 1948 were prepared but not published in revised form. Totals may not equal sum of items because of rounding.
Appendix Table 3.Reconciliation of Foreign Exchange Assets and Liabilities, 1947-57(In millions of U.S. dollars)
19471948194919501951195219531954195519561957
World Total
Total gross assets13,90013,90010,85013,60013,00013,30014,25015,25015,75016,40016,050
Liabilities of U.S.1,8502,9003,0504,4504,0505,2506,0507,0007,9008,6008,300
Liabilities of U.K.12,14710,7747,4147,7757,6466,3286,8256,9806,5916,2205,833
EPU liabilities4026651,0771,2721,1089941,0861,269
BIS deposits852108250192364352465412424409
Excess of reported assets–105174278723447281–249–303–14770239
Canada
Total gross assets2326106361,190984979841882776841736
Liabilities of U.S.2155966311,162937975832870767833728
Liabilities of U.K.1713528474912988
Latin America
Dollar Countries
Total gross assets2752753253754756757258259751,2751,550
Liabilities of U.S.3754005503504506257008009501,1501,400
Excess of reported assets–100–125–225252550252525125150
Non-Dollar Countries
Total gross assets1,2751,125725925500425550375325525350
Liabilities of U.S.200250250350175175200225225275150
Liabilities of U.K.9475442241261601711222259087
Excess of reported assets12833125144916523323812875160113
Continental EPU Countries
Total gross assets2,0502,3252,4752,9753,3504,1255,0005,8006,3506,2506,625
Liabilities of U.S.6507006751,1001,1001,6752,4503,3504,0253,9003,725
Liabilities of U.K.1,6891,245997879918669624683596540722
EPU liabilities1776651,0771,2721,1089941,0861,269
BIS deposits852108250192364352465412424409
Excess of reported assets–297328695569475340302197323300500
United Kingdom
Total gross assets208404402768174458246248106372774
Liabilities of U.S.5925133840013534621821270333673
EPU liabilities225
Excess of reported assets149153641433911228363639101
Other Sterling Area Countries
Total gross assets7,5506,6754,4004,9504,6504,0504,4754,4004,0753,9003,400
Liabilities of U.S.75507510075150200200225200200
Liabilities of U.K.7,1736,8204,7385,3535,0704,5235,0445,0594,7934,7344,333
Excess of reported assets302–195–413–503–495–623–769–859–943–1,034–1,133
Rest of the World
Total gross assets2,2752,4501,8502,4002,8502,5752,4252,7003,1753,2252,600
Liabilities of U.S.5006255001,0001,1251,3251,4001,3001,6501,8751,375
Liabilities of U.K.2,3212,1521,4501,3891,4501,1141,0361,2041,168848683
Excess of reported assets–550–327–10011275136–11196357502542
Sources: Data for 1950-57 were published in International Financial Statistics (IFS), July 1958. Data for 1947-49 were compiled by the Fund staff on the same basis. These data were derived from the statistics on foreign assets given on the country pages of IFS and defined in the notes to these country pages. For a description of the construction of, and the problems related to, this table for the period beginning with 1952, see IFS, July 1956, pp. 16-17; for earlier years, see the June 1953 issue, pp. x-xi. This table reconciles the total of exchange reserves reported by the holders with the official holdings by countries of dollar balances, as reported by the United States, and the holdings by countries of all sterling balances (official and other) as reported by the United Kingdom. In some cases, the U.S. reports of official holdings have been adjusted by the Fund. The totals of EPU liabilities and BIS deposits are as reported by these institutions.The figures for Errors and Omissions are the result of a number of factors, some positive and some negative: (1) Dollar liabilities as reported by the United States include assets held by the Soviet bloc. The dollar assets held by the Soviet bloc are neither reported by the Soviet countries nor included in the area totals of the table. This residual is therefore included in Errors and Omissions with a positive sign. (2) Sterling liabilities reported by the United Kingdom include those held by private holders, which therefore are represented by a negative sign. (3) Country holdings of assets other than dollars and sterling are included in the Total but are not reported as liabilities by their obligors; the result is a positive sign. There are other errors and omissions, the sign of which is undetermined.Data on sterling exclude liabilities to dependent areas and to Ghana.
Sources: Data for 1950-57 were published in International Financial Statistics (IFS), July 1958. Data for 1947-49 were compiled by the Fund staff on the same basis. These data were derived from the statistics on foreign assets given on the country pages of IFS and defined in the notes to these country pages. For a description of the construction of, and the problems related to, this table for the period beginning with 1952, see IFS, July 1956, pp. 16-17; for earlier years, see the June 1953 issue, pp. x-xi. This table reconciles the total of exchange reserves reported by the holders with the official holdings by countries of dollar balances, as reported by the United States, and the holdings by countries of all sterling balances (official and other) as reported by the United Kingdom. In some cases, the U.S. reports of official holdings have been adjusted by the Fund. The totals of EPU liabilities and BIS deposits are as reported by these institutions.The figures for Errors and Omissions are the result of a number of factors, some positive and some negative: (1) Dollar liabilities as reported by the United States include assets held by the Soviet bloc. The dollar assets held by the Soviet bloc are neither reported by the Soviet countries nor included in the area totals of the table. This residual is therefore included in Errors and Omissions with a positive sign. (2) Sterling liabilities reported by the United Kingdom include those held by private holders, which therefore are represented by a negative sign. (3) Country holdings of assets other than dollars and sterling are included in the Total but are not reported as liabilities by their obligors; the result is a positive sign. There are other errors and omissions, the sign of which is undetermined.Data on sterling exclude liabilities to dependent areas and to Ghana.
Appendix Table 4.Indices of World Trade and Manufacturing Activity, 1871-75 to 1936-38(Annual averages: 1913 = 100)
Volume of Trade1
PeriodManufactured articlesPrimary productsManufacturing Activity
1871-7522.4
1876-8032.131.224.5
1881-8540.038.030.4
1886-9045.144.536.8
1891-9545.951.442.6
1896-190048.060.253.6
1901-0563.270.867.0
1906-1077.983.179.9
1911-1395.697.094.3
1913100.0100.0100.0
192093.2
1921-2576.685.8103.2
1926-29104.3112.7138.9
193099.7119.8136.9
1931-3575.5107.2128.2
1936-3892.1116.6185.0
Source: League of Nations, Industrialization and Foreign Trade (1945), pp. 130-31 and 157. Data include the U.S.S.R.

These two volume indices are not combined into one index. The value of world trade in manufactured articles during the period was about 60 per cent of that in primary products, fluctuating only slightly above and below that percentage (ibid., p. 14).

Source: League of Nations, Industrialization and Foreign Trade (1945), pp. 130-31 and 157. Data include the U.S.S.R.

These two volume indices are not combined into one index. The value of world trade in manufactured articles during the period was about 60 per cent of that in primary products, fluctuating only slightly above and below that percentage (ibid., p. 14).

See above, p. 311.

If the countries now in the communist bloc are excluded, gold reserves of all countries were $4.0 billion in 1913 and monetary gold not included in reserves was $3.6 billion. If the United States is also excluded, country gold reserves were $2.7 billion and monetary gold not included in reserves was $2.9 billion. By 1928, monetary gold not included in reserves was less than 10 per cent of the amount held in reserve. See League of Nations, Interim Report of the Gold Delegation (1930), Annex XIII, “Gold: Demand and Supply,” by A. Loveday, Appendix II.

Writing in 1931, the Committee on Finance and Industry (Macmillan Committee) explained the strong prewar situation of the United Kingdom as follows: (1) London was then by far the most powerful financial center in the world and had sight claims on the rest of the world much greater than those of the world on her and could thus by the operation of her Bank Rate immediately adjust her reserve position. (2) The liquid resources held by foreigners in London and in secondary financial centers were relatively small. In contrast they were large in the 1920’s. Report (1931), pp. 124–26.

Cassel, Theory of Social Economy (1924), p. 453; Kitchin, in Interim Report of the Gold Delegation (1930), Appendix XI, p. 82.

League of Nations, Report of the Cold Delegation (1932), esp. pp. 16–23. Also, Cassel’s “Memorandum of Dissent,” p. 74, and Gregory’s “The Causes of Gold Movements Into and Out of Great Britain, 1925 to 1930,” League of Nations, Selected Documents on the Distribution of Cold (1931), esp. p. 28.

League of Nations (R. Nurkse), International Currency Experience (1944), p. 133.

Bank for International Settlements, Annual Report for 1937, p. 55.

Argentina, Brazil, Chile, Paraguay, Peru, and Uruguay.

The results are largely influenced by India and Australia, which hold the greater part of the reserves of the area.

Includes Egypt, Finland, Indonesia, Iran, Israel, Japan, Lebanon, Philippines, Spain, Syria, and Thailand.

As reported in The Globe and Mail (Toronto), October 24, 1957, and The Journal of Commerce (New York), October 29 and 31, 1957. Canada has a floating exchange rate. Whether the judgment would have been the same if it had a fixed rate is another question—the answer to which also depends upon the rate of capital imports and the balance of payments.

As reported in The Economist (London), January 25, 1958.

To the extent of $250 million the increase was due to a drawing from the Export-Import Bank. This drawing was additional to the earlier drawing of $561 million from the International Monetary Fund in December 1956 at the time of the Suez tension.

Federal Reserve Act, Sec. 11, para. 4. Requirements may be suspended for 30 days, and the suspension may be renewed for periods not exceeding 15 days.

O. L. Altman, “A Note on Gold Production and Additions to International Gold Reserves” Staff Papers, Vol. VI, No. 2 (April 1958).

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