INTERNATIONAL LIQUIDITY IS ALWAYS INADEQUATE

Much of the recent literature on the adequacy of international reserves states that there should be enough reserves in the world so that countries can avoid undesirable and painful adjustment to balance of payments disequilibrium. But this undesirable adjustment, namely deflation and unemployment, is the only adjustment mechanism that exists under a system of fixed exchange rates. It follows from this that no amount of international reserves, short of infinity, can ever be enough. Furthermore, the existing system is one in which there is a built‐in bias toward disequilibrium. If countries differ in their willingness to permit some inflation in exchange for full or nearly full employment, the inflation prone countries will tend to incur deficits. They will avoid adjustment—that is, domestic contraction, as long as they have any reserves above what they consider to be minimally acceptable levels. The inflation‐avoiding countries, which will tend to be in surplus, will prefer to accumulate reserves rather than permit inflation. In such a world there is likely always to be a ‘shortage' of reserves, whatever the actual level of reserves may be. Copyright © 1969, Wiley Blackwell. All rights reserved