What is an Official Reserve?

Mary McMahon
Mary McMahon

An official reserve is a reserve of foreign currencies, special drawing rights (SDRs), and gold kept by a national government. National governments use their official reserves for a variety of purposes, ranging from controlling the exchange rate to financing activities overseas. Nations which are members of the International Monetary Fund report information about their official reserves on a regular basis, and this information is available to the general public, for those who are curious. It can be obtained on a number of different websites and through government officials.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

One purpose of the official reserves is to back a nation's currency. Although the gold standard is no longer used, nations are expected to back their currencies with something so that they do not become meaningless. When official reserves fall low, it can devalue a currency because other nations become concerned. The nation can also use its holdings to control the supply of foreign currency and gold in its economy, adding or removing as needed to keep the economy stable while promoting growth.

People may refer to “foreign currency reserves,” which specifically include the foreign currencies held by a nation. Most nations keep the bulk of their foreign currency reserves in currencies which are known as “reserve” or “anchor” currencies because they tend to remain stable and strong. Historically the United States dollar was the most popular anchor currency for official reserve purposes, although the Euro began gaining ground shortly after its introduction, in part because several European currencies once used as reserve currencies were converted to Euros.

Monetary institutions, domestic and otherwise, use information about the official reserve funds held by other nations to make decisions about lending, where to do business, and what kind of deals to negotiate. Nations with a big official reserve tend to have a stronger position in the global economy both because their own economies are healthier and because they have economic clout, thanks to the currency and other commodities they control.

Decisions about how to use the official reserve are made by governing bodies with monetary authorities. Members of these bodies are usually appointed, and serve terms of varying length. They are generally regarded as politically neutral because they have an interest in keeping the economy strong no matter who is in office. However, sometimes the boards become more liberal or conservative as a result of shifting balances among the appointees, and they can be influenced by political pressure and social trends when they make decisions.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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