On January 1, 1970, the Fund made the first allocation of special drawing rights (SDRs) to 104 member countries that had become participants in the Special Drawing Account. The allocation marked the culmination of long efforts by many persons—academics, national officials, Fund management and staff, and members of the Fund’s Executive Board and of its Board of Governors—to deal with a major weakness in the international monetary system. It also marked the operational beginning of an important new element in the system.
The Period Prior to 1970
The events, studies, discussions, and negotiations that led to the first allocation of SDRs are well documented and need not be repeated here. It is useful, however, to consider one major question—namely, what were the circumstances that prompted the members of the Fund to conclude in the second half of the 1960s that there was a weakness in the international monetary system that required the deliberate creation of international liquidity in the form of the SDR?
As international trade and payments grew in the immediate postwar period, international reserves also expanded, principally through the accumulation of U.S. dollars by official holders. However, toward the end of the 1950s, there was some concern about the future adequacy of international reserves. In the early 1960s, this concern became more widespread as signs of stress in the international monetary system began to multiply. Fears that confidence would not be maintained in reserve media—notably gold and the main currencies used in international transactions, such as the U.S. dollar and the pound sterling—and that the reserve media would fail to grow satisfactorily in line with the growth in the volume of international trade and payments led to intensified discussion and study, both in the Fund and in various groups, on international liquidity, the functioning of the international monetary system, and the role of the Fund.
Following the amendment of the Articles of Agreement with effect from July 28, 1969, the Managing Director’s proposal to allocate SDRs for the first basic period was adopted by the Board of Governors on October 3, 1969. The proposal provided for the creation of approximately SDR 9.5 billion during 1970-72.
In this context, several observations made in the Managing Director’s proposal are of particular interest:
(1) World reserves, consisting of official holdings of gold, foreign exchange, and reserve positions in the Fund, had declined by more than 50 percent relative to world trade since the early 1950s; relative to international transactions, the decline was even steeper.
(2) From about 1964, there was a change in the situation, which was described in the proposal as follows: “… growth of reserves flattened markedly, the ratio of reserves to trade declined more rapidly, the transfer of reserves from deficit to surplus countries ceased to act as a force tending to equalize reserve ratios, and there was increasing resort to international credit as a means of relieving the tightness of reserves.”
(3) After taking into consideration the relationship of reserves to the adjustment process (i.e., the correction of payments maladjustments without resort to measures destructive of national or international prosperity), the Managing Director concluded that in the circumstances “the supplementation of reserves would be most unlikely, on balance, to exercise any adverse effect upon the adjustment process, and indeed if nothing were done to supplement reserves the stabilization efforts now being made by deficit countries might well be frustrated by the defensive measures of others.”
(4) Although the amended Articles envisaged that decisions of the Fund to allocate SDRs shall normally be for basic periods of five years’ duration, the Fund may provide that the duration of a basic period shall be other than five years. Because of difficulties in projecting future reserve needs and the supply of reserves, it was proposed and agreed that the first basic period should be three years.
The actual amounts allocated on January 1 of each of the three years 1970-72 were SDR 3,414 million, SDR 2,949 million, and SDR 2,952 million, respectively, for a total of SDR 9,315 million. These amounts were calculated as a uniform percentage of each participant’s quota in the Fund on the day before the allocation. The percentages were 16.8 percent, 10.7 percent, and 10.6 percent, respectively. (The percentages varied because of changes in quotas and in participation in the Special Drawing Account.)
Main Features of the SDR Facility
The principal characteristics of the SDR allocated on January 1, 1970 were as follows:
(1) Its value was equivalent to 0.886671 gram of fine gold, that is, SDR 1 = US$1.
(2) Its rate of interest was set at 1½ percent per annum. The Fund was empowered to raise this rate up to 2 percent or equal to the rate of remuneration paid on creditor positions in the General Account, whichever was higher, or lower it to 1 percent or the rate of remuneration, whichever was lower.
(3) Interest was payable by the Fund to each holder on the amount of its holdings of SDRs, and charges at the same rate as the interest rate were payable by each participant on the amount of its net cumulative allocation. Thus, if a participant in the course of a year had holdings on average above its allocations, it received net interest, and if its holdings on average were below its net cumulative allocation, it paid net charges. The total amount paid in interest equaled the amount of charges paid.
(4) Participants could use their holdings of SDRs in three principal ways: (a) to obtain foreign exchange from other participants designated (i.e., required) by the Fund to receive the SDRs being used; (b) by agreement with another participant to obtain balances of the user’s own currency held by that participant; and (c) to settle obligations to repurchase balances of a participant’s currency from or to pay charges to the Fund’s General Account.
SDRs could not be used, however, to obtain foreign exchange through the designation mechanism or to obtain balances of the user’s own currency in a bilateral transaction unless the user had a balance of payments need. In other words, a participant could not use its SDRs simply to change the composition of its reserves.
If so designated by the Fund, participants were obligated to provide their own currency to another participant and accept SDRs in return. Limitations were specified in the Articles.
Neither could a participant use all its SDRs over a period without being required to reconstitute a minimum proportion of its holdings. Two rules had to be observed: One was that a participant, over five-year periods, had to maintain an average SDR holding of not less than 30 percent of its average allocation. The second rule was a more general requirement that a participant pay “due regard to the desirability of pursuing over time a balanced relationship” between its holdings of SDRs and its holdings of other reserve assets.
As the unit of value of the SDR was equivalent to 0.88867 1 gram of fine gold and as all transfers of SDRs between participants were made in exchange for currency, it was necessary to transform the gold value of the SDR into a value in terms of the currency being used. The method employed was a simple one whereby the gold value of the SDR and the par value of the U.S. dollar were used to determine the SDR-U.S. dollar rate; the SDR exchange rates for other currencies were then calculated from their representative market exchange rates for the U.S. dollar. These representative rates were defined by decisions of the Fund after consultation with each member and were such that any participant using SDRs received the same value whatever currencies were provided by the participant to whom the SDRs were transferred and whichever participant provided those currencies.
Subsequently, the representative rates became the basis for valuing the Fund’s holdings of all members’ currencies. A member’s currency is revalued whenever it is used by the Fund in a transaction with another member, and all currency holdings are revalued as of April 30 each year.
The SDR was the unit of account for recording all operations in the Special Drawing Account from January 1, 1970, and in March 1972, it was decided to express the Fund’s own accounts in SDRs instead of U.S. dollars.
The initial characteristics of the SDR reflected an understandable caution in the deliberate creation of a new reserve asset and did not make it as attractive to its holders as some other reserve assets. This applied particularly to its interest rate and its usability.
In the first basic period 1970–72, allocations of SDRs totaled just over SDR 9.3 billion. Total gross transfers of SDRs in the same period amounted to about SDR 3.7 billion, or about 40 percent of the stock. Of this SDR 3.7 billion of turnover, about half consisted of transfers between participants, roughly divided in equal proportions between transactions with designation and bilateral transactions. The other half consisted of transactions between participants and the Fund’s General Account through which all the Fund’s operations and transactions were conducted, except those involving SDRs, which were conducted through the Special Drawing Account.
At the end of the first basic period, it was possible to make the following observations about the new reserve asset:
First, the design of the SDR facility had stood up well to its early tests. In particular, the designation mechanism had functioned satisfactorily and had assured participants with a balance of payments need that they could use SDRs to obtain foreign exchange needed to make foreign payments for goods or services. The SDR could also be freely used to make certain payments to the Fund, namely, in repurchases of members’ currencies held by the Fund as a result of their use of the Fund’s resources and the payment of charges for the use of the Fund’s resources.
Second, there had been no rush by participants with a balance of payments need to divest themselves of SDRs—the turnover was relatively low—and it was soon apparent that many central banks were willing holders of the asset.
Third, as it became increasingly evident in later years, there was, nevertheless, a need to enhance the attractiveness of the SDR as a reserve asset.
By the end of 1973, it was generally felt that the SDR should become the principal reserve asset of the international monetary system, and this was expressly stated in the Outline of Reform presented in June 1974 by the Committee on Reform of the International Monetary System and Related Issues (Committee of Twenty).
Evolution of the SDR Since 1970
Prior to the Second Amendment of the Articles
The Outline of Reform represented two years of intensive preparatory work in a period of recurrent stress in the international monetary system, which saw the eventual breakdown of the Bretton Woods system. There were periodic, severe disturbances in the major exchange markets. In August 1971, the United States suspended convertibility of the U.S. dollar into gold for official holders. Subsequently, a number of major countries adopted floating exchange rates, which, however, were managed by the respective national authorities and not left free to move in accord with market forces. These developments, and two others described below, had important consequences for the SDR as regards its value, its method of valuation in terms of currencies, and its interest rates—that is, the effective yield of the SDR.
The other two developments were (1) the growing willingness of countries to hold their currency reserves in assets denominated in currencies other than the U.S. dollar—a process that came to be known as the multicurrency reserve system—and (2) a very large expansion in international liquidity. As noted earlier, in the period immediately prior to 1970, there had been great concern about the decline in the ratio of reserves to trade and a general expectation of a global need—in a world of fixed par values that were adjustable by individual Fund members only to correct a fundamental disequilibrium—to supplement international liquidity. Expectations, whether great or small, are not always realized, however, and in the event there was a sharp expansion in total official holdings of reserve assets comprising gold (valued at SDR 35 an ounce), SDRs, reserve positions in the Fund, and foreign exchange. These holdings almost doubled from about SDR 79 billion at the end of 1969 to over SDR 152 billion at the end of 1973. The SDR allocations were a relatively minor factor in this expansion, which occurred principally in foreign exchange holdings, particularly holdings of U.S. dollars. Deficits in the U.S. balance of payments on official settlements led to an increase over these years of almost SDR 50 billion in the official claims of other countries on the United States.
Two other factors also had major implications for the SDR: (1) the growth and closer integration of capital markets, which improved access by countries to international borrowing facilities, especially the Eurocurrency markets; and (2) the adoption of widespread managed floating of exchange rates by the major industrial countries. Consequently, there was no global need to supplement reserves, and no allocations of SDRs were made in the second basic period 1973–77.
When the SDR facility was being developed, another expectation was that, with its value guaranteed in terms of gold and with any currency revaluations in terms of gold likely to be relatively few on the basis of experience since 1946, the value of the SDR would at least be maintained in terms of currencies. This expectation had been an important factor in setting the SDR interest rate at 1½ percent. However, as early as 1972, it was recognized that a new approach to the value of the SDR would need to be introduced or an increase in its interest rate might be required.
With effect from July 1, 1974, major adaptations were made in the method of valuing the SDR and in determining its interest rate. Instead of the de facto link with the U.S. dollar, it was decided to value the SDR on the basis of a basket of the currencies of 16 countries that had a share in world trade of goods and services in excess of 1 percent on average over the five-year period 1968–72. This basket was later adjusted in July 1978 by the elimination of two currencies and the addition of two others. The interest rate was raised to 5 percent, subject to adjustment at six-month intervals according to a formula related to changes in the combined market interest rate calculated on the basis of domestic interest rates for short-term instruments in France, the Federal Republic of Germany, Japan, the United Kingdom, and the United States.
Although these changes improved the characteristics of the SDR, further steps were still needed to improve its usability. The implementation of such steps, however, had to await the Second Amendment of the Fund’s Articles.
Since the Second Amendment of the Articles
On April 1, 1978, the Second Amendment of the Articles of Agreement entered into effect. With regard to the role of the SDR, the amended Articles expressly stated: “Each member undertakes to collaborate with the Fund and with other members in order to ensure that the policies of the member with respect to reserve assets shall be consistent with the objectives of promoting better international surveillance of international liquidity and making the special drawing right the principal reserve asset in the international monetary system.” In addition, the amended Articles provided for radical changes in the role of gold aimed at reducing its importance in the international monetary system.
The developments and measures described below also indicate the present role of the SDR in international transactions:
The third basic period began on January 1, 1978, and based on a proposal by the Managing Director concurred in by the Executive Board, the Board of Governors resolved in December 1978 to make allocations of SDR 4 billion on January 1 of 1979, 1980, and 1981. The total of SDR allocations now amounts to SDR 21,433 million. All 146 members of the Fund are participants in the Special Drawing Rights Department, and all except 5, which joined the Fund after January 1, 1981, have received SDRs in allocations. The People’s Republic of China received allocations totaling SDR 236.8 million and, on April 30, 1982, held SDR 215.7 million.
Another step, taken with effect from January 1, 1981, was a change in the SDR valuation basket from 16 currencies to 5—the U.S. dollar, the deutsche mark, the Japanese yen, the French franc, and the pound sterling—and its unification with the interest rate basket. The SDR interest rate, which from July 1, 1974 to June 30, 1976 averaged about 55 percent of the combined market rate determined by the interest rate basket, had been successively raised by Fund decisions to 60 percent and then to 80 percent of the combined market rate, and finally, with effect from May 1, 1981, it was raised to 100 percent. The actual SDR interest rate (and the SDR rate of charge) for the quarter that began on July 1, 1982 was 12.01 percent.
These changes meant that the SDR had finally been adapted to the prevailing international system of multiple reserve currencies and its yield had been adjusted to the market. In 1981, it thus became broadly competitive with similar holdings of the five major currencies. Its role as a reserve asset and a store of value was correspondingly enhanced.
The amended Articles and Fund decisions taken under their provisions represented other steps that helped to improve both the liquidity and usability of the SDR:
In the amended Articles, participants were allowed to use their SDRs to obtain currency in transactions by agreement with other participants (i.e., bilateral transactions), without regard to the requirement of need and without the necessity for specific authorization by the Fund.
The amended Articles also gave the Fund the authority to prescribe or permit operations in which participants may use SDRs by agreement without exchanging them directly for currency. In late 1978 and early 1979, the Fund adopted decisions that permit holders to use SDRs to settle financial obligations (other than to make donations), to make loans of SDRs at interest rates and maturities agreed between the parties, and to use SDRs in interest payments and repayment of principal. It was also decided to permit the use of SDRs as security for the discharge of financial obligations (again, other than to make donations).
The constraint of the reconstitution requirement was first eased by reducing the limit of 30 percent to 15 percent, with effect from January 1, 1979, and on April 30, 1980, it was removed altogether.
In late 1979 and early 1980, further decisions were taken to extend the usability of the SDR. Participants were allowed to use SDRs in swap arrangements and forward operations against currency or another monetary asset, other than gold, and to use them in donations.
Fund members are now required to pay all charges due to the General Resources Account in SDRs and may of course continue to make repurchases of the Fund’s holdings of their currency in SDRs. Under the Seventh General Review of Quotas, participants were required to pay 25 percent of their increased quota subscriptions in SDRs, and new members may also be authorized to use SDRs in part payment of their quota subscriptions.
For some time before the Second Amendment of the Articles entered into effect, the Fund channeled back to members much of the inflow of SDRs to the Fund by transfers of SDRs to members making purchases from the General Resources Account. Many did so and converted all or part of the amounts of SDRs obtained in this way into foreign exchange through the designation mechanism.
SDRs have been used to denominate the amounts in recent borrowing agreements between the Fund and member governments, monetary authorities, and the Bank for International Settlements. Some of these agreements permit the lender to exchange a loan claim on the Fund for promissory notes in bearer form that would be transferable to other parties, official or private.
Prescribed holders of SDRs
Under the Articles, the Fund is authorized to prescribe as holders of SDRs nonmember countries, members that are nonparticipants in the Special Drawing Rights Department, institutions that perform functions of a central bank for more than one member, and other official entities. In October 1982, 13 institutions had prescribed holder status. Institutions that are prescribed by the Fund as holders of SDRs may engage in any of these operations, but they are not eligible to receive SDRs in allocations, to use the designation mechanism, or to deal in SDRs with the Fund’s General Account, except if they are lenders to the Fund. In that case, they may, under the individual lending agreements, receive interest and principal repayments in SDRs.
Several of these institutions have engaged in transactions and operations in SDRs, and as a group they held SDRs amounting to almost SDR 4.3 million at the end of April 1982. Thus, a number of major institutions are in a legal position to acquire, hold, and use SDRs as they deem advisable under the relevant decisions of the Fund.
The SDR as a unit of account and currency peg
The SDR has been used as a unit of account in private market transactions, such as the acceptance of SDR-denominated deposits by banks and the issuance of bonds, syndicated bank loans, and certificates of deposit denominated in SDRs. An interesting although as yet very limited development is its use as a unit for invoicing private international transactions in goods and services. Some 15 international organizations use the SDR as their unit of account or as the basis of their accounting unit. The SDR is also used as a standard of value in a significant number of international conventions.
Sixteen member countries peg their exchange rates to the SDR. As at June 30, 1982, 23 Fund members, including the People’s Republic of China, pegged their currencies to a composite other than the SDR.
The use of the SDR as a unit of account to denominate a wide range of financial instruments and obligations began in 1975 with a bond issue and was given considerable impetus in 1981 from the simplification of the SDR valuation basket. However, the market in SDR-denominated assets is a small segment of the total private market. What is of particular significance is whether the development of what may be conveniently termed the “private SDR” is conducive to enhancing the role of the SDR itself as a reserve asset. I find it difficult to imagine otherwise, because a complementary “private SDR” opens up possibilities, even though their realization may be some time in the future, of linking the “private SDR” in some way with the SDR as a means of helping in the development of a more stable international payments system.
The position of the SDR today
In total amount, SDRs constitute a relatively small proportion of officially held reserves, and it is uncertain whether the stock of SDRs will be increased in the near future. At the end of April 1982, total reserves excluding gold of all countries amounted to SDR 325 billion, of which SDRs accounted for just under 5 percent. On the other hand, all 146 Fund members are participants in the Special Drawing Rights Department, and a significant number of major international institutions are prescribed holders of SDRs.
Although participants and prescribed holders are able to use their SDRs freely in a wide variety of ways, in fact, the major uses by participants are to make certain payments to the Fund itself, to obtain foreign exchange through the designation mechanism, or to obtain SDRs needed to settle financial obligations to the Fund by engaging in bilateral transactions. In the last few years, the amount of bilateral transactions by agreement between participants has increased both in number and value. A growing number of participants have been willing to provide SDRs in such transactions, and the Fund staff has been able to informally bring together parties to bilateral transactions. Some of the prescribed holders have not as yet engaged in transactions and operations in SDRs. The use of SDRs in loans and in settlement of financial obligations is growing; however, there has been no use under the decisions that allow for wider use of SDRs as security for the discharge of financial obligations or in swaps, forward operations, and donations.
The characteristics of the SDR have been greatly improved over the years—its value is more stable in terms of currencies than any single currency, and its interest rate is the average of short-term rates in the five major centers. With its effective yield comparable to the yield on a multireserve currency holding, it is an attractive asset for a monetary authority or central bank to hold as part of its foreign reserves.
The SDR, however, is subject to the constraint that the designation mechanism requires participants judged by the Fund to be sufficiently strong to accept SDRs up to a point at which their holdings of SDRs in excess of net cumulative allocations are equal to twice their net cumulative allocations. Thus, there remains a degree of compulsion in the operation of the SDR facility, and participants do not completely control their holdings of the asset.
The use of the SDR as a unit of account outside the circle of official holders has been an encouraging development which, as it expands further, can be expected to contribute appreciably to the progress of the SDR as the principal reserve asset.
Prospects for the SDR
In examining the prospects for the SDR, it is important to keep a sense of time. In a historical perspective, its evolution has been over a very brief period, and although the recent pace of change has been rapid in some other areas, such as in international communications, I doubt whether it is either reasonable or realistic to expect a similar pace of change in the international monetary system. In analyzing the prospects for the SDR, it is also important to bear in mind that reaching international agreement on what changes in its characteristics are necessary and feasible to enhance its role in the system is not likely to be a quick process. Moreover, the international monetary system is not static, and it is advisable to guard against forming firm opinions about a future monetary system based on the current situation.
Some years ago, a phrase often used by a central banker in my own country, New Zealand, was “the inevitability of gradualness.” If one subscribed to such an optimistic doctrine, one would argue with regard to the SDR that a gradual approach means that it would inevitably evolve as the principal reserve asset of the international monetary system. Nonsubscribers to this doctrine might argue quite differently. Some might state that the role of the SDR so far has been a relatively modest one, that its share in the total non-gold reserves of countries is no bigger now than when SDRs were first allocated, and that it is by no means certain that a gradual approach will result in its becoming the principal reserve asset. Others may take the view that, notwithstanding the difficulties in reaching international agreement, dramatic rather than gradual changes in the role and stature of the SDR in the international monetary system are not to be precluded.
Without subscribing to a doctrine of inevitability, I am nonetheless inclined to a pragmatic view that progress will be gradual. In this context, three questions need to be considered: Is there scope at present to improve the characteristics of the SDR? If there is, and it is utilized, would the role of the SDR be appreciably enhanced? If so, would further progress need to be made before it could be fairly claimed that the SDR is the principal reserve asset?
Under the present Articles, it would be possible to change some of the present characteristics of the SDR in a number of ways. The interest rate, for example, could be determined more frequently than once a quarter, and interest (and charges) could be paid more frequently than once a year. Such changes would make the SDR more comparable to reserve currencies as regards the calculation and payment of interest. The interest return could also be made more competitive with the return on other reserve assets. This could be achieved by setting the rate higher than 100 percent of the combined market rate or by revising the present interest rate basket to include instruments that carry higher interest rates. Such changes would bring the SDR interest rate better in line with market rates for the “private SDR,” particularly those in the form of claims on private banks.
The liquidity and usability of the SDR may be improved, even if marginally, by simplifying the present reporting required by the Fund from participants and prescribed holders when they use or acquire SDRs and by developing a more active market in SDRs by extending the Fund’s present activity in informally helping to bring together possible parties to a transaction or operation in SDRs. These and other ideas need more detailed consideration before specific proposals to implement them can be developed. The SDR is still not widely known by the public at large—it is not a tangible asset like currency and it lacks an easily understood symbol.
More fundamental issues, however, are involved in any effort to assess longer-run prospects for the SDR. Central among these issues is the manner in which international financial relations may be conducted in the future; the objectives that will be sought through international monetary cooperation and the role of the SDR in serving those objectives; the future supply of SDRs; and whether the SDR could and would be usable outside the present circle of official holders and the Fund, if not directly by the nonofficial sector, then indirectly by establishing a mechanism whereby national monetary authorities could exchange SDRs against private assets or liabilities denominated in terms of the SDR.
Judging by recent history, these issues most likely will not be settled either easily or quickly. In the meantime, however, it seems probable that further technical improvements will be made in the characteristics of the existing SDR; that the use of the SDR as a unit of account will continue to grow in both the official and private sectors, especially if different exchange rate relationships develop among the major currencies; and that, in the context of present international monetary arrangements, the SDR will continue to play a significant role in facilitating trade and financial transactions and in contributing to financial stability.
Hence, as regards the objective of making the SDR the principal reserve asset in the international monetary system, I would say that further progress will first be necessary in resolving the issues I have just mentioned before it could be unequivocably said that the objective has been attained. There are, however, reasons for optimism. For 36 years, the Fund has been an example of effective international collaboration. Its membership has increased by more than 30 since the beginning of 1970, and it has accumulated more experience in dealing with the problems of general instability and with the very difficult problems of individual member countries in establishing and maintaining a secure basis for economic growth. The private component of the international financial system is becoming more familiar with the SDR. While the amount of SDRs and members’ official assets denominated in SDRs, such as reserve positions in the Fund, constitute a small proportion of international reserves, it is nonetheless a most significant one in demonstrating the willingness of Fund members to hold such assets. I think it is fair to say that there is more general awareness of the mutual interdependence and integration of national economies and of the need for stable domestic and international economic environments if development efforts are to proceed and yield results close to their objectives.
As a pragmatist, I conclude that considerable progress will need to be made to establish the SDR as the principal reserve asset in the international monetary system. I believe, however, that it will eventually be made.
Related Reading
Byrne, William J., “Evolution of the SDR, 1974-81,” Finance & Development, International Monetary Fund and World Bank (Washington), Vol. 19 (September 1982), pp. 31–33.
Committee on Reform of the International Monetary System and Related Issues, International Monetary Reform: Documents of the Committee of Twenty (Washington, International Monetary Fund, 1974).
Cutler, David S., and Dhruba Gupta, “SDRs: Valuation and Interest Rate,” Finance & Development, International Monetary Fund and World Bank (Washington), Vol. 11 (December 1974), pp. 18–21.
Gold, Joseph, Special Drawing Rights: Character and Use, IMF Pamphlet Series, No. 13, 2nd edition (Washington, 1970).
Gold, Joseph, The Second Amendment of the Fund’s Articles of Agreement, IMF Pamphlet Series, No. 25 (Washington, 1978).
Gold, Joseph, SDRs, Currencies, and Gold: Fifth Survey of New Legal Developments, IMF Pamphlet Series, No. 36 (Washington, 1981).
Habermeier, Walter, Operations and Transactions in SDRs: The First Basic Period, IMF Pamphlet Series, No. 17 (Washington, 1973).
Hooke, A.W., The International Monetary Fund: Its Evolution, Organization, and Activities, IMF Pamphlet Series, No. 37, 2nd edition (Washington, 1982).
International Monetary Fund, International Reserves: Needs and Availability (Washington, 1970).
International Monetary Fund, Reform of the International Monetary System: A Report by the Executive Directors to the Board of Governors (Washington, 1972).
Polak, J.J., Some Reflections on the Nature of Special Drawing Rights, IMF Pamphlet Series, No. 16 (Washington, 1971).
Polak, J.J., Valuation and Rate of Interest of the SDR, IMF Pamphlet Series, No. 18 (Washington, 1974).
Polak, J.J., Thoughts on an International Monetary Fund Based Fully on the SDR, IMF Pamphlet Series, No. 28 (Washington, 1979).
Summary of Discussion
Much of the discussion on the SDR was of a technical nature, concerning such matters as the uses of the SDR, the countries that could receive allocations of SDRs, the institutions that could hold SDRs, and the formulas that were used to determine the value of and the rate of interest on the SDR. However, attention was also paid to more policy-oriented matters, including the roles assigned to the SDR under the First and Second Amendments of the Fund’s Articles of Agreement, the steps that could be taken to enhance the role of the SDR as the principal reserve asset of the international monetary system, and the reasons why no allocations of SDRs had been made or provided for since the end of the third basic period in 1981.
The First Amendment specified a rather modest role for the SDR—it was to supplement existing reserve assets, which were to remain the major components of international reserves. The Second Amendment, however, called for the SDR to become the principal reserve asset of the international monetary system, implying that SDRs should at some time replace at least part of the gold and foreign exchange holdings in international reserves. It was suggested by some participants that this indicated an inconsistency between the two Amendments and that developments since the Second Amendment came into effect indicated that the supplementary role of the SDR was still predominant.
The Fund staff argued that the difference between the roles described in the two Amendments reflected not an inconsistency but an evolution of thinking about the SDR. The objective expressed in the First Amendment—of being a supplementary reserve asset—was about the most that could reasonably be expected at that time of the new and untested asset. By the time the Second Amendment was being drafted, however, the SDR, despite its early limitations, was becoming increasingly accepted, and confidence was growing that it could eventually become the principal reserve asset of the international monetary system. The Fund staff also noted that, while the transition from supplementary to principal reserve asset had certainly not been made, the capacity of the SDR to fill the latter role had increased considerably since the Second Amendment entered into effect. The method of valuing the SDR had been simplified, the rate of interest on the SDR had been raised to the market level, and the range of uses to which the SDR could be put had been widened. As a result of these improvements, particularly the rise in the interest rate, it had become possible to abolish the requirement that members hold minimum average balances of SDRs.
Participants observed that there were important advantages to having the SDR as the principal reserve asset of the system. These included the distribution among all Fund members—and not just among those whose currencies were used as reserve assets—of the seignorage involved in reserve creation and the possibility of more effective control over international liquidity. This led to a discussion of the actions that could be taken, by the Fund and others, to promote the SDR. It was suggested that the Fund could further improve the characteristics of the asset, although it was recognized that scope was now limited for additional progress in this direction. The Fund could also set an example by making more use of SDRs and less use of currencies in its financial transactions with members. The most important action, however, would be for private economic agents to denominate their international transactions in SDRs. If banks were to open accounts denominated in SDRs, if depositors were to use these accounts, and if firms were to denominate their external borrowings in SDRs, the SDR would be well-placed to become the principal reserve asset of the international monetary system.
Participants expressed considerable interest in the reasons why the Fund had not allocated any SDRs in 1982 and had not decided to make any allocations in 1983. The Fund staff pointed out that a decision to allocate SDRs required the support of 85 percent of the Fund’s voting power. The necessary support had not been forthcoming for allocations in 1982 or 1983, largely because of concern among some of the major industrial countries that an allocation might raise doubts as to the resolve of the authorities in these countries to eliminate inflation. They added that the Managing Director was keeping in close contact with Executive Directors on the issue and would make a proposal for a resumption of allocations when a consensus in favor of such action emerged.