The international monetary system has experienced significant changes during the 1970s. The most dramatic of these has been the transformation from a system of pegged exchange rates to one in which central banks make no institutional commitment to maintain a particular exchange rate. Despite this change, central banks have been unwilling, in general, to allow their exchange rates to be completely market-determined and, consequently, continue to hold foreign reserves. The primary focus of this article is to analyze central banks’ demand for foreign reserves in light of this institutional change.