Thursday, August 18, 2016

FRB - AG - Remarks by Chairman Alan Greenspan - Currency reserves and debt

Remarks by Chairman Alan GreenspanCurrency reserves and debt

Before the World Bank Conference 

on Recent Trends in Reserves Management, Washington, D.C.

April 29, 1999

One way to address the issue of the management of foreign exchange reserves is to
start with an economic system in which no reserves are required. There are two.
The first is the obvious case of a single world currency.
The second is a more useful starting point: a fully functioning, fully adhered to,
floating rate world.

All requirements for foreign exchange in this idealized, I should say, hypothetical,
system could be met in real time in the marketplace at whatever exchange rate prevails.
No foreign exchange reserves would be needed.

If markets are functioning effectively, exchange rates are merely another price
to which decisionmakers--both public and private--need respond.
Risk-adjusted competitive rates of return on capital in all currencies would converge,
and an optimized distribution of goods and services enhancing all nations' standard
of living would evolve.

Only liquid reserves denominated in domestic currency would be required by public
and private market participants. And in the case of a central bank of a fiat currency regime,
such reserves can be created without limit.

But, clearly, the real world is not perceived to work that way..

Read in full here ->


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