The History of the SDR

3 The History of the SDR The opening session of the seminar provided an opportunity to review both the original rationale for creating the SDR in the 1960s and the ways in which the world economy and the SDR have evolved since that time. Robert Solomon presented the main paper for that review. Following his presentation, Max Corden, Adolfo Diz, and Rudolf Rhomberg each examined the implications of the ways in which the system and the asset had evolved. Creation and Evolution of the SDR Robert Solomon This paper is intended to provide historical perspective on special drawing rights. Although first created in 1969, their origin can be traced to the way the Bretton Woods system operated and the economic and political views of policymakers about that system. Attitudes toward SDRs after 1969 were affected by the change in the international mone tary system following the so-called breakdown of Bretton Woods and by the marked increase in the mobility of private capital. A look back at the history gives rise to two general observations. First, a major shortcoming at Bretton Woods was the failure to antici pate the enormous increase in capital mobility that has occurred. Sec ond, the SDR was, in the context of the 1960s, a basic reform and not merely "the last and most controversial of the gadgets devised to deal with the weakness of the U.S. payments position," as Harold James characterizes it in his monumental history commissioned for the Fund's fiftieth anniversary Games, 1996, p. 174). The Bretton Woods System Although the Bretton Woods agreement marked a major step for ward in international cooperation-especially compared with the 1930s, to which it was in part a reaction-it failed to provide a system- 25 26 The History of the SDR atic means for increasing the reserves of IMF member countries in a world of growing trade and output. The only explicit provision along those lines in the Articles of Agreement of the International Monetary Fund was the possibility of a "uniform change in par values," in other words, a general increase in the official price of gold. Given the nature of the system, with its dependence on the dollar as the main reserve currency convertible into gold for monetary authorities, action of that sort was ruled out. It is not clear how the founding fathers at Bretton Woods expected countries' reserves to grow. Presumably they believed that newly mined gold would continue to flow into official reserves to the extent that it was not used for industrial and artistic purposes. Whether they also anticipated a net increase over time in dollar reserves is uncertain. In any event, that is what happened. In the early postwar years, there was widespread concern about a "dollar shortage" as war devastated countries sought to buy goods from the United States. The Marshall Plan and private U.S. capital outflows made it possible for these needs to be met. In fact, capital outflows from the United States, including Marshall Plan grants, exceeded the U.S. current account sur plus. As measured by what later came to be called the "official settle ments basis" (sales of gold by the United States plus increases in its li abilities to foreign monetary authorities}, the United States moved into balance of payments deficit in 1950. Of course, the payments position was not characterized that way at the time. Rather, it was referred to, with approval, as a "net transfer of gold and dollars" to the rest of the world, where many countries were short of reserves, while the United States had 60 percent of the world's gold reserves at the end of World War II. In the process, the dollar became the principal reserve currency. The official settlements deficit showed up first as an increase in the dollar reserves of other countries, especially those in Europe. Soon some of those monetary authorities began to convert a portion of their net dollar receipts into gold at the U.S. Treasury, and that too was regarded as a welcome development in the early 1950s. On the basis of data available in 1969, total reserves of all countries increased, on average from 1951 to 1964, by $1.5 billion a year, of which gold accounted for $0.5 billion and dollar holdings for $0.9 billion. As will become relevant when we consider the decision in 1969 to create SDRs, over the next four years, 1964--68, gold reserves decreased by $0.5 billion a year and official dollar holdings rose only $200 million a year (International Monetary Fund, 1970, p. 443). Robert Solomon 27 Proposals for Reform As noted, in the early postwar years well into the 1950s, the U.S. bal ance of payments "deficits" were welcomed on both sides of the At lantic and Pacific, since they alleviated the dollar shortage and helped European countries and Japan to rebuild their reserves as one aspect of restoring their economies after the depredations of World War II. As the decade of the 1950s moved on, the dollar shortage ended and the European countries made their currencies convertible. Self-confidence returned and attitudes began to change. Some resentment over U.S. prominence or hegemony developed. More specifically, the special role of the dollar came to be a matter of concern, if not resentment, in some quarters. By the late 1950s, the dollar shortage was replaced by what some observers called a "dollar glut." Two reactions to these changed circumstances are noteworthy. Robert Triffin formulated his famous "dilemma": on the one hand, the world was dependent on U.S. balance of payments deficits for growth of reserves; if the U.S. deficits were eliminated, the rest of the world would lose a source of new reserves, which could depress eco nomic activity. On the other hand, if the deficits continued, the increase in U.S. liabilities to the rest of the world relative to U.S. gold reserves could lead to instability as official holders of dollars became concerned that the relative value of their reserve assets might decrease in relation to the value of gold. The way to resolve this dilemma, according to Triffin, was to have the IMF meet the "legitimate liquidity require ments of an expanding world economy" (Triffin, 1960). Actually, as Triffin acknowledged, his proposed solution to the dilemma was similar to Keynes's proposal for an international clearing union with a new reserve asset, the "bancor." The other reaction to the way the system was working was exempli fied, at the extreme, by General de Gaulle, who resented the "exorbitant privilege" the United States enjoyed as the issuer of the world's main reserve currency. Presumably under the influence of Jacques Rueff, de Gaulle favored a reform of the international monetary system that would end the special role of the United States. In particular, he ob jected to the ability of the United States, which France and other coun tries did not have, to incur balance of payments deficits-including di rect investment by U.S. corporations in France and elsewhere-and to finance those deficits by issuing its own currency to the rest of the world (Solomon, 1992, pp. 126-30). In his famous press conference of February 1965, he called for a return to the gold standard. And there- 28 The History of the SDR after France converted its dollar accumulations into gold at the U.S. Treasury. De Gaulle's view on the role of the dollar was just one aspect of his general position regarding the primacy of the United States in world affairs and of his aim of creating an independent Europe led by France. This position was not "anti-American." It reflected de Gaulle's belief that the United States was too powerful and, of course, his concept of France's role in the world. Although the officials of other European countries did not support these French views, the belief that the United States had a dispropor tionate role in the system was shared by some of them. They would have preferred a more symmetrical system. Another belief in Europe was that by incurring an overall deficit in its balance of payments much of the counterpart of which showed up in Europe as capital in flow-the United States was "exporting inflation." Those who held this view were also attracted by the idea of reducing the reserve-currency role of the dollar. On the U.S. side too there was concern about the balance of pay ments deficit. According to Arthur Schlesinger, President-elect Kennedy told his advisors that his two greatest fears were nuclear war and the balance of payments deficit (Schlesinger, 1965, p. 130)! Beginning in the early 1960s, a series of measures were initiated by the U.S. Government aimed at curbing outflows of private capital and dealing with excessive accumulations of dollars by monetary author ities abroad. A swap network (reciprocal central bank credit facilities) was established under the leadership of the Federal Reserve. The General Arrangements to Borrow (GAB) were created as a means of supplementing the resources of the Fund so that it could meet a potential large drawing by the United States. The GAB provided the basis for the Group of Ten. To deal with the Triffin dilemma, Robert Roosa, Under Secretary of the Treasury in the early 1960s, proposed that the United States should purchase foreign currencies when its balance of payments was in bal ance or surplus, thereby making it possible for other countries to con tinue to accumulate dollar reserves. The United States also proposed a study in the Group of Ten of ways to ensure the adequacy of interna tional liquidity.

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