NAC files, lot 60 D 137, “Documents”
Memorandum by the Staff Committee of the National Advisory Council on International Monetary and Financial Problems to the Council1
Document No. 1487
- U.S. Position on IMF Paper on Adequacy of Monetary Reserves2
To develop a U.S. position on the agenda item for the sixteenth session of ECOSOC which relates to the IMF study entitled The Adequacy of Monetary Reserves.
- The U.S. Delegation should leave to the representatives of the IMF the main burden of explaining or defending the study. However, the Delegation should concur in a proposal to take note of it and to express to the Fund ECOSOC’s appreciation and thanks.
- Should it appear appropriate, the Delegation might wish to comment as
- Agree with the Fund that monetary reserves are meant to cover deficits of a country which alternates between temporary deficit and surplus positions, but is in overall balance during the course of an “economic cycle” (presumably, a period of intermediate length of approximately 2–5 years).
- Agree further that a country can be expected to maintain reserves to cover all such temporary deficits, except perhaps those that arise from a depression abroad. In that event, a country in overall balance, but with insufficient reserves to cover deficits attributable to a foreign depression among other causes, might appropriately seek temporary assistance from the IMF.
- Accept the view that in the case of deficits experienced by a country with a basic, and not merely a temporary, imbalance the concept of adequate reserves is irrelevant. Reserves cannot ordinarily be expected to cover deficits of this type, since no amount would ever be adequate here. Instead, the country concerned should attempt to bring the imbalance under control through a proper combination of internal and external policies.
- Emphasize the necessity for countries that accumulate reserves to guard against relaxing their anti-inflationary efforts, or pursuing policies by which instability would be intensified.
- If the disproportionately large reserves held by the U.S. and certain other countries are made the subject of critical remarks, the Delegation might draw for its rebuttal on the section in the IMF study (pages 13–14) which explains the basic reasons for this skewed distribution.
In general, reserves should be used only to meet deficits in a country’s balance of payments that are temporary and followed by surpluses of like magnitude. Reserves used for deficits that are not temporary and reversible will of course face the threat of being exhausted. Ordinarily, drafts on reserves are thus appropriate for a country whose external accounts are at least balanced over a period of intermediate length, and whose surplus and deficit phases within the period describe a cycle (or series of cycles) in which the former phases are at least quantitatively equal to the latter.
A country with balanced accounts should aim at meeting all temporary deficits—except perhaps those due to depressions abroad—out of its own reserves. On the average, the reserves a country should hold over an “economic cycle” (a period whose duration is not defined in the IMF paper but might be considered not to exceed 2 to 5 years) would be an amount equal to the average temporary deficits incurred during the cycle, plus some margin for miscalculations and some margin to meet psychological needs. Adequate reserves at any given point within a cycle would of course be different. At a point on a cycle’s deficit phase, adequate reserves would theoretically equal the expected normal drains throughout the portion of the phase that remained; similarly, at a point on the surplus phase they would equal the accretions to reserves expected during the remainder of this swing, minus the full drain of the next deficit phase of the cycle—with some margin for miscalculations and psychological needs.
In this latter context, adequate reserves, which would vary over time essentially involve an estimate, therefore, of the outlook for future external balance, and the amplitude of fluctuations within that balance, and cannot be precisely measured. Their size would [Page 336] depend mainly on (1) the seasonal influences affecting the country’s balance of payments, (2) the extraordinary influences that may develop, such as crop failures, and (3) the variability of its import prices, and the prices of, and demand for, its exports.
When a country with cyclically balanced accounts is short of reserves in a deficit phase of a cycle, it may appropriately try to make the shortage good by borrowing. It should not, if this can be avoided, impose or intensify restrictions, or pursue deflationary policies to the extent of bringing about severe unemployment.
Reference has been made to the need for a country in external balance to aim at meeting out of its own reserves all temporary deficits except perhaps those due to a foreign depression. A country that endeavored to match its outgo and income over time, taking into account a possible heavy excess of outgo over income stemming from a slump abroad, would find itself accumulating more reserves than it would ordinarily require. For most countries this would be very difficult to accomplish under present circumstances. If and when countries that are otherwise in balance fall short of reserves as a result of a slump abroad, it would accordingly seem appropriate for them to turn to the IMF for assistance (as suggested in the IMF Annual Report for 1952).
Attention might be called to the thought expressed in the IMF paper that for a country in external balance four levels of adequate reserves can be identified, the first three of which, grouped on an ascending scale, would enable the country to maintain restrictions of varying intensity on a parallel descending scale. The implication is that as reserves rise, restrictions can fall.
It is misleading to speak of reserves as governing the level of restrictions unless the argument is properly qualified. High reserves may, of course, permit the relaxation of restrictions but such relaxation can be permanent only when future payments prospects indicate a surplus. Where prospects are merely for balance on the basis of existing restrictions, a relaxation cannot be expected to be permanent unless a country adopts other financial measures to maintain its balance. In general, balance-of-payments restrictions are basically determined by a country’s present and prospective trade and payments position, which in turn is a function of its exchange rate, internal financial situation, commercial policy or other considerations that are independent of the level of reserves. In view of the secondary relationship of reserves to restrictions, there would not appear to be a great advantage in dealing with reserves of different magnitudes as being adequate for or consistent with restrictions at different intensities.
Reserves of two levels of adequacy might however be distinguished for a country with balanced external accounts—one level [Page 337] that is adequate to cover even deficits arising from a depression abroad, and one that is adequate only to cover normal deficits arising in the absence of a disturbance of this type.
- Transmitted to the members of the NAC under cover of a memorandum by Glendinning, dated July 2, 1953, not printed. This memorandum was cleared by the NAC Staff Committee at its meeting of July 2, 1953.↩
- The reference paper was drafted in the IMF in April 1953. After revision in the IMF Executive Board in May, it was transmitted to the UN-ECOSOC in June (U.N. Document E/2454) for discussion at the Sixteenth Session of ECOSOC, held in Geneva, June 30–Aug. 5, 1953. Subsequently, a further revised version of the paper was issued by the IMF in October 1953; for text, see IMF, Staff Papers (Washington, 1954), vol. III, pp. 181–227.↩