Staff Papers

INTERNATIONAL MONETARY FUND STAFF PAPERS CONTENTS INTERNATIONAL LIQUIDITY AND THE BALANCE OF PAYMENTS Oscar L. Altman 329 SEASONALITY IN WORLD FINANCIAL AND TRADE DATA J. B. Gupta 353 EFFECTS OF EXCHANGE-RATE DEVALUATIONS AND REVALUATIONS ON RECEIPTS FROM TOURISM Andreas S. Gerakis 365 THE CALL MONEY MARKET IN FRANCE. .Hannan Ezekiel 385 THE ECONOMY OF TOGO. .U Tun Wai, Edwin L. Bornemann, Michel M. Martin, and Pierre E. Berthe 409 THE INTERNATIONAL MONETARY FUND, 1962-1965: A SELECTED BIBLIOGRAPHY Martin L. Loftus 470 Resumes 350, 363, 383, 406, 468 Resumenes 351, 364, 383, 407, 469 VOL. XII !\o. 3 \OVKMBKR 1965 ©International Monetary Fund. Not for Redistribution STAFF PAPERS J. KEITH HORSEFIELD, Editor DOROTHY WESCOTT, Assistant Editor Editorial Committee J. Keith Horsefield, Chairman Subimal Mookerjee Hans Aufricht Henry C. Murphy J. Marcus Fleming Brian Rose Charles L. Mervvin Ugo Sacchetti From the Foreword to the first issue: "Among the responsibilities of the International Monetary Fund, as set forth in the Articles of Agreement, is the obligation to 'act as a center for the collection and exchange of information on monetary and financial problems,' and thereby to facilitate 'the preparation of studies designed to assist members in developing policies which further the purposes of the Fund.' The publications of the Fund are one way in which this responsibility is discharged. "Through the publication of Staff Papers, the Fund is making available some of the work of members of its staff. The Fund believes that these papers will be found helpful by government officials, by professional economists, and by others concerned with monetary and financial problems. Much of what is now presented is quite provisional. On some international monetary problems, final and definitive views are scarcely to be expected in the near future, and several alternative, or even conflicting, approaches may profitably be explored. The views presented in these papers are not, therefore, to be interpreted as necessarily indicating the position of the Executive Board or of the officials of the Fund." The authors of the papers in this issue have received considerable assistance from their colleagues on the staff of the Fund. This general statement of indebtedness may be accepted in place of a detailed list of acknowledgments. Subscription: US$6.00 a volume or the approximate equivalent in the currencies of mosl; countries. Three numbers constitute a volume. Single copies may be purchased at $2.50. Special rate to university libraries, faculty members, and students: $3.00 a volume; $1.00 a single copy. Subscriptions and orders should be sent to: THE SECRETARY International Monetary Fund 19th and H Streets, N.W. Washington, D. C. 20431 ©International Monetary Fund. Not for Redistribution INTERNATIONAL MONETARY FUND STAFF PAPERS Vol. XII November 1965 5 No. 3 ©International Monetary Fund. Not for Redistribution This page intentionally left blank ©International Monetary Fund. Not for Redistribution International Liquidity and the Balance of Payments Oscar L. Altman * Selections from this paper were delivered at the Annual Meeting of the American Statistical Association, Philadelphia, Pennsylvania, on September 8,1965. HIS PAPER discusses three major ways of creating international Tliquidity: increasing official holdings of foreign exchange, principally dollars, under the gold exchange standard; creating reserves in the form of gold tranche positions through the operations of the International Monetary Fund (IMF); and creating reserves in the form of an internationally managed composite reserve unit.1 These three processes illustrate in a general way the creation of international liquidity concurrently with, after, and before the transactions they are designed to finance. Each of them is related to balance of payments deficits at a different point of time. Each of them has a different set of characteristics and a different collection of advantages and disadvantages. Each presents a different problem of management. I. Reserves Under the Gold Exchange Standard RATIONALE OF HOLDING OF DOLLARS BY FOREIGNERS Foreign exchange reserves in the form of dollars are created under present practices as follows: A resident of the United States pays dollars to a foreign individual, commercial enterprise, or bank. If these foreigners elect to keep these dollars, international liquidity is not created. The United States classifies these dollars as short-term external liabilities to nonofficial holders; foreign governments call them by equally * Mr. Altman, Deputy Director of the Research and Statistics Department, and Fund Historian, is a graduate of Cornell University and of the University of Chi- cago. He taught economics at Ohio State University and was on the staff of the National Resources Planning Board and of the French Supply Council. He was Director of Administration of the Fund until 1954. He is the author of Savings, Investment, and National Income and of a number of papers published in technical journals. 1 There have been many proposals for composite reserve units, and some initial proposals have subsequently been modified. This paper concentrates upon the essence of these proposals and disregards their differences. ©International Monetary32 9Fund. Not for Redistribution 330 INTERNATIONAL MONETARY FUND STAFF PAPERS formidable names, but do not consider them as part of their international reserves. When dollars are in this form, the United States has no obligation to convert them into gold. If nonofficial foreigners no longer wish to hold these dollars, their central banks will come into possession of them. International liquidity is created at this point, since the dollars are now added to the total of world reserves. If these dollars are subsequently used to buy gold from the United States, this additional international liquidity is destroyed. It is commonly said that the United States creates the international liquidity with which to finance its balance of payments deficit. It is also said that the U.S. balance of payments deficit is financed by short-term loans made by foreigners. Both these statements are gross simplifications and distortions of the relationship of dollars to the balance of payments and to international liquidity. The first statement is misleading because the United States does not create anything to finance its balance of payments deficit. Its residents transfer to foreigners dollars they already own. If residents do not own enough dollars, they borrow them from domestic commercial banks, which may or may not "create" them for this purpose, or from other sources, domestic or foreign. These transactions do not create international liquidity nor do they in most cases create dollars. The second statement is misleading because foreigners do not, except in one very formal sense, lend anything. Surely, no U.S. resident who holds dollars ever thinks he is lending them to the Government or to the economy of the United States. Why should nonresidents who hold dollars think they are lending them to the United States? A foreign bank keeps a stock of dollars to run its loan and foreign exchange business; foreign monetary agencies use dollars to keep the foreign exchange quotations of their currencies within stipulated limits, to finance fluctuations in their balance of payments, and to save for other purposes. The idea that foreigners who hold dollars are really lending to the United States has gained currency in the last few years for two reasons: first, it has been a very useful slogan in discussing the responsibilities of surplus and deficit countries to make balance of payments adjustments; and second, the concept of lending dollars is a formal associate of the idea that a balance of payments deficit needs to to be financed and that financing means using either liquid assets that are owned or funds that are borrowed. In reality, the creation of international liquidity in the form of dollars is affected, limited, or "managed," by five kinds of interlocking decisions: (1) the willingness of the United States to allow its external short-term liabilities to increase; (2) the willingness of the United States to convert dollars into gold for foreign monetary authorities; (3) the willingness of foreigners, other than governments, to hold dollars for their private ©International Monetary Fund. Not for Redistribution INTERNATIONAL LIQUIDITY AND BALANCE OF PAYMENTS 331 purposes; (4) the willingness of foreign monetary authorities to hold dollars as part of their international reserves; and (5) the willingness of foreign governments to acquire more international reserves in any form. Creation of international liquidity in this way reflects the separate judgments of tens of governments, thousands of business enterprises, and millions of individuals. Foreign holdings of dollars have been so belabored since 1958 that it is worth reminding ourselves that dollars are valuable and that residents and nonresidents alike hold them for their own advantage. The dramatic growth of the Euro-dollar market, and the recent development of security flotations outside the United States denominated in dollars, are merely two additional illustrations of the advantages foreigners find in holding dollars. At the end of 1964, foreign commercial banks, nonbanking enterprises, and individuals held $10.6 billion of short-term dollars, having increased their holdings by $700 million a year in the preceding six years.2 These dollars are a prime, flexible asset. Many foreign banks and other business enterprises find dollars indispensable for their business operations. Many individuals consider them a preferred form in which to save or hoard. When it is recalled that short-term rates of interest are lower in the United States than in almost all other industrial countries, and that there are substantial withholding and income taxes on interest earned by nonresidents, the desire to hold short-term dollars is seen in better perspective. It should be noted that the separate and voluntary decisions of foreign business enterprises and individuals to hold dollars do not depend upon the decisions of foreign monetary agencies to hold dollars as part of their international reserves.

Load more