The Basics of The Monetary Reserve

by Investing School on July 6, 2011

That which backs up the value of a nation’s assets is considered its monetary reserve. In some cases it is as simple as holding sufficient commodities such as gold, silver or precious stones. In other cases, it is held in a foreign currency, such as the dollar. These reserves provide a cushion which allows central banks to carry out functions such as adding currency to the money supply or for settling foreign exchange contracts in the appropriate local currency.

In the case of the United States, the dollar was originally backed by gold deposits. Today the dollar is considered a fiat currency, one that is not pegged to gold reserves, although the Fed does keep a large quantity of reserves for short term contracts and liquidity. The size of a country’s reserves can significantly impact its ability to enter into transactions with foreign countries.

Currently, much of the world does business in the U.S. dollar. Transactions are pegged to the value of the dollar whether someone is selling wine in Chile or auto parts in Australia. The fact is though that the dollar is losing its power and its value. Part of that is a result of the number of loans that the U.S. currently holds and partly it is a factor of the changes in world economics.

Unfortunately, this isn’t a problem that can be solved simply by printing more currency. The imbalances in trade, lower prices for labor and materials in other countries and a great many other factors have created challenges for the stability of many nations monetary reserves.

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