Abstract
The present chapter reviews various approaches - old and new - toward assessing the need for reserves as developed since 1960. What is common to the approaches discussed here is that they aim at finding operationally useful indicators of the need for and the adequacy of international reserves. Pure analysis of the reserve need problem in which the operational aspect is a secondary consideration, is treated in chapter 6.l
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References
Robert Triffin, Gold and the Dollar Crisis, New Haven, 1960. This book reproduced to a large extent the contents of two articles by Triffin published in the Banca Nazionale del Lavoro Quarterly Review, viz. “The Return to Convertibility: or Convertibility and the Morning After” (March 1959) and “Tomorrow’s Convertibility: Aim and Means of International Policy” (June 1959). In earlier publications Triffin had already presented some of the same arguments as those given in his book of 1960; cf. his book Europe and the Money Muddle, New Haven, 1957, and his Wicksell Lecture for 1958, The Future of the European Payments System, Stockholm, 1958.
An extensive account of this debate is contained in IMF (J. Keith Horsefield), The International Monetary Fund 1945–1965, Volume I, 1977
and IMF (Margaret G. de Vries), The International Monetary Fund 1966–1971, Washington, 1977.
The new facility was explained, together with proposed (and later adopted) amendments of the Fund’s Articles of Agreement, in an IMF publication on the Establishment of a Facility Based on Special Drawing Rights in the International Monetary Fund and Modifications in the Rules and Practices of the Fund, Washington, April 1968. For an early and extensive commentary cf. Fritz Machlup, Remaking the International Monetary System: The Rio Agreement and Beyond, Committee for Economic Development Supplementary Paper No. 24, Baltimore, June 1968.
Cf. Proposal by the Managing Director on the Allocation of Special Drawing Rights for the First Basic Period: A Report to the Board of Governors of the International Monetary Fund, Washington, 1969. (Reproduced in IMF, International Reserves: Needs and Availability, Washington, 1970). For the decision of the Board of Governors of the Fund on the adoption of this proposal cf. IMF, Annual Report, 1970.
Cf. Communiqué of the Committee of Twenty, Rome, January 18, 1974. A system of managed floating as a more permanent institution came to be increasingly advocated; cf., for instance, C.J. Oort, Steps to International Monetary Order: The Exchange Rate Regime of the Future, Per Jacobsson Lecture, 1974.
Cf. Communiqué of the Interim Committee of the IMF, Kingston, January 9, 1976. For comments on the Jamaica agreement cf., for instance, Edward M. Bernstein et al, Reflections on Jamaica, Essays in International Finance No. 115, April 1976, and Tom de Vries, “Jamaica or the Non-Reform of the International Monetary System”, Foreign Affairs, April 1976.
Cf. in this connection IMF, Annual Reports, 1974 (p. 46), 1975 (p. 40), and 1976 (p. 42).
The main reason for his choice of the reserves/imports ratio as a reserve need indicator was the availability of ready-made calculations of this measure in the IMF study International Reserves and Liquidity (discussed in section ν of chapter 4). The second reason was that this ratio was the “most popularized in all postwar discussions of the subject, and that monetary authorities in many countries are apt to think today of reserve adequacy in these terms” (Gold and the Dollar Crisis, p. 36).
Ibid., p. 36.
See section ν of chapter 4.
Oscar L. Altman, “Professor Triffin on International Liquidity and the Role of the Fund”, IMF Staff Papers, May 1961, p. 164. See also: Oscar L. Altman, “Professor Triffin, International Liquidity, and the International Monetary Fund”, in Seymour E. Harris (ed.), The Dollar in Crisis, New York, 1961.
Cf. Robert Triffin, “Altman on Triffin: A Rebuttal”, in Seymour E. Harris (ed.), The Dollar in Crisis, New York, 1961, and Robert Triffin, “A Brief for the Defense”, IMF Staff Papers, May 1961.
Cf. Fritz Machlup, “Further Reflections on the Demand for Foreign Reserves”, (originally written in 1962) in his collected essays, International Monetary Economics, London, 1966, p. 262 (British edition). Machlup notes that: “The ratio of official gold and foreign-exchange holdings of all countries to their imports was 49 per cent in 1960; this was much less than the 117 per cent in 1938, but much more than the 21 per cent in 1913. Incidentally this “drastic decline” and “sharp increase”, depending on the year with which the comparison is made, teaches again the old lesson that one must not trust trends and rates of change derived from arbitrarily chosen base years”.
Cf., for instance, James W. Angeli, “The Reorganization of the International Monetary System: An Alternative Proposal”, Economic Journal, December 1961 (reproduced in Herbert G. Grubel (ed.), World Monetary Reform, Stanford, 1963; cf. p. 104); Richard E. Caves, “International Liquidity: Toward a Home Repair Manual”, Review of Economics and Statistics, May 1964, p. 175; IMF, Annual Report, 1964, p. 29; Milton Gilbert, Problems of the International Monetary System, Essays in International Finance No. 53, Princeton, April 1966, pp. 14–15; Fritz Machlup, “The Need for Monetary Reserves”, Banca Nazionale del Lavoro Quarterly Review, September 1966, p. 10.
This was emphasized by Sohmen; cf. Egon Sohmen, International Monetary Problems and the Foreign Exchanges, Special Papers in International Economics No. 4, Princeton, 1963, p. 19.
Cf. Fritz Machlup, Plans for Reform of the International Monetary System (originally published in 1962 in the Princeton series), in the collection of essays, International Monetary Economics, London, 1966, p. 296. See also Fritz Machlup, “Liquidité Internationale et Nationale”, Bulletin d’Information et de Documentation, Banque Nationale de Belgique, February 1962 (also reproduced in International Monetary Economics).
Baumöl found that “…. the square root formula implies that demand for cash rises less than in proportion with the volume of transactions, so that there are, in effect, economies of large scale in the use of cash.” Cf. William J. Baumöl, “The Transactions Demand for Cash: An Inventory Theoretic Approach”, Quarterly Journal of Economics, November 1952, pp. 550, 551 and 556. The same view was expressed by Professor Bent Hansen in his Central Bank of Egypt Lectures on International Liquidity, Cairo, 1962 (p. 8). More recent theoretical studies which also suggest the existence of economies of scale in reserve holding are: Julio H.G. Olivera, “A Note on the Optimal Rate of Growth of International Reserves”, Journal of Political Economy, March/April 1969; E. Streissler, “A Stochastic Model of International Reserve Requirements During Growth of World Trade”, Zeitschrift für Nationalökonomie, December 1969; Julio H.G. Olivera, “The Square-Root Law of Precautionary Reserves”, Journal of Political Economy, September/October 1971; and Lawrence H. Officer, “The Demand for International Liquidity: A Test of the Square-Root Law”, Journal of Money, Credit and Banking, August 1976.
Cf. International Monetary Economics, p. 297.
Weir M. Brown, The External Liquidity of an Advanced Country, Studies in International Finance No. 14, Princeton, 1964, p. 41.
Walter S. Salant and associates, The United States Balance of Payments in 1968, Brookings Institution, Washington, August 1963.
Italics added. Cf. IMF, Annual Report, 1964, p. 29.
The relation between the balance of payments adjustment process and the need for reserves is discussed in section vi Of this chapter.
IMF, Annual Report, 1964, p. 30.
In this connection the efforts of Mr. Høst-Madsen of the IMF to arrive at figures for the payments imbalance for the world as a whole, especially with regard to solving the problem of asymmetries between balance of payments surpluses and deficits may be mentioned. Cf. Poul Høst-Madsen, “Asymmetries Between Payments Surpluses and Deficits”, IMF Staff Papers, July 1962, and “Measurement of Imbalance in World Payments 1947–58”, IMF Staff Papers, November 1962. His contribution toward a shift in emphasis to examining the needed growth of reserves rather than the absolute level of reserve needs has been recognized by Fleming; cf. J. Marcus Fleming, Toward Assessing the Need for International Reserves, Essays in International Finance No. 58, Princeton, February 1967, p. 12 n.
Communiqué of Ministers and Governors of the Group of Ten of October 2, 1963. Members of the study group were the Deputies of the Ministers and Governors.
Cf. Ministerial Statement of the Group of Ten and Annex Prepared by Deputies, August 1964, par. 24 (reproduced in Robert V. Roosa, Monetary Reform for the World Economy, New York, 1965).
Cf. Fritz Machlup and Burton G. Malkiel (editors), International Monetary Arrangements: The Problem of Choice, Report on the Deliberations of an International Study Group of 32 Economists, Princeton, 1964, p. 33.
Cf. Rudolf R. Rhomberg, “Trends in Payments Imbalances 1952–64”, IMF Staff Papers, November 1966, and The Need for Reserves: An Exploratory Paper, Paper presented by the Fund staff in January 1966 (reproduced in International Reserves: Needs and Availability). In its study the Fund staff noted, inter alia, that the stock of reserves and the growth rate of reserves are to some extent substitutes for each other (for the theoretical foundation of this view, see section ii of chapter 6 below). For this reason it considered it desirable to analyse the need for reserves with regard to both the “stock approach” and the “flow approach”. The Fund staff contended that “in absence of other information” it would be best to assume that payments imbalances will tend to increase proportionally with the volume of international transactions, with imports forming a rough measure of the latter. Taking the absolute amount of the balance of payments disequilibrium of each country, without regard to sign, the staff found an average annual increase of about 6 per cent for the period 1952–64, which is of the same magnitude as the average growth rate of world trade in that period.
IMF, Annual Report, 1966, p. 14.
Cf. Quantitative Criteria for the Assessment of Reserve Needs, Paper prepared by the Fund staff in June 1969 (reproduced in International Reserves: Needs and Availability). The base period chosen was 1954–68, as it is long enough to analyse trends and because the global reserve situation was deemed to have been broadly satisfactory during this period (except perhaps for the years 1965–68).
The Fund staff noted that imports are an imperfect indicator of these magnitudes but “provide the most useful generally available measure” of them (ibid. p. 471).
The “normal” level was taken to be the average ratio during the period 1954–68.
More fundamental problems associated with this approach are discussed at the end of this section.
International Reserves: Needs and Availability, p. 466. A broad outline of a global model which would permit the quantification of the effects of changes in global reserves has been drawn up by Rhomberg; cf. section iv of chapter 6 below.
Cf. Proposal by the Managing Director in International Reserves: Needs and Availability.
The Need for Reserves: Calculation for the Period 1973 to 1977, unpublished staff memorandum of May 1972. See also section ν of chapter 6 below.
Payments imbalances were calculated by adding the balance of payments deficits as well as surpluses of sixty countries. The calculation used in the Fund’s 1964 Annual Report (see p. 67 above) was based on an aggregation of deficits only. The difference in method of calculation seems to be due to the fact that asymmetries in total balance of payments surpluses and deficits (other than those arising from changes in the world stock of monetary gold, and, since 1970, from the allocation of SDR’s) have been increasing rapidly in size since the late sixties. Such asymmetries are due mainly to the investment of official reserves on the Eurocurrency market, since such investments are entered as official reserve transactions of the country of the central bank which places funds in the market, whereas they appear as transactions of commercial banks in the balance of payments of the country receiving the funds.
See p. 68 above.
IMF, Annual Report, 1969, pp. 25, 26.
Robert Clower and Richard Lipsey, “The Present State of International Liquidity Theory”, American Economic Review, May 1968, p. 593.
Cf. J.J. Polak, “Money: National and International” in International Reserves: Needs and Availability, p. 512.
John Williamson, “Surveys in Applied Economics: International Liquidity”, Economic Journal, September 1973, p. 697.
John H. Makin, “Exchange Rate Flexibility and the Demand for International Reserves”, Weltwirtschaftliches Archiv, No. 2, 1974.
Based on the so-called square root law as developed by Olivera; cf. note 3 on p. 64 above.
Cf. Weir M. Brown, The External Liquidity of an Advanced Country, Studies in International Finance No. 14, Princeton, 1964.
The problem of the wide swings in the sum of payments imbalances which render trend calculations of little significance was referred to on p. 69 above.
Cf. Quantitative Criteria for the Assessment of Reserve Needs.
Walter S. Salant, “Practical Techniques for Assessing the Need for World Reserves”, in International Reserves: Needs and Availability, p. 292.
Cf. Leland B. Yeager, “The Misconceived Problem of International Liquidity”, Journal of Finance, September 1959.
Cf. The External Liquidity of An Advanced Country, pp. 22–23.
Cf. Egon Sohmen, “General Reserve Supplementation: Some Central Issues”, in IMF, International Reserves: Needs and Availability, especially pp. 29,
Cf. Egon Sohmen, “General Reserve Supplementation: Some Central Issues”, in IMF, International Reserves: Needs and Availability, especially 30.
Group of Ten, Ministerial Statement and Annex Prepared by Deputies, August 1964, par. 34.
Cf. Group of Ten, Report of the Study Group on the Creation of Reserve Assets, August 1965, par. 8.
Cf. Group of Ten, Communiqué of Ministers and Governors and Report of Deputies, July 1966, par. 34.
IMF, Annual Report, 1965, p. 16.
William Fellner, “Rules of the Game: Vintage 1966”, in William Fellner, Fritz Machlup, Robert Triffin and Eleven Others, Maintaining and Restoring Balance in International Payments, Princeton, 1966, pp. 13
William Fellner, “Rules of the Game: Vintage 1966”, in William Fellner, Fritz Machlup, Robert Triffin and Eleven Others, Maintaining and Restoring Balance in International Payments, Princeton, 1966, and 16.
Cf. Fritz Machlup, “The Need for Monetary Reserves”, Banca Nazionale del Lavoro Quarterly Review, September 1966 (Reprints in International Finance No. 5, Princeton, 1966).
Ibid., p. 26 of the reprint.
Ibid., p. 29.
Machlup (“The Need for Monetary Reserves”, p. 4) objects to the use of the term “demand for reserves”, because it implies an offer for something in exchange for the object demanded and therefore involves a price. It can be argued, however, that the price involved in the demand for reserves is the opportunity cost of holding reserves. The price is therefore the return foregone on investment of the resources that would have been available if there had been no accumulation of reserves.
There exists considerable confusion with regard to the terms “demand” and “need” for reserves in the literature. These concepts are briefly explained in the Introduction and more fully in section i of chapter 9 of this study.
Cf. section iii of chapter 4 above. Williamson (Economic Journal, September 1973, p. 694) has observed with regard to Machlup’s views that “It is paradoxical that the economist who so vigorously resisted the suggestion that businessmen are satisficers should have so readily assumed that central bankers are ! “
“The Need for Monetary Reserves”, p. 21.
Robert Clower and Richard Lipsey, “The Present State of International Liquidity Theory”, American Economic Review, May 1968.
Ibid., p. 594.
Ibid., p. 595.
M. June Flanders, “International Liquidity is Always Inadequate”, Kyklos, No. 3, 1969.
Flanders states (p. 523, note 8) that this conclusion is the complement of Machlup’s conclusion that: “There is no sense.… in which it can be said that the world total of monetary reserves is inadequate”. (“The Need for Monetary Reserves”, p. 33). For a later publication by Flanders, dealing with the determinants of the demand for reserves, see the Appendix.
See p. 24 above.
See p. 62 above.
Oscar L. Altman, “Professor Triffin on International Liquidity and the Role of the Fund”, IMF Staff Papers, May 1961, pp. 177–178. Altman concluded that these symptoms were absent during the years 1957–59 although the growth of reserves was much smaller than that of world trade during that period.
Robert Triffin, Gold and the Dollar Crisis, New Haven, 1960, p. 151. See also Leland B. Yeager, “The Triffin Plan: Diagnosis, Remedy and Alternatives”, Kyklos, No. 3, 1961, reproduced in Herbert G. Grubel (ed.), World Monetary Reform, Stanford, 1963; cf. p. 169.
Cf. Roy Harrod, “A Plan for Increasing Liquidity: A Critique”, Economica, May 1961, reproduced in World Monetary Reform (see especially p. 118).
Roy Harrod, “Liquidity”, in World Monetary Reform, p. 208.
Cf. Roy Harrod, “The Dollar Problem and the Gold Question”, in Seymour E. Harris (ed.), The Dollar in Crisis, New York, 1961 (especially pp. 47–48).
Harry G. Johnson, “International Liquidity: Problems and Plans”, Malayan Economic Review, April 1962, reproduced in World Monetary Reform; op. cit. p. 373.
Cf. Report of the Nederlandsche Bank for the year 1960, p. 12.
Cf. Report of the Nederlandsche Bank for the year 1964, p. 18.
Group of Ten, Ministerial Statement and Annex prepared by Deputies, Paris, 1964, par. 24.
Group of Ten, Report of the Study Group on the Creation of Reserve Assets, Paris, 1965, par. 10.
Cf. Gottfried Haberler, Money in the International Economy, London, 1965, pp. 40–41.
IMF, Annual Report, 1965, p. 14.
IMF, Annual Report, 1966, p. 10. For a similar view see Milton Gilbert, Problems of the International Monetary System, Essays in International Finance No. 53, Princeton, April 1966, pp. 19–20. Gilbert also mentioned exchange instability and payments restrictions as the most likely symptoms of a shortage of reserves and added a third symptom, viz. deteriorating standards for the use of official borrowing facilities.
IMF, Annual Report, 1966, p. 12.
Report of the Nederlandsche Bank for the year 1965, p. 26.
See p. 80 above.
IMF, Annual Report, 1969, p. 26.
Cf. Proposal by the Managing Director in International Reserves: Needs and Availability.
Cf. Victor Argy, Comments on paper by Ahtiala, in International Reserves: Needs and Availability.
Cf. John Williamson, “Surveys in Applied Economics: International Liquidity”, Economic Journal, September 1973, p. 733.
Cf. Robert A. Mundell, International Economics, London, 1968, chapter 13.
Cf. Stephen Marris, The Bürgenstock Communiqué: A Critical Examination of the Case for Limited Flexibility of Exchange Rates, Essays in International Finance No. 80, Princeton, May 1970, p. 58.
Cf. John Williamson, The Choice of a Pivot for Parities, Essays in International Finance No. 90, Princeton, November 1971, pp. 15–22.
IMF, Annual Report, 1972, p. 34.
In the IMF’s 1971 Annual Report it was stated that the direct influence of a certain global reserve level on the world conjunctural situation is limited and indirect, whereas increases in reserves (other than SDRs) have a more direct and more substantial inflationary effect (p. 32).
Cf. IMF, International Monetary Reform: Documents of the Committee of Twenty, pp. 163–164.
Cf. IMF, Annual Report, 1974, p. 39.
For a discussion of the motives for holding reserves cf. section i of chapter 6.
The situation is different for a reserve currency country, which need not suffer a drain of (gross) reserves while in deficit (cf. section vi of chapter 6). The adjustment process also functions quite differently under a system of floating exchange rates. The need for reserves under such a system is discussed in chapter 7.
This concept is explained more fully on p. 90 below.
Including the degree up to which the automatic adjustment process is allowed to work. To let it work undisturbed without taking any accentuating, neutralizing or compensating measures can also be a conscious policy decision.
Cf. W.M. Scammel, International Monetary Policy, London, 1957, p. 75.
Cf. Thomas Balogh, “International Reserves and Liquidity”, Economic Journal, June 1960. Balоgh’s views were discussed at some length in section ν of chapter 4 above.
Fritz Machlup, International Monetary Economics, London, 1966, p. 264.
IMF, Annual Report, 1963, p. 49.
Cf. Oscar L. Altman, “The Management of International Liquidity”, IMF Staff Papers, July 1964.
Italics inserted.
Altman, p. 238.
It is, for instance, alluded to in the objectives of the OECD, which are, inter alia, “to achieve the highest sustainable economic growth and employment and a rising standard of living in member countries, while maintaining financial stability.…” (Article 1(a) of the convention on the Organisation for Economic Co-operation and Development). The treaty of the European Economic Community mentions such objectives as a balanced expansion, greater stability and an increasing improvement in the standard of living (EEC Treaty, Article 2).
IMF, Annual Report, 1964, p. 27. There appears to be an element of wishful thinking in this statement. It seems doubtful that in reality all countries attach such high importance to the maintenance of stable prices.
Artide XXVIII, Section 1(a) of the (proposed) second amendment of the Articles of Agreement of 1976.
The qualification that SDR creation should seek to prevent deflation and not lead to inflation appears to have been explicitly added in view of the fact that the Fund’s purposes (as described in Article I of the Articles of Agreement) do not explicitly mention the maintenance or attainment of price stability.
Reserves and the Adjustment Process, Paper prepared by the IMF staff in June 1969. Reproduced in International Reserves: Needs and Availability; op. cit. p. 458.
Op. cit., p. 459.
For the background of this approach see section ii of chapter 6 below.
Cf. Walter S. Salant, “Practical Techniques for Assessing the Need for World Reserves”, in International Reserves: Needs and Availability.
Rudolf R. Rhomberg, “Estimation of Effects of Changes in International Reserves”, in International Reserves: Needs and Availability, p. 158.
Cf. Salant, p. 276. Salant points out that the estimation of the target value of payments imbalances would ideally require an econometric model of the world economy. On the question of a world macro-model cf. section iv of chapter 6 below.
Cf. IMF, Annual Report, 1964, p. 26.
The IMF has defined “reserve ease” as a description of an existing reserve situation without any implication as to its adequacy; cf. IMF, Annual Report, 1969, p. 21.
Reserves and the Adjustment Process, reproduced in International Reserves: Needs and Availability; op. cit. p. 457. For an interesting view on the impact of the supply of international liquidity on the adjustment process, cf. Richard N. Cooper, “International Liquidity and Balance of Payments Adjustment”, in International Reserves: Needs and Availability.
For a description of the adjustment process cf., for instance, Working Party 3 of the Economic Policy Committee of the OECD, The Balance of Payments Adjustment Process, Paris, 1966, and Federal Reserve Bank of Boston, The International Adjustment Mechanism: Proceedings of the Monetary Conference of October 1969. According to Working Party 3 the adjustment process is “essentially a question for governments as to how to achieve a wide range of aims of an economic, political and social nature with the limited number of policy instruments…. available to them.” (The Balance of Payments Adjustment Process, par. 16).
Cf. Tibor Scitovsky, Economic Theory and Western European Integration, London/Stanford, 1958, pp. 101–102.
James Tobin, “Economic Progress and the International Monetary System”, (1963), reproduced in Bela Balassa (ed.), Changing Patterns in Foreign Trade and Payments, New York, 1964.
Peter B. Kenen, “Financing and Adjustment: The Carrot and the Stick”, in Maintaining and Restoring Balance in International Payments (William Fellner, et al), Princeton, 1966, p. 151 et seq.
Roy Harrod, “The Speed of Adjustment”, in Maintaining and Restoring Balance in International Payments, pp. 137–143.
Cf.,for instance, Otmar Issing, “Zur Frage der Objektiven Beurteilung einer’angemessenen’ Versorgung mit Internationaler Liquidität” (On the Question of an Objective Assessment of an Adequate Supply of International Liquidity), Schweizerische Zeitschrift für Volkswirtschaft und Statistik, March 1967.
Cf. Jürg Niehans, “The Need for Reserves of a Single Country”, in International Reserves: Needs and Availability, who notes that: “The different assessment of reserve needs reflects both differences in welfare judgment and differences in views about the working of the macroeconomic system.” (p. 55).
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de Beaufort Wijnholds, J.A.H. (1977). Various approaches. In: The Need for International Reserves and Credit Facilities. Publication of the Netherlands Institute of Bankers and Stock Brokers, vol 31. Springer, Boston, MA. https://doi.org/10.1007/978-1-4684-6954-7_6
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