ECONOMIC

The composition of reserves among different assets becomes an issue becauseeach asset (or borrowing facility) has its particular characteristicswhich determine its desirability and its most appropriate role relative toother types of assets. Moreover, one can affect the total volume of reservesonly by affecting the volume of individual components.The Bretton Woods Agreement sanctioned the use of both gold and foreigncurrencies as international reserves, but it did not make any provisionsfor international control of the level of those reserves. In practice the growthof the monetary gold stock was the result of the difference between newlymined gold and the private demand for gold. The growth of currencyreserves (mostly dollars) was the result of the difference between the netamount of foreign currency acquired through intervention in the foreignexchange market and the conversion of such currency balances into gold orother assets. The Bretton Woods Agreement did provide one managed sourceof borrowed reserves in the form of controlled access to a stock of foreigncurrencies managed by the International Monetary Fund.In the late 1960's two developments occurred which established somelimited international influence over reserve creation. First, as a result of anarrangement made among a number of central banks, it was agreed tostabilize the stock of monetary gold. Second, the member countries of theInternational Monetary Fund decided to create a new reserve asset, calledthe SDR, which can be created and distributed on the basis of internationalconsent. At the same time there was an increasing desire to limit the accumulationof currencies, but there was no effective means of doing so. The Committeeof Twenty has agreed that in a reformed international monetarysystem, "countries will cooperate in the management of their currency reserves."No agreement has been reached, however, on how this is to beaccomplished.The Issue of the NumeraireThe numeraire of the international monetary system is the common unitof account in terms of which the relative values of all currencies are measured.While it is of course possible to express the value of a currency interms of any other currency, it is usually convenient to adopt a single referencepoint. In addition to being a convenient measuring stick, thenumeraire is usually also the unit value in terms of which the obligationsof countries to the international monetary system and the claims of countrieson the system are expressed.Under the Bretton Woods system, gold served as the formal numeraire,though the dollar became the de facto numeraire. The use of the dollar asthe most commonly used unit of account was made legitimate by the officialtie to gold. It was convenient because the dollar increasingly became themost important official as well as private international reserve asset.When the convertibility of the dollar into gold was suspended in August1971, the tie between the dollar and gold was broken. It was thus nolonger possible to assume that international obligations of countries to the208