Analytical discussions of the international monetary system are conventionally divided into the three separate problems of adjustment, liquidity, and confidence. This trichotomy goes back to the deliberations of Fritz Machlup's celebrated international study group of thirty two economists in 1964 (Machlup and Malkiel, eds., 1964). The adjustment problem is understood to relate to the capacity of countries to maintain or restore equilibrium in their international payments. As this is the subject of the preceding paper in this volume, it will not be addressed directly here. Instead, the present paper will concentrate on the remaing two problems of the monetary system, which together comprise the general subject of international reserves and liquidity. A major theme of this paper, however, will be the need for more explicit recognition of the relationship between this subject and the problem of payments adjustment than has been customary in the literature in the past.

The liquidity problem is generally understood to relate to the issue of the quantity of international monetary reserves. The confidence problem is generally understood to relate to the issue of the composition of reserves – specifically, to the issue stemming from the coexistence of several different kinds of reserve assets, and therefore the possibility of disturbing shifts among them. It is also understood that lurking in the background of both these problems is a third fundamental issue relating to the distribution of international reserves.