What is a Monetary Reserve?

A monetary reserve is the collection of foreign currency and precious metals that a country has saved. This collection of funds often is used in the balance of trade, to build credit and to back its currency. Monetary reserves can be aggressive or conservative depending on the country and its monetary policy.

The simplest form of a monetary reserve comes from countries that operate on the gold standard. A good example would be the franc of Switzerland, one of the oldest practitioners of the gold standard until 2001, because each franc issued was backed up with its equivalent in gold in the country's reserve. The benefit is that a country keeps itself from getting into inflation and deflation problems associated with credit. Conversely, most countries abandoned this method long before the Swiss because the gold standard severely limited a country's spending power because it could operate with only as much money as it had gold.

Many nations have moved into a form of monetary reserve called fiat money. This monetary policy allows for gold and other precious metals to be part of the reserve, but it also includes foreign currency as part of its collection. This is beneficial to building up finances for two reasons. One, it allows for trade in the trading nation's home currency and makes the process easier. Secondly, it allows a country to operate like a financial trader and buy and sell currency on the market in order to build up its monetary reserve's value.

Fiat money is one of the most frequently used types of finance. One example would be the United States' Federal Reserve Bank, because it stockpiles funds for trading but also uses it to release money. The value of the United States dollar is not tied strictly to gold, so the country is able to print more money whenever more capital is acquired. If the monetary reserve shrinks, the Federal Reserve also has to take currency out of circulation to ensure there is not more money than what is in reserve.

How a nation uses its monetary reserve is normally a reflection of its governmental policies. Some nations trade aggressively to attempt to spike their worth quickly, and others sit on their collection of valuables to let the inflation slowly increase the overall value. No matter what policy a nation has, its monetary reserve is directly connected to the precious metals and currency it has stored in its bank.