ABSTRACT
Each country's overall economic policy is (or should be) centred round the problem of achieving as close an approximation as possible to the twin objectives of internal and external balance. The objective of internal balance means that a government aims at operating its domestic economy at the highest level of activity that is consistent with the avoidance of an undue degree of inflation: in industrialized economies (at least) this usually involves keeping unemployment as low as seems reasonable in the light of the need to secure reasonable mobility of labour from one place and industry to another. Externally, governments have to concern themselves with keeping their balance of payments reasonably sound: that is to say, they have to avoid running external deficits so large that their reserves of foreign exchange (supplemented where possible by borrowing from the International Monetary Fund and sometimes also from other countries) fall dangerously low; but at the same time they naturally avoid building up their country's reserves past a certain point, for at some level of the reserves it will be more beneficial to use any additional receipts of foreign exchange to import more goods and services (or to lend more overseas, or to give more aid to other countries), instead of adding further to the reserves. The point at which additional reserves will become a wasteful use of resources will depend partly on the return available on them by way of interest if they consist of claims on other countries, or by way of the prospect of capital gains if they consist of gold or of currencies that are expected to rise in value relative to some alternative form of reserves. l It will also depend upon how
likely the government feels it to be that the country will suffer serious deficits in the near future, and how far the reserves are already felt to be adequate for covering any reasonably foreseeable deficit. The major consideration in deciding to limit a country's reserves will be the return the country could expect to derive from using some of its reserves to finance the import of a higher volume of goods and services, which would enable it to invest rather more, and so achieve a higher rate of growth, or to consume rather more and thus have an immediately higher standard of living.
