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The Dollar and Special Drawing Rights A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Feuerlein, W. J. Article — Digitized Version The dollar and special drawing rights Intereconomics Suggested Citation: Feuerlein, W. J. (1979) : The dollar and special drawing rights, Intereconomics, ISSN 0020-5346, Verlag Weltarchiv, Hamburg, Vol. 14, Iss. 3, pp. 111-115, http://dx.doi.org/10.1007/BF02924550 This Version is available at: http://hdl.handle.net/10419/139608 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu MONETARY POLICY The Dollar and Special Drawing Rights by W. J. Feuerlein, Boca Raton * The IMF's Interim Committee recently for the first time discussed the creation of a "Substitution Account" to convert certain amounts of excess reserve currencies into SDRs. This issue is likely to be on the agenda of the next annual meeting of the IMF in the fall of this year. Prof. Feuerlein discusses the problems of such an account. t the annual meeting of the International Mon- in terms of gold, thus indirectly in dollars, but due A etary Fund in Washington, D.C., in September to the problems with the US dollar in 1974, this 1978, two key actions were taken. In the first was changed and the value of the SDRs from then place, agreement was reached on an increase in was fixed in terms of a basket of 16 of the world's the quotas in the fund which would bring the IMF's major currencies. Since the SDRs were expected general resources to SDR 58.6 bn (about $ 73 bn). to play a role somewhat similar to the limited role The second agreement was to allocate SDRs in a of gold they were also popularly called "paper quantity that would just double the amount now in gold". As constituted in 1969, SDRs could only be existence; in this connection, it was also agreed to used for transactions between central banks and make the SDRs more attractive by easing many of international government institutions. the requirements concerning their use. Subsequent to these actions, the US Government has agreed Although the general reason for creating the SDRs to let the IMF study a proposal to create a "Sub- was to create more international liquidity, or in stitution Account". Such account was suggested other words to provide additional international many times in the past and again by the previous reserves to members of the IMF, there are four managing director early in 1978. The purpose was specific more detailed concepts involved, namely: to convert certain amounts of excess reserve [] To provide fairly substantial amounts of inter- currencies into SDRs. Until recently, the US Gov- national reserves to member countries, especially ernment did not agree to have this proposal con- the industrialized countries of the world, because sidered. Now it seems that the US's attitude has the volume of international transactions had been changed and thus serious consideration could be skyrocketing; in order to have a smoothly func- given to such an action. The IMF's Interim Com- tioning international system, larger reserves than mittee recently for the first time discussed this available in the 1960s were believed necessary. suggestion and will make a more detailed report Although there was no excess inflation in the prior to the next annual meeting of the IMF in the industrialized countries during that period, the mod- fall of this year. In order to give a perspective to erate but general price increases also required this problem, a brief review of the evolution and larger and larger amounts of international reserves. developments of the SDRs since 1969 is presented herewith. [] It was deemed unsound economically to rely on US balance of payments deficits as the major The Original Concept of the SDR Creation vehicle for liquidity creation. Furthermore, the US balance of payments in some years, as shown In the 1960s, the world's liquidity problem, or the below, had no deficit and had some surplus years potential lack of international reserves, Fed to an which lead to liquidity destruction. Relying on a agreement at the IMF meeting in 1967 to create a single currency as the vehicle for liquidity was new international reserve, namely, "Special Draw- deemed to be unsound. Other currencies could ing Rights" (SDRs). Subsequent to the ratification not be relied upon to provide it and gold also had of the agreement a total of somewhat more than become an uncertain element in the monetary 9 bn dollars of SDRs were issued in three tranches; system. it was also agreed to consider additional issues if [] The creation of liquidity through US balance needed. The SDRs issued in 1969/71 were defined of payments deficits proved to be very uneven. * Florida Atlantic University Some countries gained reserves while others did INTERECONOMICS, May/June 1979 111 MONETARY POLICY not. It all depended on the flow of transactions in the whole Bretton Woods System was near col- countries' balances of payments. lapse. The emphasis at that time was to improve [] The creation of SDRs as an additional inter- the international monetary system and to create national reserve was deemed to be the first step more liquidity as a substitute for gold without, how- in a series of future steps leading towards a new ever, requiring the US dollar to perform the world monetary system. Although this was far in world's key currency function in the long run. the future, it was deemed to be important to get The US balance of payments changed from a sur- started. plus of 2.7 bn dollars in 1969 to a deficit of 9.8 bn The two tabulations below show in figures some in 1970, and further large deficits almost in all of the developments in the sixties. The first table subsequent years. No end is in sight yet. This shows the growth of international reserves, paper does not intend to analyze the cause for namely, gold, dollars and other foreign exchange these deficits or the remedies. These figures are and resources in the IMF. These resources in- cited only to show that the world's dollar liquidity creased considerably until 1968 and also 1969, increased tremendously since 1969. which are the years when SDR creation, was under The years 1971 to 1973 were crucial in the evo- consideration. The second table shows, however, lution of the international monetary system. Tech- that the US balance of payments had a deficit nically, the Bretton Woods system began, to fall only in the early sixties and later was in balance; apart in 1971, when it was realized that the US a slight surplus in 1968 and 1969, thus leading to dollar was heavily overvalued. The dollar sub- liquidity destruction. Naturally, this was offset sequently was devalued twice and then permitted probably by some increase in gold holdings and to fluctuate freely. Notwithstanding this develop- also in the holdings of other foreign exchange. It ment, the international financial changes did not seems clear, however, that the world could not result in an international financial collapse, and in rely on deficits in the US's balance of payments to fact the US dollar continued as the major world create the liquidity necessary for smooth oper- trading and financial currency. ations. Table 1 As a result of the exchange rate adjustments after 1971, it would have been, expected that the US Total International Reserves balance of payments would slowly return to an End of Year I in bn SDRs equilibrium position. This did not occur, partly at least because the US dollar was not floating freely 1960 59.8 but was supported at one time or another through 1962 62.6 the intervention of foreign central banks which did 1965 70.9 not want their currencies to appreciate too much 1968 77.7 against the dollar, and thus bring about export problems and possible unemployment and eco- 1969 78.7 nomic difficulties. Thus, the world's international S o u r c e : IMF 1978 Supplement. liquidity continued concentrated mostly in United States dollars. The following short table shows this: Table 2 Table 3 US Balance of Payments Total International Reserves Surplus or Deficit (-) (in bn SDRs) in bn $ 197O 93.3 1960-64 average -2.2 1972 146.7 1965-69 average in balance 1974 180.2 1968 -t- 1.6 1976 222.3 1969 + 2.7 1977 262.2 S o u r c e : Federal Reserve Bulletins. 1978 (est.') 280.0 Source: IMF 1978 Supplement. When in 1967 and 1968 the original issuance of Special Drawing Rights was considered for the The excess liquidity in US dollars was not evenly first time, nobody foresaw the developments of the distributed; in fact it was .heavily concentrated in US balance of payments and the coming excess a few countries such as Germany, Switzerland, liquidity situation in the 70s.
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