of assistance could be provided to the developing nations by distributing to them the largest part of any new reserves that are created as a consequence of reform. For the creation of new reserves effects a saving of real resources, and these resources might just as conveniently accrue to the less developed countries as to any others. Unfortunately, though, the idea of a link is usually resisted the problems of international liquidity and economic development are distinct, it is said; the less developed countries should not be granted "something for nothing." As a matter of fact, the opposite is the case: the two problems are already closely linked by the fact that the less developed countries at present must actually pay a very considerable "something for nothing" because of the strikingly inequitable distribution of the adjustment burden. They pay the largest total of adjustment costs without even the benefit of a quid pro quo. It seems only reasonable, therefore, since monetary reform does involve a saving whose distribution is in any event a matter of deliberate choice, to let the main benefit accrue to those who until now have been obliged to pay the highest price for the privilege of membership in the system. And it seems only equitable to let the benefit accrue roughly in proportion to the present distribution of adjustment costs.

This is not to suggest that an approach to the problem of economic development via monetary reform is preferable to all other types of aid schemes. It is my intention only to demonstrate that there is a logical connection between these two areas of concern. In fact, all approaches to the development problem are useful; all are preferable to the vicious circle of adjustment vulnerability and reserve exhaustion that presently entraps the less developed countries of the world.

Sincerely,

BENJAMIN J. COHEN, Assistant Professor of Economics.

NOTES

1. Working baiances retained directly in foreign currencies-primarily dollars, in practice-should
not exceed 10 percent of 1968 exports and are assumed (in column (b)) to average about 5 percent.
This assumption is made only for illustrative purposes. Agreed levels of working balances should be
a matter for negotiation and should take into account foreseeable needs for proximate debt repay-
ments and the countries' very different exposure to shifts of short-term funds between major money
markets.

2. Reserves proper-i.e., beyond working balances-as shown in column (c). They should be
held exclusively in gold and/or deposits with the conversion account:

a. The proportion retained in gold should not exceed, as a maximum, the average proportion of the
participating countries' gold holdings to their total reserves beyond working balances; i.e., as of
December 1968, 62.3 percent for a worldwide conversion account and 73.3 percent for a conversion
account limited to the former gold pool countries; see cols. (e) and (g).

b. The remainder should be held in minimum, and in free, deposits with the conversion account.
3. Cols. (f) and (h) show the maximum gold shifts that would have resulted from such an agree-
ment, as of Dec. 31, 1968, and facilitate a comparison of the implications of these 2 alternative ar-
rangements.

4. If countries were allowed to convert into gold the portion of their deposits which exceeds the
agreed minimum, only when their working balances exceed 10 percent of exports, maximum gold
withdrawals would have been cut sharply-

a. in the case of a worldwide conversion account, from $7.38 billion to $1.69 billion, releasing $5.69 billion of gold to the account for agreed interventions in the private gold market;

b. in the case of a gold pool countrys' conversion account, from $2.66 billion to $0.69 billion,
releasing $1.87 billion for such interventions.

5. Insofar as countries did not exercise fully their rights to gold withdrawals, the gold needed to
cover actual withdrawals and agreed market interventions would be called by the account from the
countries whose ratio of gold reserves to total reserves is highest (and ratio of account deposit to
total reserves therefore lowest). This would, over time, tend toward a gradual harmonization of re-
serve composition.

6. Subsequent surpluses and deficits would be financed first through accretions to, or drawings from,
each country's working balances. Deficit countries would draw freely upon their deposit with the
account to reconstitute depleted working balances, while surplus countries would deposit with the
account the accretions to working balances in excess of the agreed ceilings. The obligation of all
countries, however, to keep in deposit with the account a minimum proportion of their gross reserves
would insure sufficient gold deposits by deficit countries to the account to balance allowable gold
withdrawals by surplus countries.

Source: International Financial Statistics, April 1969.

Chairman REUSS. The subcommittee will now stand in adjournment. (Whereupon, at 3:20 p.m., the committee adjourned, to reconvene subject to the call of the Chair.)

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