Gold and foreign exchange reserves


This definition must be seen in a historical context.

All nations have what might be called last ditch reserves with which to pay their internalional debts. They tend to be accumulated in the natural course of foreign trade. However, when it comes to settling a particular debt it is obviously necessary to have the apropriate currency. A vast quantity of euro is not always acceptable to a creditor in Brazil or Russia. For this reason national reserves need to be held in a currency that is internationally recognized and the only commonly accepted currency is, traditionally, gold; thus, goldproducing countries have a valuable natural source of international exchange, though they have to take care not to devalue that asset by overproduction.

After 1945 and until the mid 80´s the American dollar was virtually on a par with gold in the international exchange market, as it was a currency that was always acceptable, particulariy as its value in exchange was more likely to increase than to fall. In recent years the dollar has lost a great deal of its attraction due to lack of confidence in the stabihty of the American economy, and the emergence of other currencies backed by the economic strength of their countries, of origin, e.g. West Germany and Japan.
At one time the U.K. reserves were referred to as the gold and dollar reserves. The changing tides of fortune have led to this title being discarded in favour of gold and foreign exchange reserves. Considerable attention is paid to the level of these reserves and any tendency for them to fall calls for government action. The action taken must be such as to build up gold and currency reserves by attracting money from other countries. This can be done either by attempting to reverse an imbalance of payments by seeking means to bolster exports and discourage imports or by attracting deposits on capital account by offering high interest rates to foreign investors. The first method is necessarily longterm only, barring abrupt devaluation of the pound when exchange rates are fixed. and the second has the disadvantage of involving the obligation to pay out higher sums by way of interest, thus making it even more difficult to balance payments in future years. This second method, then, is acceptable only as a stop-gap whilst the first is given time to take effect.

The international position has, in recent times, been much changed by the setting up of various supranational institutions which can offer help to particular nations over varying periods, and at a price. The primary source of aid is the International Monetary Fund (I.M.F.), which can both sell or lend currency to a debtor country, within limits, and, more important, provide credit facilities over a stated period. This latter ability makes the I.M.F. akin to an international bank, with power to grant overdrafts or make loans as the situation requires. The U.K. has on more than one occasion received loans and credit facilities from the I.M.F. These have not always been used up but can provide considerable assistance in both propping up and rebuilding a falling economy. Such facilities are not included in the stated figure of reserves.

Present moves within the European Union towards a single common European currency, though more apparent in theory than in practice, would have the obvious advantage to the U.K. of strengthening reserves, as present holdings of the various European currencies would merge into one fund acceptable throughout ;rge into one fund acceptable throughout might even become closer to gold in terms of world-wide acceptability than the dollar

Reference: The Penguin Business Dictionary, 3rd edt.