The political economy of the SDR: The rise and fall of an international reserve asset

Global Governance

Volumn 4, Issue 3, 1998, Pages 355-379

  Bird, Graham ^a  

^a NONE

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EID: 0032221236     PISSN: 10752846     EISSN: None     Source Type: Journal    
DOI: 10.1163/19426720-00403007     Document Type: Review

References (36)

1. The proceedings of the seminar were subsequently published in book form. See Michael Mussa, James M. Broughton, and Peter Isard, eds., The Future of the SDR in the Light of Changes in the International Monetary System (Washington, D.C.: International Monetary Fund, 1996).
2. Robert Triffin, Gold and Dollar Crisis (New Haven: Yale University Press, 1960). In the years before the introduction of the SDR, a number of proposals attempted to overcome the Triffin dilemma by permitting the growth of international reserves even in circumstances where the U.S. official settlements balance was in surplus. The Keynes Plan, rejected at the Bretton Woods Conference in 1944, had favored introducing a new international reserve asset - bancor. Countries would acquire bancor by trading in part of their gold and foreign exchange. A U.S. proposal in the early 1960s suggested creating Roosa bonds (named after the U.S. Treasury under secretary who put forward the scheme). The United States could purchase foreign currencies at times when its balance of payments was not in deficit by issuing bonds that would permit the rest of the world to accumulate dollar-denominated assets. In 1963, President John F. Kennedy - who had earlier been reported as stating that his worst fears related to nuclear war and the balance-of-payments deficit - endorsed the idea of a study by the Group of Ten countries (G-10) to explicitly examine ways of ensuring the growth of world liquidity in circumstances where the U.S. balance-of-payments deficit was eliminated. As part of this study, the French proposed establishing a "collective reserve unit" (CRU), which would be linked to gold and issued by the G-10. Alongside these official deliberations, academics and the IMF staff also discussed a range of possible "solutions," including increasing the price of gold. The various proposals are well summarized in Robert Solomon, The International Monetary System, 1945-1981 (New York: Harper & Row, 1982).
3. Robert Triffin, Gold and Dollar Crisis (New Haven: Yale University Press, 1960). In the years before the introduction of the SDR, a number of proposals attempted to overcome the Triffin dilemma by permitting the growth of international reserves even in circumstances where the U.S. official settlements balance was in surplus. The Keynes Plan, rejected at the Bretton Woods Conference in 1944, had favored introducing a new international reserve asset - bancor. Countries would acquire bancor by trading in part of their gold and foreign exchange. A U.S. proposal in the early 1960s suggested creating Roosa bonds (named after the U.S. Treasury under secretary who put forward the scheme). The United States could purchase foreign currencies at times when its balance of payments was not in deficit by issuing bonds that would permit the rest of the world to accumulate dollar-denominated assets. In 1963, President John F. Kennedy - who had earlier been reported as stating that his worst fears related to nuclear war and the balance-of-payments deficit - endorsed the idea of a study by the Group of Ten countries (G-10) to explicitly examine ways of ensuring the growth of world liquidity in circumstances where the U.S. balance-of-payments deficit was eliminated. As part of this study, the French proposed establishing a "collective reserve unit" (CRU), which would be linked to gold and issued by the G-10. Alongside these official deliberations, academics and the IMF staff also discussed a range of possible "solutions," including increasing the price of gold. The various proposals are well summarized in Robert Solomon, The International Monetary System, 1945-1981 (New York: Harper & Row, 1982).
4. For example, see K. Alec Chrystal, "International Reserves and International Liquidity: A Solution in Search of a Problem," in Graham Bird, ed., The International Financial Regime (Surrey, England: Surrey University Press, with Academic Press, 1990).
5. For example, see Nicholas Kaldor, Causes of the Slow Rate of Economic Growth of the United Kingdom (Cambridge: Cambridge University Press, 1966).
6. In fact, the U.S. balance of payments moved into substantial deficit at exactly the same time as SDRs were first allocated. Combined with large speculative capital movements against the dollar, this led to the suspension of gold convertibility. These circumstances also led to the Smithsonian meeting and agreement in December 1971. By increasing the dollar price of gold and realigning exchange rates, the agreement attempted to prop up the Bretton Woods system in anticipation of further longer-term proposals that might emerge from the deliberations of the Committee of Twenty (C-20). Although overtaken by events, such as the oil crisis and the move to generalized exchange rate flexibility, the C-20's reform outline envisaged that the SDR should become the principal reserve asset and that the role of gold and reserve currencies should diminish.
7. Better textbooks point out that a movement from a basically fixed exchange rate regime toward one of greater but not free flexibility may increase the demand for reserves as countries seek to offset the effects of volatile and destabilizing capital flows. In this case, high capital mobility may increase the variability of exchange rates and increase the demand for reserves, which are needed in an attempt to minimize deviations from what are seen as fundamental equilibrium rates. Similarly, countries that maintain an exchange rate peg against a floating currency may also exhibit an increase in both the incidence and size of balance-of-payments deficits and may therefore demand additional rather than fewer international reserves.
8. Link proposals took on various forms; for a review of them, see Graham Bird, "The Link Between SDRs and Aid," chap. 11 in Bird, The International Monetary System and the Less Developed Countries (London: Macmillan, 1978).
9. Graham Bird, "International Reserves: Supply, Demand and Adequacy," chap. 5 in Bird, World Finance and Adjustment (Houndmills, England: Macmillan, 1985). At the end of September 1997, the board of governors of the IMF adopted a resolution to amend the articles of agreement to allow for a special one-time allocation of SDRs.
10. Michael Mussa, "The Rationale for SDR Allocation Under the Present Articles of Agreement of the International Monetary Fund," paper presented at an IMF seminar on the future of the SDR, Washington, D.C., 18-19 March 1996, in Mussa et al., Future of the SDR.
11. Michael Mussa, "The Rationale for SDR Allocation Under the Present Articles of Agreement of the International Monetary Fund," paper presented at an IMF seminar on the future of the SDR, Washington, D.C., 18-19 March 1996, in Mussa et al., Future of the SDR.
12. The need for an 85 percent majority stems from the success of European Economic Community (EEC) countries in 1967 in effectively ensuring that they had a veto over SDR creation.
13. For a more skeptical assessment of the evidence, see Graham Bird, IMF Lending to Developing Countries: Issues and Evidence (London and New York: Routledge, 1995).
14. Holger Wolf, "Currency Baskets as International Units of Account," paper presented to an IMF seminar on the future of the SDR, Washington, D.C., 18-19 March 1996, in Mussa et al., Future of the SDR.
15. Holger Wolf, "Currency Baskets as International Units of Account," paper presented to an IMF seminar on the future of the SDR, Washington, D.C., 18-19 March 1996, in Mussa et al., Future of the SDR.
16. For attempts to measure this, see Graham Bird, "The Informal Link Between SDR Allocation and Aid: A Note," Journal of Development Studies 12, no. 3 (April 1976); Bird, "The Benefits of Special Drawing Rights for Less Developed Countries," World Development 1 (March 1979); Bird, "SDR Distribution, Interest Rates and Aid Flows," The World Economy 4, no. 4 (December 1981).
17. For attempts to measure this, see Graham Bird, "The Informal Link Between SDR Allocation and Aid: A Note," Journal of Development Studies 12, no. 3 (April 1976); Bird, "The Benefits of Special Drawing Rights for Less Developed Countries," World Development 1 (March 1979); Bird, "SDR Distribution, Interest Rates and Aid Flows," The World Economy 4, no. 4 (December 1981).
18. For attempts to measure this, see Graham Bird, "The Informal Link Between SDR Allocation and Aid: A Note," Journal of Development Studies 12, no. 3 (April 1976); Bird, "The Benefits of Special Drawing Rights for Less Developed Countries," World Development 1 (March 1979); Bird, "SDR Distribution, Interest Rates and Aid Flows," The World Economy 4, no. 4 (December 1981).
19. E. Grilli and M. Reiss, "EC Aid to Associated Countries: Distribution and Determinants," Weltwirtschaftliches Archiv, no. 2 (1992).
20. It is feasible that G-7 governments are reducing conventional aid to alleviate domestic budgetary pressures and to respond to domestic political opposition to foreign aid in an environment where many forms of government expenditure are being cut. In a situation where G-7 governments would prefer to provide more assistance to developing countries than their domestic political realities permit, SDR allocation could be viewed as a useful mechanism, because it bypasses the usual budgetary processes and is not nearly as transparent (or as open to domestic criticism) as conventional aid.
21. Jacques J. Polak, "Should the SDR Become the Sole Financing Technique for the IMF?" paper presented at an IMF seminar on the future of the SDR, Washington, D.C., 18-19 March 1996, in Mussa et al., Future of the SDR.
22. Jacques J. Polak, "Should the SDR Become the Sole Financing Technique for the IMF?" paper presented at an IMF seminar on the future of the SDR, Washington, D.C., 18-19 March 1996, in Mussa et al., Future of the SDR.
23. John Williamson, "Rationalizing SDR Allocation," paper presented at an IMF seminar on the future of the SDR, Washington, D.C., 18-19 March 1996, in Mussa et al., Future of the SDR.
24. John Williamson, "Rationalizing SDR Allocation," paper presented at an IMF seminar on the future of the SDR, Washington, D.C., 18-19 March 1996, in Mussa et al., Future of the SDR.
25. Bird, "SDR Distribution, Interests Rates and Aid Flows."
26. Graham Bird, "Economic Assistance to Low-Income Countries: Should the Link be Resurrected?" Essays in International Finance, no. 193, Princeton University, July 1994.
27. Ariel Buira, "The Potential of the SDR for Improving the International Monetary System," and Yaqub Muhammad, A. Mohammed, and I. Zaidi, "A Focused SDR Allocation," papers presented at an IMF seminar on the future of the SDR, Washington, D.C., 18-19 March 1996, in Mussa et al., Future of the SDR.
28. Ariel Buira, "The Potential of the SDR for Improving the International Monetary System," and Yaqub Muhammad, A. Mohammed, and I. Zaidi, "A Focused SDR Allocation," papers presented at an IMF seminar on the future of the SDR, Washington, D.C., 18-19 March 1996, in Mussa et al., Future of the SDR.
29. Ariel Buira, "The Potential of the SDR for Improving the International Monetary System," and Yaqub Muhammad, A. Mohammed, and I. Zaidi, "A Focused SDR Allocation," papers presented at an IMF seminar on the future of the SDR, Washington, D.C., 18-19 March 1996, in Mussa et al., Future of the SDR.
30. Warren L. Coats, Jr., "Enhancing the Attractiveness of the SDR," World Development (July 1990); Sabash Thakur, "The Hard SDR: An Exploratory Analysis," IMF Staff Papers, September 1994.
31. Warren L. Coats, Jr., "Enhancing the Attractiveness of the SDR," World Development (July 1990); Sabash Thakur, "The Hard SDR: An Exploratory Analysis," IMF Staff Papers, September 1994.
32. Wolf, "Currency Baskets as International Units of Account."
33. Graham Bird, "From Bretton Woods to Halifax and Beyond: The Political Economy of International Monetary Reform," The World Economy 19, no. 2 (March 1996).
34. On this question, see Barry Eichengreen and J. A. Frankel, "The SDR and the Future of the International Monetary System," paper presented at an IMF seminar on the future of the SDR, Washington, D.C., 18-19 March 1996, in Mussa et al., Future of the SDR. Eichengreen and Frankel argue that the dollar outperforms and is highly likely to continue to outperform its competitors in three of the four determinants of reserve currency status - economic size, developed financial markets, and historical inertia. Only a lack of confidence in the value of the dollar, associated with the external debt position of the United States, could work against it, as compared with the yen and the deutsche mark. A single European currency may prove a stronger challenger to the dollar. But it is still difficult to see how the rise of the euro would create circumstances in which the SDR would also rise, unless exchange rate movements associated with a sudden and substantial movement away from the dollar and into the euro recreated interest in a substitution account to absorb excess dollars by exchanging them for SDRs. Looking to the distant future does nothing more for the SDR's prospects. In a tripolar currency world with flexible exchange rates or in a single currency world, the demand for international reserves would fall, as would any residual appeal that SDRs might have retained.
35. On this question, see Barry Eichengreen and J. A. Frankel, "The SDR and the Future of the International Monetary System," paper presented at an IMF seminar on the future of the SDR, Washington, D.C., 18-19 March 1996, in Mussa et al., Future of the SDR. Eichengreen and Frankel argue that the dollar outperforms and is highly likely to continue to outperform its competitors in three of the four determinants of reserve currency status - economic size, developed financial markets, and historical inertia. Only a lack of confidence in the value of the dollar, associated with the external debt position of the United States, could work against it, as compared with the yen and the deutsche mark. A single European currency may prove a stronger challenger to the dollar. But it is still difficult to see how the rise of the euro would create circumstances in which the SDR would also rise, unless exchange rate movements associated with a sudden and substantial movement away from the dollar and into the euro recreated interest in a substitution account to absorb excess dollars by exchanging them for SDRs. Looking to the distant future does nothing more for the SDR's prospects. In a tripolar currency world with flexible exchange rates or in a single currency world, the demand for international reserves would fall, as would any residual appeal that SDRs might have retained.
36. The IMF prepared an information paper on 12 March 1996 for its seminar on the future of the SDR, Washington, D.C., 18-19 March 1996. Modified by the author, it served as the source for the appendix.