Currency & Reserves

1880

The modern exchange market became tied to the price of gold

The article dates the modern exchange market, anchored to gold prices, to 1880. The countries significant by size of reserves in that year were Austria-Hungary, Belgium, the Canadian Confederation, Denmark, the Grand Duchy of Finland, the German Empire and Sweden-Norway. Official international reserves at this stage consisted only of gold and occasionally silver.

1890

Bank of England borrowed GBP 2 million from the Bank of France during the Baring crisis

During the Baring crisis, known as the Panic of 1890, the Bank of England borrowed two million pounds from the Bank of France. It stands as an early instance of central banks cooperating in the buying and selling of official international reserves to influence exchange rates and avert financial crisis.

1944–68

Bretton Woods system made the US dollar a reserve currency convertible into gold

Under Bretton Woods the US dollar functioned as a reserve currency and so became part of nations' official international reserve assets. From 1944 to 1968 the dollar was convertible into gold through the Federal Reserve System, embedding dollar holdings alongside gold in reserve portfolios.

1948–95

General Agreement on Tariffs and Trade began the multilateral regulation of trade, later institutionalised as the WTO

From the first GATT of 1948 to the foundation of the World Trade Organization in 1995, trade regulation became a major concern for most countries. The article links this trade framework to the context in which reserve accumulation policies are judged.

1968

United States restricted gold convertibility to central banks only

After 1968 only central banks, rather than individuals or institutions, could convert dollars into gold from official gold reserves. This narrowed the gold anchor to the official reserve system itself.

early 1970s

Many countries adopted flexible exchange rates after Bretton Woods ended

With the end of the Bretton Woods system in the early 1970s, many countries moved to flexible exchange rates. This reshaped the purpose of reserve holdings from defending fixed parities to managing floating currencies.

1973

Official gold reserves ceased to back any currency convertibility

After 1973 no individual or institution could convert US dollars into gold from official gold reserves, and since then no major currency has been convertible into gold from official reserves. Gold must be bought in private markets like any other commodity, though dollars and other currencies still function as official international reserves.

1980–89

Japan's foreign assets rose from 13% to an unprecedented 62% of GDP

By the end of 1980 Japan's foreign assets were about 13% of GDP, but by the end of 1989 they had reached 62%. The build-up was funded by selling yen to acquire dollar-based assets, which also swelled Japan's domestic debt.

1985

Japan began accumulating forex reserves to weaken the yen after the Plaza Accord

Shortly after the Plaza Accord of 1985, Japan's foreign exchange reserves began a sustained ascent, used primarily as a tool to weaken the surging yen. Because the reserves were almost exclusively invested in US Treasuries, the policy effectively extended a vast loan to the United States, making Japan the world's largest creditor and the US the largest debtor.

2016

Mexico warned China over triggering currency wars

The pattern of resisting appreciation through reserve accumulation was labelled a currency war by an exasperated Brazilian authority, and the theme returned in 2016 after the commodities collapse when Mexico warned China about triggering currency wars. The episode illustrates reserve policy as an instrument of international friction.

2013

IMF Article IV used debt and import-cover ratios to assess reserve adequacy

Article IV of 2013 employed metrics including total external debt to gross international reserves, reserves in months of prospective imports, broad money ratios, and short-term external debt on a residual maturity basis plus the current account deficit. These ratios formalised how reserve sufficiency is judged.

2011

IMF proposed a new metric for reserve adequacy

The IMF put forward a new measure to assess whether a country's reserves were adequate. It added to existing ratio-based assessments of reserve sufficiency.

2011

Swiss National Bank announced a ceiling of CHF 1.2 to the euro

After the franc appreciated against the euro from 1.5 to 1.1, the SNB announced a ceiling at CHF 1.2. Defending the cap drove further reserve accumulation, and by the middle of 2012 Swiss reserves reached 71% of GDP.

2010

Swiss National Bank accumulated reserves for 15 months then let the franc appreciate

After the 2008 crisis and during the initial stages of the Eurozone crisis the Swiss franc appreciated sharply, prompting the SNB to accumulate reserves for 15 months until June 2010 before letting the currency rise. The resulting devaluation of reserves cost CHF 27 billion in 2010, about 5% of GDP, partly offset by almost CHF 6 billion of profit from the surge in gold prices.

2008

IMF members approved a capital increase as Fund resources were strained

After the 2008 crisis the members of the Fund had to approve a capital increase because its resources were strained. The episode underlined the limits of pooled international reserves as a substitute for national holdings.

2007

US Federal Reserve organised central bank liquidity swaps during the financial crisis

As a new financial crisis emerged by 2007, the Federal Reserve arranged liquidity swaps with other institutions. During the 2008 crisis it instituted currency swap lines with several countries, alleviating dollar liquidity pressures and reducing the need for countries to draw down their own reserves.

2000s

China drove global interest in reserve accumulation through its trade surpluses

The dynamics of China's trade balance and reserve accumulation during the first decade of the 2000s was one of the main reasons for international interest in reserve policy. It framed the subsequent debate over excess reserves and currency management.

1997

East and Southeast Asian nations began a massive build-up of forex reserves after the Asian financial crisis

Before the 1997 Asian financial crisis central banks held meagre reserves by modern standards and were exposed to market pressures and alleged hot money manipulation. After 1997, East and Southeast Asian states judged their reserve levels too low and began accumulating heavily, partly out of doubt in IMF reserves. The cash piled into US and European debt had major implications for developed economies, crowding out investment.