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The article discusses how anti-recessionary policies involving low interest rates might put pressure on the foreign reserve position of the United States by bringing about a conversion of foreign-held dollar balances in gold. The article also examines the influence of monetary and fiscal measures on current account. The article's general conclusion is that those movements in foreign holdings between gold and dollar assets throughout the years, which could be attributed to interest-rate changes, account for only a small fraction of total foreign dollar holdings.

Under the gold-exchange standard, national currencies have supplemented gold as an international means of payment. Investigation of these policies is essential in assessing the adequacy of international reserves and the urgency of reducing the U.S. balance of payments deficit. This article extends and tests Kenen's model on reserve policies of central banks and show its implications for the U.S. balance of payments policy. Kenen built his model around a global function for central banks' reserve-asset preferences. If the foreign assets of nonofficical holders become very large, there is always a danger that the central banks will be flooded with dollars once these assets are liquidated. Such large-scale liquidations are most likely to occur when reserve currencies are weak and when it is most awkward to convert dollars into gold. The U.S. short-term investment position (official and private) is a very important determinant of reserve policies, while the return on dollar holdings plays only a minor role. The U.S. balance of payments measures will be more successful in reducing the gold drain, if they are aimed at countries that hold relatively few dollars as international reserves.

International reserves held by the monetary authorities of countries are not used to finance international transactions but to allow the maintenance of fixed exchange rates through intervention by the monetary authorities in the foreign-exchange market. That is to say, international reserves are held by the monetary authorities for precautionary motives namely, to be able to finance temporary balance-of-payments deficits. This forestalls the need for immediate adjustment to the imbalances and allows the country to pursue more independent domestic policies in the face of external disturbances. It is clear that the quantity of international reserves required for this purpose is closely related to the magnitude of the imbalances in the balance of payments. The International Monetary Fund and several economists cling to the traditional reserves/imports ratio as a measure of the adequacy of international reserves, but it is generally recognized that this ratio is useful only insofar as the volume of trade and the size of the imbalances are correlated.