The Review of Economics and Statistics Vol. 51 No. 3 1969
Adequacy of International Means of Payments
Abstract
It has been argued recently that the size of the holdings of foreign exchange by commercial banks provides a better measure of the adequacy of international means of payments than the size of official reserves.' At first glance this appears obvious for it is these commercial holdings of foreign exchange which are used directly for financing international exchange while official reserves are used only to finance imbalances in countries' balance of payments which result from the maintenance of relatively exchange The argument becomes less clear, however, when one stops to question what is meant by the adequacy of international means of payments. Within a free market context, what does it mean to say that commercial holdings of foreign exchange are inadequate? The commercial interests involved clearly can not feel that their foreign exchange holdings are inadequate (apart from a desire to have higher wealth positions in general) for otherwise they would simply exchange domestic for foreign currency until their foreign currency holdings were no longer inadequate. In other words, from the point of view of commercial banks and traders, at any point in time would merely mean a temporary disequilibrium situation. traders on both sides of the market felt their foreign currency holdings to be inadequate then they would in effect merely swap currencies with one another (a practice now common between central banks). the size of the desired swaps did not match on each side of the market, then under flexible rates the price of the relatively scarce currency would be bid up until desired holdings equalled actual holdings, i.e., until foreign currency holdings were adequate. As Yeager has put it, If no authority concerned itself with gold and foreign exchange, and if private persons, firms and dealers such as banks, found their holdings inadequate, they would bid for additional amounts, thus depressing the home currency on the exchange market, stimulating exports relative to imports, and making available the quantity of foreign exchange desired at the new level of exchange rates. 2 Under a fixed rate system the increased demand for foreign currency would be reflected in official reserve losses. In either case, observed foreign currency holdings would always reflect desired or adequate holdings except for the effects of transitory disequilibrium. We could, however, meaningfully speak of inadequacy in terms of a discrepancy between desired and actual holdings if a free market does not exist. In other words, where exchange controls, etc. effectively prevent traders from satisfying their demands for foreign balances then we could unambiguously say that observed holdings were inadequate. As is brought out in Heller's figures,3 the rapid expansion of holdings of foreign currencies by banks in industrial Europe as postwar exchange controls were loosened suggests that there was considerable inadequacy at the beginning of the period. one accepts the argument put forward here that one can meaningfully speak of an inadequacy of commercial holdings of foreign exchange only where traders do not face free markets for foreign exchange, then inadequate commercial holdings of foreign exchange are themselves a reflection of an inadequacy of official reserves (at least from the point of view of the country in question). In other words, inadequacy of commercial holdings of foreign exchange is a reflection of impediments placed on the foreign exchange market which in turn reflect that the government of the country in question feels that its official reserve holdings are below their desired level, i.e., that they are inadequate. At first glance Heller's figures would seem to contradict this argument. Over the 1951 to 1966 period the global ratios of official reserves to imports and banks' foreign exchange holdings to imports show quite different trends, the former falling by almost one half while the latter almost tripled. Hence, Heller's conclusion that, while according to
- DOI
- 10.2307/1926572
- Volume
- 51
- Issue
- 3
- Pages
- 373
- Sources
- openalex crossref