Optimum International Reserves and the Speed of Adjustment

Abstract

In the current debate on international monetary reform the protagonists can be grouped into two main camps. On the one hand, the AngloAmericans maintain that what is most urgently needed is a major addition to the stock of international reserves. They fear that without a larger supply of international means of payment countries will be forced to adopt measures which restrict trade and foreign payments and which interfere with the attainment of domestic policy goals. On the other hand, the Continentals stress the importance of faster adjustment on the part of countries which have deficits in their balance of payments. They argue that if governments make a determined effort to eliminate payments deficits as soon as they arise, the need for large injections of new reserves is considerably reduced. One group therefore sees the world economy as best served if countries are allowed to finance a deficit over an extended period, whereas the other regards less financing and greater speed in making payments equal to receipts as the key to improvement in the international monetary system.'