What is a 'Monetary Reserve'

A monetary reserve is a central bank's holdings of a country’s currency and precious metals. The central bank holdings allow for the regulation of the nation's currency and money supply, as well as manage the transactions in global markets. Monetary reserves help governments to meet current and near-term financial obligations. Reserves are an asset in a country’s balance of payments. The U.S. dollar is the dominant reserve asset, so most nations central banks hold much of their reserves in U.S. dollars.

BREAKING DOWN 'Monetary Reserve'

Monetary reserves holdings are known as monetary aggregates and are broad categories which define and measure the money supply in an economy. In the United States, the standardized monetary aggregates include physical paper and coins, money market shares, savings deposits, and other items. 

A country's central bank monetary authorities will use their readily available reserve assets to fund currency manipulation activities within the nation's economy. Central banks will also maintain international reserves which are funds that the banks can pass among themselves to satisfy global transactions. Reserves themselves can either be gold or a specific currency, such as the dollar or euro.

History of the Monetary Reserve

The current system of holding currency and commodities dates from 1971-73. At that time, President Richard Nixon enacted price controls and ended the U.S. dollar’s convertibility to gold in response to rampant inflation plus the recession, or stagflation, as well as pressure on dollar and gold prices.

This change marked the end of the Bretton Woods Agreement era. The 1944 Bretton Woods Agreement set the exchange value for all currencies in terms of gold. Member countries pledged that central banks would maintain fixed exchange rates between their currencies and the dollar. If a country's currency value became too weak relative to the dollar, the central bank would buy its own currency in foreign exchange markets to decrease supply and increase the price. If the currency became too expensive, the bank could print more to increase supply and decrease price and thus demand.

Because the United States held most of the world's gold, a majority of countries pegged their currency value to the dollar instead of to gold. Central banks maintained fixed exchange rates between their currencies and the dollar. The value of the dollar increased even though its worth in gold remained the same, making the U.S. dollar effectively a world currency. This discrepancy eventually led to the collapse of the Bretton Woods system.

Monetary Reserve before Bretton Woods

Until World War I, most countries were on the gold standard, in which they guaranteed to redeem their currency for its value in gold. But to pay for the war, many went off the gold standard. This caused hyperinflation as money supply exceeded demand. After the war, countries returned to the gold standard.

During the Great Depression in response to the 1929 stock market crash, foreign exchange and commodities trading increased, which raised gold prices, so people exchanged dollars for gold. The Federal Reserve raised interest rates to defend the gold standard, worsening the crisis. The Bretton Woods system gave countries more flexibility than strict adherence to the gold standard, with less volatility than with no standard. A member country could change its currency's value to correct any disequilibrium in its current account balance.

  1. Bretton Woods Agreement

    The Bretton Woods Agreement is a landmark system for the management ...
  2. Key Currency

    A key currency used is money issued by stable, developed country ...
  3. Managed Currency

    A managed currency is one whose monetary exchange rate is affected ...
  4. National Currency

    A national currency is a legal tender issued by a central bank ...
  5. Fixed Exchange Rate

    A fixed exchange rate is a regime where the official exchange ...
  6. Nixon Shock

    A term used to describe the actions taken by former U.S. President ...
Related Articles
  1. Trading

    Forex: World's Biggest Market A Relative Newcomer

    Unlike the stock markets, the forex market is a truly new market. We’ll take a brief look at its origins and how it works today.
  2. Investing

    Who Holds The Largest Gold Reserves?

    The biggest holders of gold account for 30,500 of the world's estimated 160,000 tonnes.
  3. Insights

    A Primer On Reserve Currencies

    For nearly a century, the U.S. dollar has served as the world's premier reserve currency, but the future is uncertain.
  4. Insights

    The US Will Remain the World's Reserve Currency

    Learn why the U.S. dollar is not in any danger of losing its reserve currency status and understand how China is pushing the yuan to be a reserve currency.
  5. Insights

    Why China Is Buying Gold at a Rapid Pace (BCS)

    The People's Bank of China has been buying up extra gold reserves at a breakneck pace. Could this signal a challenge to the U.S. dollar?
  6. Investing

    Does it Still Pay to Invest in Gold?

    Gold's appeal dates back thousands of years and investors now have several different options when it comes to investing in the royal metal. Find out whether gold can live up to the hype.
  7. Trading

    How Inflation-Fighting Techniques Affect The Currency Market

    Central banks use these strategies to calm inflation, but they can also provide longer-term clues for forex traders.
  8. Insights

    Central Bank

    They print money, they control inflation, they are known as the "lender of last resort". Check out the role of Central Bank nd how its role evolved overtime.
  9. Insights

    The Currency Board: Understanding The Government's Bank

    Currency board or central bank - what's the difference? Find out more about this little-known monetary authority.
  1. What is the gold standard?

    Learn more about the gold standard, including its complicated global history and its connection to the fiat system and the ... Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center