ECONOMIC

in relation to the country's liquid dollar obligations and the major centralbanks had abstained from converting large amounts of dollars into gold,despite the fact that they were continuing to accumulate a large numberof dollars. The Committee of Twenty has agreed that in the context oflong-term monetary reform it would be desirable to establish the convertibilityof (the dollar as well as other) currencies into primary reserve assetsinsofar as it is decided to stabilize currencies within agreed margins. Butwhether such an obligation to convert should be mandatory or at the optionof the country acquiring the currency is still at issue.The Level, Distribution, and Composition of ReservesTo support the value of their currencies in the foreign exchange market,most countries maintain an inventory of foreign currencies. In addition,countries accumulate international assets, such as SDR's or gold, whichcan be used to buy foreign currencies from the governments issuing them.Finally, countries maintain lines of credit with each other and with theInternational Monetary Fund so that they can borrow additional amountsof foreign currency when the need arises. Some might argue that the reservesa country keeps are its own affair. It is widely believed, however, that thereserves which countries keep are of interest to the whole world communitybecause they affect the behavior of governments and in doing so also affecteveryone else. There are three separate, though interrelated, aspects of the socalledliquidity issue: the level of world reserves; their distribution amongcountries; and their composition in terms of the types of assets held andthe kind of borrowing facilities that are readily available.The level of world reserves is important because if the level is not "right,"countries on balance may be induced to adopt policy measures that have adisruptive effect on other countries. For instance, some fear that if reservesare inadequate, countries may not prevent changes in exchange ratesconsidered excessive by the international community; or they may not geardomestic demand management policies to appropriate employment objectives,or they may impose controls on imports or capital outflows. On theother hand, it is feared that if reserves are excessive countries in paymentsdeficit may keep their exchange rates at a fixed level long after an adjustmentwould have been desirable; or they may escape financial disciplice andthus create an inflationary problem for themselves as well as for others; orthey may impose controls on exports or capital inflows.The distribution of reserves among countries becomes an issue once thedecision is made to manage the global level of reserves. Judgment about theadequacy of world reserves from the point of view of any one country mustbe based on the relative distribution of those reserves among countries. Thus,while some countries might consider world reserves to be "excessive," theymight not be willing to give up any of their own reserves. From the pointof view of countries with inadequate reserves, global reserves can be excessiveonly to the extent that other countries are willing to give up "excess"reserves.207