This paper discusses the possibility of an IMF that would be based fully on the special drawing right (SDR). The paper explores the basic economic justification for a General Department restructured in this way, the broad outline of the structure that would have to be established, the liquidity effects that would have to be considered, and the effects of these changes on other provisions. It also discusses some of the simplifications that would be brought about, and the steps involved in the transition from an IMF consisting primarily of currencies to one based fully on the SDR.

Appendix. The Balance Sheet of an SDR-Based Fund

Because the principal operations of the General Department in the present Fund are construed as the purchases of currencies held by the Fund with other currencies, the major entries in the conventional balance sheet for that Department tend to remain constant unless the Fund borrows or quotas are increased (see Part I of the accompanying table). On the asset side, it reflects mostly the currencies or other assets that the Fund has obtained through subscriptions and borrowing; on the liability side, the main entries are for quotas (equal to subscriptions) and indebtedness, plus the item for reserves that covers the accumulation of net profits on the Fund’s operations. Quotas and the corresponding assets are much the largest items and do not expand or contract with the volume of credit that the Fund has outstanding.

This balance sheet can readily be converted to a form that would show the results to date of the Fund’s activities. That form would, in effect, depict the Fund as a “bank” that created international money by extending credit. The only change required is to reduce the entries for “Currencies” and “Quotas” by an equal amount, in order to eliminate the part of those items that is not actually related to credit extension that has taken place. Only Fund holdings of each member’s currency above its quota, including all holdings of currency acquired under compensatory financing, buffer stock, or other designated facilities that are treated as being above quota, reflect the use of Fund credit. Thus all other currency holdings—and the corresponding part of quotas, which could be thought of as capital authorized but still uncalled—may be eliminated from the balance sheet. After this deduction, the remainder of the entry for “Currencies” represents credit extension—in Fund terminology, “Use of Fund credit”—while the remainder of the entry for “Quotas” shows the claims of members on the Fund referred to as “Reserve tranche positions.” The Fund’s balance sheet after this conversion is given in Part II of the table.

In the foregoing presentations, the separation between the two Departments of the Fund has been maintained. It was pointed out earlier, however, that a Fund based on SDRs could advantageously be unified. The merger of the two Departments is effected in Part III of the table. It involves two changes from Part II: (1) The entries for the holdings of SDRs by the General Department are canceled on both sides of the accounts; and (2) The item “Reserve tranche positions,” a concept of members’ assets in the Fund that is associated with the notion of currency subscriptions, is replaced by an additional amount of SDRs. In this way, Part III of the table shows the consolidated balance sheet of the Fund as it would look if it were put fully on an SDR basis.

IMF: Alternative Balance Sheets as at July 31, 1978 (In millions of SDRs)

Part I: Present Books of Fund General Resources Account

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Including balances of initial subscriptions receivable, not due.

Part II: Fund Depicted as a “Bank” General Resources Account

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Compared with Part I, an equal amount (SDR 29,923 million) of unused currencies and uncalled subscriptions has been eliminated; see p. 23.

Part III: Consolidated Fund on an SDR BASIS

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Part IV: Consolidated FUND on an SDR Basis, Expanded to Show Potential for Credit Creation

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Includes, in addition to the GAB, the similar arrangements concluded with the Swiss National Bank. In this presentation, “Credit agreed under GAB” does not reflect the amounts agreed in national currencies converted into SDRs at market exchange rates on July 31, 1978, as shown in International Monetary Fund, International Financial Statistics (Washington), September 1978, p. 8, column (11). Instead, it is the sum of (a) Fund indebtedness under the GAB, which is the SDR equivalent of the amounts in national currencies borrowed by the Fund, converted into SDRs at the rates in effect at the time of borrowing and (b) the SDR equivalent of the amounts in national currencies still available for borrowing on July 31, 1978, converted at the rates in effect on that date.

Part III of the Fund’s balance sheet reflects the amount of credit extended. It may be of interest to expand this version to show (as in the present balance sheet) some concept of potential operations. The result of such an exercise is given in Part IV of the table. Specifically, “SDR holdings, issued” becomes “Quotas,” which set the limit to the amount of SDRs that the Fund can issue (see Credit Transactions by the Fund in SDRs, paragraph (3) above, p. 8). The extent to which the actual issue of SDRs has fallen short of this notional limit is indicated by the contingent asset, “Unissued SDRs.” This treatment parallels the balance sheet of the present Fund, in which quotas are offset by the currency holdings that are notionally available for credit extension. In both cases, the real potential for lending is very much overstated, as the quotas of the members that would in fact be users of Fund credit are counted along with those of the other members that could be expected to supply the resources.

If the balance sheet is to give this kind of an indication of the Fund’s potential for credit extension, it would seem consistent to show the full amount of credit agreed under the GAB (or other credit arrangements, such as the supplementary financing facility), rather than simply the amount of the Fund’s actual borrowings. Only the latter figure appears in the Fund’s present balance sheet (Part I). In the expanded version of the balance sheet of an SDR-based Fund (Part IV), however, credit availability under the GAB has also been included. The balance sheet totals in Part IV exceed those of Part I by the amount of available but unused credit.

International Monetary FUND Pamphlet Series

(All pamphlets have been published in English, French, and Spanish, unless otherwise stated)

*1. Introduction to the Fund, by J. Keith Horsefield. First edition, 1964. Second edition, 1965. Second edition also in German.

*2. The International Monetary Fund: Its Form and Functions, by J. Marcus Fleming. 1964. In English only.

3. The International Monetary Fund and Private Business Transactions: Some Legal Effects of the Articles of Agreement, by Joseph Gold. 1965.

4. The International Monetary Fund and International Law: An Introduction, by Joseph Gold. 1965.

*5. The Financial Structure of the Fund, by Rudolf Kroc. First edition. 1965. Second edition, 1967.

6. Maintenance of the Gold Value of the Fund’s Assets, by Joseph Gold. First edition. 1965. Second edition, 1971.

7. The Fund and Non-Member States: Some Legal Effects, by Joseph Gold. 1966.

8. The Cuban Insurance Cases and the Articles of the Fund, by Joseph Gold. 1966.

9. Balance of Payments: Its Meaning and Uses, by Poul Host-Madsen. 1967.

*10. Balance of Payments Concepts and Definitions. First edition. 1968. Second edition. 1969.

11. Interpretation by the Fund, by Joseph Gold. 1968.

12. The Reform of the Fund, by Joseph Gold. 1969.

13. Special Drawing Rights, by Joseph Gold. First edition, 1969. Second edition, with subtitle Character and Use,1970.

14. The Fund’s Concepts of Convertibility, by Joseph Gold. 1971.

15. Special Drawing Rights: The Role of Language, by Joseph Gold. 1971.

16. Some Reflections on the Nature of Special Drawing Rights, by J.J. Polak, 1971.

17. Operations and Transactions in SDRs: The First Basic Period, by Walter Habermeier. 1973.

18. Valuation and Rate of Interest of the SDR, by J.J. Polak. 1974.

19. Floating Currencies, Gold, and SDRs: Some Recent Legal Developments, by Joseph Gold. 1976. Also in German.

20. Voting Majorities in the Fund: Effects of Second Amendment of the Articles, by Joseph Gold. 1977.

21. International Capital Movements Under the Law of the International Monetary Fund, by Joseph Gold. 1977.

22. Floating Currencies, SDRs, and Gold: Further Legal Developments, by Joseph Gold. 1977. Concluding section also in German.

23. Use, Conversion, and Exchange of Currency Under the Second Amendment of the Fund’s Articles, by Joseph Gold. 1978.

24. The Rise in Protectionism, by Trade and Payments Division. 1978.

25. The Second Amendment of the Fund’s Articles of Agreement, by Joseph Gold. 1978.

26. SDRs, Gold, and Currencies: Third Survey of New Legal Developments, by Joseph Gold. 1979. Concluding section also in German.

27. Financial Assistance by the International Monetary Fund: Law and Practice, by Joseph Gold. First edition, 1979. In English only. Second edition, 1980.

28. Thoughts on an International Monetary Fund Based Fully on the SDR, by J.J. Polak. 1979.

29. Macroeconomic Accounts: An Overview, by Poul H0st-Madsen. 1979.

30. Technical Assistance Services of the International Monetary Fund. 1979.

31. Conditionality, by Joseph Gold. 1979.

32. The Rule of Law in the International Monetary Fund, by Joseph Gold. 1980.

33. SDRs, Currencies, and Gold: Fourth Survey of New Legal Developments, by Joseph Gold. 1980.

34. Compensatory Financing Facility, by Louis M. Goreux. 1980.

35. The Legal Character of the Fund’s Stand-By Arrangements and Why It Matters, by Joseph Gold. 1980.

36. SDRs, Currencies, and Gold: Fifth Survey of New Legal Developments, by Joseph Gold. 1981.

37. The International Monetary Fund: Its Evolution, Organization, and Activities. First edition, 1981. Second edition, 1982. Third edition, 1983. Fourth edition, 1984.

38. Fund Conditionality: Evolution of Principles and Practices, by Manuel Guitian. 1981.

39. Order in International Finance, the Promotion of IMF Stand-By Arrangements, and the Drafting of Private Loan Agreements, by Joseph Gold. 1982.

40. SDRs, Currencies, and Gold: Sixth Survey of New Legal Developments, by Joseph Gold. 1983. In English. French and Spanish in preparation.

*Out of print. Photographic or microfilm copies of all English editions, including numbers that are out of print, may be purchased direct from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Michigan 48106, U.S.A., or, for those living outside the Western Hemisphere, from University Microfilms Limited, 30/32 Mortimer St., London, WIN 7RA, England.

Copies (unless out of print) may be requested from:

External Relations Department, Attention: Publications

International Monetary Fund, Washington, D.C. 20431, U.S.A.

Telephone number: 202 473 7430

Cable address: Interfund


Article VIII, Section 7 and Article XXII.


Throughout this paper, except where the broader meaning follows from the context, the term “General Department” is used to indicate the principal account of that Department, and the only one in existence so far, namely, the “General Resources Account.”


Article V, Section 3(f).


Article VII, Section 1.


The word “currencies” is put in quotation marks since the assets held by the Fund in individual “currencies” are, unlike ordinary holdings of currencies, not subject to the changes in value of one currency against another, as their value is maintained in terms of the SDR.


This term is used here in the nontechnical sense and does not specifically refer to “operations” in the sense of the Articles.


A member’s net contribution to the Fund in the form of gold or SDRs, or amounts of its currency drawn by other members, is considered as part of its reserves (“reserve tranche”).


J. Keith Horsefield, The International Monetary Fund, 1945-1965: Twenty Years of International Monetary Cooperation (Washington, 1969), Vol. I, pp. 28-30.


See First Amendment, Article XXI, Section 1 (Second Amendment, Article XV, Section 1) and Second Amendment, Article VIII, Section 7.


The term “gold tranche position” was introduced at this time and an explanation was given why these positions should be considered as part of members’ reserves (International Monetary Fund, Annual Report of the Executive Directors for the Fiscal Year Ended April 30, 1963 (Washington, 1963), p. 40). The concept was expanded to “reserve position in the Fund” when loan claims under the General Arrangements to Borrow (GAB) first appeared (Annual Report, 1965, p. 68).


For a brief discussion see J. Marcus Fleming, “The Fund and International Liquidity,” International Monetary Fund, Staff Papers, Vol. XI, No. 2 (July 1964), pp. 183-85. A more detailed description is given in Hannan Ezekiel, “The Present System of Reserve Creation in the Fund,” Staff Papers, Vol. XIII, No. 3 (November 1966), pp. 398-420.


Article III, Section 3(a).


Not counting arrangements with the United Kingdom and Italy which, if drawn, would primarily have used GAB resources rather than the Fund’s holdings of currencies and SDRs.


In none of these comparisons is allowance made for a possible further refinement in the calculation of liquidity ratios, viz., to take some rough account of the different probabilities that particular liquid claims will be exercised. In appraising liquidity ratios of the General Department in present circumstances, one could take into account the fact that the holders of loan claims, which are typically the countries with the strongest positions, are likely to be less frequently in a position where they need to exercise the liquidity of their claims than the average holders of SDRs or of reserve tranche positions.


The Fund can borrow currency from anyone, including private parties that cannot hold, and therefore could not lend, SDRs.


These transactions could run as follows: (a) the Fund extends credit in SDRs to the borrowing member; (b) the Fund, for the account of the borrowing member, exchanges the SDRs against freely usable currency with the prospective lender; (c) the Fund borrows the SDRs from the lender.


The direct financial benefit that a member derives from nonparticipation in the Special Drawing Rights Department, viz., that it does not share in the cost of that Department, was treated as a somewhat serious matter at the time of the First Amendment (see Second Amendment, Article XVI, Section 2, last six lines and Article XX, Section 4). The costs have, however, proved to be minimal—about SDR 1 million a year. Dropping these special provisions and the allocation of costs they require would provide another welcome, if small, simplification.


The power for the Fund to make this change is tucked away among the provisions of the Articles dealing with “Explanation of Terms” (Article XXX (c) (hi)). The power has been exercised with respect to drawings under the oil facility.


Paragraph 5(a) of the communiqué of September 24, 1978 of the Interim Committee reads in part: “It was agreed that the interest rate on the SDR should be increased from 60 per cent of the weighted average of the short-term interest rates in the five member countries with the largest quotas to 80 per cent of that average and that the rate of remuneration should be set at 90 per cent of the interest rate on the SDR, that is, at 72 per cent of the combined market rate… Shortly before the end of each financial year, the Fund would consider whether the estimated net income of the Fund for that year was sufficiently large to permit the average annual rate of remuneration applicable for that year to be raised to a level above 90 but not above 100 per cent of the average annual rate of interest on the SDR.” See International Monetary Fund, Summary Proceedings of the Thirty-Third Annual Meeting of the Board of Governors, 1978 (Washington, 1978), p. 309.


This follows (not without some difficulty) from Article V, Section 9(b). The steps are as follows. The remunerated part of the reserve tranche of any member equals the “norm” less the Fund’s holdings of that member’s currency; the unremunerated part equals the quota minus the “norm.” The “norm” is 75 per cent of the member’s quota at the date of the Second Amendment plus payments made by the member in currency (its own as well as that of other members) or SDRs for quota increases after that date. Such payments must equal 100 per cent of quota increases after the date of the Second Amendment. Hence, the “norm” equals a member’s current quota minus 25 per cent of its pre-amendment quota, and the unremunerated part of the reserve tranche equals 25 per cent of the pre-amendment quota, i.e., the same amount as before quota increases pursuant to the Sixth General Review of Quotas and any subsequent reviews.


Article V, Section 9(c) permits reduction of the percentage “on the basis of the same criteria for all members”; the economic justification for such reduction could well be the sale of gold by the Fund against currencies, since the receipt of additional currencies would, in itself, reduce the amount on which the Fund would have to pay remuneration.


In setting this amount, allowance could be made for any increase in the cost of the Fund’s credit operations as a result of the need to pay the SDR interest rate, rather than 90 per cent of this rate, for the resources used.


This percentage could be allowed to decline in the same manner as suggested above for x.


Executive Board Decision No. 5704-(78/39), adopted March 22, 1978; see Selected Decisions of the International Monetary Fund and Selected Documents: Supplement to Eighth Issue (Washington), December 4, 1978, p. 41. Also reproduced in Annual Report, 1978, pp. 125-26.


Article V, Section 3(d).


Article XIX, Section 5 and Schedule F.


Article V, Section l(i).


The present Articles contain rudimentary provisions for “reverse designation” to enable a participant to acquire SDRs to pay charges and assessments or to meet its reconstitution obligation. These have never been used as sufficient SDRs could always be acquired from the General Department.


A substitute criterion could also be found, in the unlikely event that this were considered desirable, for the adjustment of voting rights that the present Article XII, Section 5(b) prescribes for creditors and debtors in certain decisions.


The special terms that sprung up in the 1960s, without basis in the Articles, to indicate the two subdivisions of the gold tranche on either side of 75 per cent of quota, viz., the “basic gold tranche” and the “super gold tranche,” appear fortunately to have vanished with the coming into effect of the Second Amendment. Current practice is to use the self-explanatory, if less flamboyant, terms “unremunerated reserve tranche” and “remunerated reserve tranche.”


The Executive Directors’ Report on the Reform of the International Monetary System (Washington, 1972) had already concluded that this provision “does not in its present form provide a practical means of applying pressure on surplus currencies” (p. 25).


Suitable changes would be needed in the liquidation provisions to preserve existing rights of members.


For example, adding to the Fund’s holdings of SDRs by the partial payment of quota increases in SDRs enlarges reserve positions in the Fund at the same time.