The SDR: Some Problems and Possibilities

This paper was presented at a seminar for Scandinavian economists and officials held under the auspices of the International Monetary Fund at Store Kro, Fredensborg, Denmark, in September 1970. The views expressed are personal and are not necessarily those of the International Monetary Fund.

Abstract

This paper was presented at a seminar for Scandinavian economists and officials held under the auspices of the International Monetary Fund at Store Kro, Fredensborg, Denmark, in September 1970. The views expressed are personal and are not necessarily those of the International Monetary Fund.

I. The Special Drawing Right

THE YEAR 1969 witnessed a potentially important development in the international monetary system in the form of an amendment to the Articles of Agreement of the International Monetary Fund (IMF), authorizing the Fund to issue a new fiduciary international reserve asset, as and when required, to supplement the supply of traditional reserve assets for the purpose of meeting the world’s estimated need for reserves. The first allocation of the new reserve assets, called special drawing rights (SDRs), was made very shortly thereafter—at the beginning of 1970. The Fund had already for many years been generating reserve assets in the form of gold tranche drawing rights and liquid loan claims, a by-product of the extension of medium-term credit to countries in payments difficulty, undertaken on the initiative of the latter. Other fiduciary reserve claims on the Bank for International Settlements or on individual countries had also been created as a by-product of the extension of short-term credit under various arrangements. The supply of these credit-related reserves, however, was determined, at least proximately, by individual countries’ need to borrow rather than by the general need for reserves. The SDR is the first reserve asset to be supplied on the basis of a deliberate assessment of the global need for reserves and reserve growth.

Before going on to consider some of the problems that have arisen and may arise in connection with the SDR, let us recall some of the salient features both of the asset itself and of the manner in which it is issued to the world.

In the first place, the special drawing right is essentially an entry in the books of the Fund. All operations and transactions in SDRs are conducted through a Special Drawing Account, financially quite separate from the General Account of the Fund, which conducts all the rest of the Fund’s business. Special drawing rights can be held at present only by such national monetary authorities as are members of the Fund and elect to participate in the scheme, or by the General Account of the Fund, although there is a provision whereby the right to hold them may be extended to other international monetary institutions. Possession of special drawing rights entitles a country to obtain a defined equivalent amount of currency from other participating countries, and enables it to discharge certain obligations toward the General Account of the Fund.

The right to obtain currency from other countries is based ultimately on the legal obligation undertaken by all participants, when designated by the Fund, to provide convertible currency to participants using their SDRs at prescribed rates of exchange. This obligation is not unlimited but extends only to the point at which the designee is holding three times its net cumulative allocation of SDRs. Moreover, the principles on which participants are designated by the Fund to receive SDRs are such as to ensure that no country is required to hold more than its fair share of SDRs. A country is required to receive SDRs only if its balance of payments and reserve position is deemed sufficiently strong, and designations are so distributed as to promote approximate equality among participants in the ratios of their SDR holdings in excess of net cumulative allocations to their reserves in other forms, or to restore this equality if it has been disturbed.

SDRs may be transferred between any two participants by agreement without recourse to the designation system of the Fund, where the purpose is to redeem currency liabilities of the transferor to the transferee. This facility is particularly useful to the United States and the United Kingdom, to whom it offers a substitute for conversions of their currencies into gold or dollars, respectively. It is possible that the scope for transfers without designation may be extended later to other types of case.

Transfers among participants, whether with or without designation of the transferee, should be made only to the extent required to enable the transferor to avoid a declining trend in its gold and foreign exchange reserves. Use of SDRs is not subject to challenge, but if it does not fulfill the requirement of need it may be offset by designation of the transferor. The rules governing the need to use SDRs and designation, although not entirely symmetrical, are broadly intended to bring about a balanced relationship between the use and holdings of SDRs, on the one hand, and of other reserves, on the other.

Participants exchange SDRs among themselves for convertible currency at prescribed rates of exchange. The rate for the U.S. dollar is the par value of the dollar in terms of gold. The rate for any other currency is determined by the current market value of that currency in terms of U.S. dollars. This is to ensure that a participant using special drawing rights will receive the same market value, whichever currencies are provided in exchange and whichever participant provides the currency.

Participants are permitted to transfer SDRs to the General Account of the Fund for certain purposes, viz., to pay charges and to repay drawings from the Fund. The General Account, on its side, is entitled to require participants to provide their currencies in exchange for SDRs if it requires to replenish its holdings of such currencies, and may use SDRs in other transactions, such as drawings, by agreement with the participant in question.

Although participants may use their SDR balances up to the hilt if they need to do so to meet payments deficits, they are required to maintain, over any five-year period, an average balance equal to 30 per cent of their net cumulative allocations. In order to ensure, as far as possible, the observance of this requirement, the Fund will give priority in designation to those countries that need to reconstitute their SDR holdings in order to fulfill this requirement, and will designate them whether or not their balance of payments and reserve position is strong. Participants in this position may also obtain SDRs for convertible currency from the General Account or from specified other participants, who may be released for this specific purpose from the normal requirement of need to use SDRs. These provisions are necessary because there is no general right of participants to obtain SDRs from other participants or even to require other participants to convert their own currencies into SDRs.

Unless participants are continuously in too weak a balance of payments and reserve position, their SDR holdings, even if they fall to less than 30 per cent of the net cumulative allocation, are likely to be restored by the ordinary processes of designation in advance of their becoming subject to special designation for the purpose of reconstitution, and more completely than would be necessary to enable them to meet the legal reconstitution requirement.

Participants are given an incentive to hold or accumulate SDRs not only by the assurance that they can use them to meet payments deficits, and by the fact that they benefit from an absolute gold value guarantee—even in the event of a general devaluation of currencies—but also because a small interest (presently 1½ per cent) is paid on any excess of a country’s holdings of SDRs over its net cumulative allocation, and the same interest is charged on any shortfall.

Now, a word about how SDRs are brought into existence. Most of the important features of this process are referred to in Article XXIV, Section 1(a):

In all its decisions with respect to the allocation and cancellation of special drawing rights the Fund shall seek to meet the long-term global need, as and when it arises, to supplement existing reserve assets in such manner as will promote the attainment of its purposes and will avoid economic stagnation and deflation as well as excess demand and inflation in the world.

In the first place, SDRs are created by a decision of the Fund. More precisely, a decision to allocate has to be based on a proposal by the Managing Director, concurred in by the Executive Directors, and has to be voted by Governors of the Fund representing an 85 per cent majority of the voting power of all participants.

Second, the Fund’s general objective when it creates SDRs must be to meet a global need to supplement reserves, that is, the need of the membership as a whole and not merely of particular countries that happen to be short of reserves.

Third, the need in question is a need to supplement existing reserve assets. This does not necessarily imply that there must always be types of reserve asset other than SDRs, but it does imply that if such other types of asset do exist account must be taken of their existing and prospective supply.

Fourth, the need in question has to be a long-term need. This concept finds expression in the provision that decisions to allocate or cancel SDRs shall be made for basic periods that will normally be five years in duration, though they may be of some other duration: in fact, the first decision to allocate related to a basic period of only three years. Moreover, there is a provision whereby the rates of allocation during a basic period may be changed in the event of “unexpected major developments.”

In the fifth place, the manner of supplementing reserve assets is to be such as to avoid inflation and deflation in the world and to promote the Fund’s purposes. This supplies, in effect, the criterion of global need. In the Managing Director’s proposal relating to the first decision to allocate SDRs it was explained that the relevant purposes of the Fund could be grouped as follows:

  • (a) expansion of international trade, economic activity and development;

  • (b) promotion of multilateral payments and elimination of restrictions;

  • (c) promotion of exchange stability and orderly exchange rate adjustments; and

  • (d) correction of payments maladjustments and reduction in payments disequilibria without resort to measures destructive of national or international prosperity.

A further important feature of the allocation of SDRs remains to be mentioned, namely, that SDRs are to be distributed among participants in proportion to their Fund quotas but any participant that did not vote in favor of the decision may choose not to receive an allocation.

II. Experience Thus Far

We have now1 had some 13 months’ experience with SDRs. This is a very short time for an asset designed for the long run. However, the system is already working with surprising smoothness. Only seven members of the Fund, comprising 1.7 per cent of Fund quotas, have failed to become participants in the Special Drawing Account. The first decision to allocate was made for a basic period of three years, in such a way as to distribute the equivalent of approximately $3.5 billion of SDRs at the beginning of 1970 and $3 billion each at the beginning of 1971 and 1972. The issuance of SDRs, combined with certain other favorable developments, has had a good effect on the degree of confidence felt in currencies. Some $1.1 billion of SDRs has been used thus far—about 17 per cent of the amount allocated—showing that most countries have not been unduly eager to part with the new fiduciary instrument. SDRs have, however, been used, to a rather greater extent than was generally expected, for the repayment of drawings from the General Account, particularly by some less developed countries. Use of SDRs for such repayments is not subject to the requirement of need—an arrangement that can be rationalized to some extent by the fact that, from the standpoint of the General Account, SDRs are more useful assets than any particular creditor currency that might otherwise have been used for such repayment. A wide range of countries has been designated to receive SDRs—wider than the range of currencies normally used by the General Account. Practical working criteria for the need to use, and the fitness to receive, SDRs are being developed through experience. One of the minor problems here is an asymmetry between the criteria for using and for receiving, which makes possible the economically rather meaningless situation in which the same country is both receiving and legitimately using SDRs. The precise system of designation is being gradually developed in the light of experience and up to now has been working quite satisfactorily.

III. Problems and Possibilities

In turning now to some of the questions that have arisen and possibilities that have been envisaged, in academic literature and elsewhere, in connection with the SDRs, I will reverse the order in which the broad classes of topics were dealt with in Section I. The general character of the SDR is for the time being fixed, and to change its characteristics would in many cases involve amending the Articles. But the process of deciding on allocations is relatively fluid and discretionary and has already thrown up a number of issues.

Estimation of need for total reserve growth

First of all, there is the problem of how to estimate the need to supplement global reserves. This can be broken down into two subproblems: (1) How big is the need for total reserve expansion? and (2) How much of this need will be met by an expansion in other types of reserves?

We in the Fund have tried to estimate the need for total reserve increase in the world, mainly by guessing at the sort of effects that different rates of reserve growth might have on national policies, and hence on various target variables. But the trouble is that international economic policymakers are faced with a multiplicity of targets and a paucity of effective instruments. One is interested in the effects on national policies for demand management, trade and capital flows, exchange rates, and the financing of payments surpluses and deficits, and even on the willingness of donor countries to provide aid to developing countries. But, of course, it is impossible to optimize all these policies simply by manipulating the rate of reserve expansion. The particular dilemma encountered on the occasion of the first decision to allocate SDRs was how far one could go in bringing about the expansion in liquidity required to prevent the seizing up of international trade without giving undue encouragement to world inflation. Of course, some instruments other than reserve creation are at the disposal of international policymakers. For example, there is some scope for controlling the supply of types of liquidity—such as IMF drawing facilities in the credit tranches—the use of which is subject to policy conditions. Again, the Fund has a possibility of direct influence over countries’ exchange rate behavior and demand management. The Bank for International Settlements can do something to coordinate certain aspects of monetary policy. The Organization for Economic Cooperation and Development attempts to improve balance of payments adjustment among major countries by a method of direct confrontation and discussion of national forecasts and intentions. But these instruments are all rather weak in themselves and are exercised from different centers at different times.

Another type of problem in the determination of international reserve needs arises from ignorance about the relevant empirical relationships.

Owing to the novelty of deliberate reserve creation, relatively little work has been done in estimating the policy effects of reserve levels and reserve changes. If lack of research were the only trouble, it might at length be remedied. But there are more fundamental difficulties. In view of the small number of economic agents involved, namely, national governments, one can hardly hope to establish clear statistical uniformities. Then again, the existence of two-way causal relationships between reserves and national policies and the probability that the influence of reserves on policies may depend considerably on the manner in which these reserves accrue to the country in question make it difficult to gauge the strength of the influences in which one is interested without setting up models of formidable complexity.

There is no escape from these difficulties by having resort to rough-and-ready methods such as those that the Fund had to employ in preparing the first decision to allocate SDRs. On that occasion we started from the proposition that the degree of reserve ease over the period from 1954 to 1968 was about right—although possibly more than adequate at the beginning and less than adequate at the end—and we sought to extrapolate into the future the relationships between reserves and other economic variables that had prevailed in that period. But which relationships? Reserves over that period rose much more slowly than international trade, international transactions, balance of payments disequilibria, or money supply (although the last-mentioned criterion was not used). Did that mean that reserves could safely continue to rise more slowly than these other magnitudes, or was the decline in the ratio of reserves to other economic magnitudes rendered tolerable only by the special circumstances that reserves at the beginning of the period had been very high and, moreover, had been redistributed during the period from high-reserve countries to low-reserve countries? If so, one might conclude that reserves in future, to avoid stringency, would have to rise faster than before. This question of the relative importance to be attributed to reserve stocks and to reserve growth is still unsolved.

In view of all these uncertainties it is not surprising that in the Managing Director’s proposal for the allocation of special drawing rights for the first basic period the trend growth of the need for reserves over the ensuing five-year period was estimated rather broadly (at $4 billion to $5 billion a year).

Estimation of supply of other reserves

The need for reserve creation in the form of SDRs depends not only on the prospective need for reserve growth in general but also on the prospective supply of other reserves, such as gold, foreign exchange holdings, and reserve positions in the Fund. Over the period 1956-65, inclusive, reserves in these forms rose at an average rate of $1.5 billion per annum.

Now, to some extent the supply of these other reserves arises out of international credit operations. These may be called credit-related, or credit-induced, reserves. Such, for example, are reserve positions in the Fund other than those resulting from gold transactions, creditor balances arising out of mutual credit arrangements, and dollar balances that accrue when the United States provides balance of payments assistance to other countries. To some extent the supply of these reserves varies directly with the global need for reserves, and inversely with the supply of other reserves—presumably including SDRs. If this responsiveness were complete, there would be little point in issuing SDRs. However, the responsiveness of the supply of credit-related reserves to global need is very imperfect, especially in the long run, since it is geared to a disproportionate extent to the payments deficits of particular countries, and since, as far as they arise from bilateral credit arrangements, the quality of the reserves created may not be all that could be desired. Again, the tendency for the supply of credit-related reserves to offset the supply of others may be expected to be only partial. For these reasons it remains both possible and desirable to attempt to optimize the supply of total reserves through the issuance of SDRs: in estimating the need for the latter, however, the prospective supply of credit-related reserves has to be regarded as a function of the supply of other reserves as well as of the total demand for reserves and not as a fixed datum.

The supply of foreign exchange reserves in dollars and in sterling is also influenced by the payments deficits (or surpluses) of the reserve centers in question, and by the distribution of reserves among third countries. The former factor is the more important for dollars, the latter for sterling; both are difficult to predict. The growth of both gold and foreign exchange reserves may also be influenced by speculative and confidence factors that are in no way responsive to the need for reserves. The influence of speculation in gold has, of course, been damped down by the introduction of the two-tier market, and that of speculation in sterling by the introduction of the exchange guarantees for sterling balances and by improvement in the balance of payments of the United Kingdom, but this factor may still be troublesome.

In view of its dependence on factors that are highly uncertain, such as the balance of payments disequilibria of particular countries and the emergence or appeasement of speculative flurries, it is extremely difficult to predict the development of the supply of “other reserves” for a number of years ahead. By the same token, it is difficult to estimate the need for reserve supplementation through the issuance of SDRs over any such period. This suggests that the number of years ahead for which the Articles consider it normal that a decision to allocate SDRs should provide—namely, five years—may be too long, and that the three-year life span of the first basic period might in practice become the norm. Not that it is so much easier to predict the expansion of other reserves over a three-year than over a five-year period, but the shorter the period, the easier it is to corrrect, to the extent that this may be desirable, for any past deviations in actual compared with planned reserve growth. The rationale for the five-year basic period was that in view of the uncertain, but presumably long, time lags characterizing the causal linkage between reserve creation and its economic effects, there was no point in trying to gear reserve creation to short-term variations in the need for reserves. The best that could be hoped for was to get the trend growth approximately right. But such a view, though consistent with a long basic period, does not require it, any more than a Friedmanite view about the aims of monetary policy requires that decisions about the growth of the money stock should be taken only at lengthy intervals. Thus, it would be possible to determine an annual rate of allocation over a relatively short period on the basis of trend projections relating to a longer period.

However, a mere shortening of the basic period will not solve the problem either. It would be highly unsatisfactory that the amount of SDRs created, which are distributed in proportion to quota, should have to fluctuate to offset unexpected developments in the growth of other reserves, which are distributed in quite a different way. It seems to follow that something ought to be done to stabilize the growth of gold, foreign exchange, and other types of reserves, but how this is to be accomplished is far from clear. I revert to this question in the penultimate section of this paper.

Rate of interest on SDRs

The relatively high level of world interest rates, including rates paid on foreign exchange reserves, that has prevailed, and the rather rapid changes that have occurred, over the last few years, raise the question whether the rate of interest presently paid on SDRs, viz., 1½ per cent, is not too low, and whether the provisions governing rate changes are not too rigid. Under the present Articles, any increase in the rate beyond 2 per cent can take place only if the remuneration payable to net creditors of the Fund is likewise raised above 2 per cent, a decision that Executive Directors can make only by a 75 per cent majority of the total voting power. The question is the more acute in that the possibility of a rise in the dollar price of monetary gold has receded, and the fixed equivalence of the SDR in terms of gold has thereby been robbed of much of its importance.

Too low a rate of interest on SDRs can have consequences that, although limited in various ways, are inconvenient. The lower the rate of interest on SDRs, the more inclined countries in deficit will be to use their SDRs, in preference to other reserve assets, to finance their deficits, and the more likely it is that SDRs will be accumulated by surplus countries, or countries with a balance of payments and reserve position strong enough to qualify them to be designated. The lower this rate of interest, too, the less eager will be the surplus countries to accumulate SDRs. Both of these consequences may lead the surplus countries to be more grudging and negative than they would otherwise be in their estimate of global needs to supplement reserve assets on the occasion of future decisions to allocate SDRs.

The lower the interest rate on SDRs, the more inclined countries will be to repay drawings from the Fund in SDRs rather than in currency or gold. This, however, need have no international consequences, since the Fund can use the SDRs to replenish its stock of currencies and would probably be able to induce members to draw SDRs rather than currencies.

It might be thought that, given the passive role generally played by the United States in foreign exchange markets, too low an interest rate on SDRs would lead to a net transfer of SDRs to the United States and—to the extent that this was in exchange for dollars rather than for gold—to an increase in official dollar holdings, and hence in total world reserves. This tendency, however, could not go very far. It is true that a low interest rate on SDRs might make it more difficult for the United States, when it is in deficit, to induce countries to convert dollar accumulations into SDRs. The issue, however, is more likely to arise with respect to SDR conversions that are a substitute for gold conversions than to those that affect the amount of dollar reserves in the world. Moreover, it is always open to the United States, as to other countries, to use the designation mechanism to acquire the currencies it needs to finance its deficit and to reduce dollar accumulations. If, on the other hand, the United States was in a strong balance of payments and reserve position and was subject to designation, the general rules of designation would make it impossible for other countries to unload onto the United States a stock of SDRs out of proportion to its other reserves.

Indirectly, however, the low interest rate on SDRs might influence the supply of dollar reserves by affecting the choice of reserve-holding countries between gold and dollars. For example, a low rate of interest on SDR reserves might make monetary authorities want to sell more gold to the United States for dollars or to convert fewer dollars into gold in order to keep up the income from their reserve holdings.

At a more fundamental level, a lower rate of interest on SDRs, by lowering the average interest yield of reserves, might lead in the long run to a decline in the real volume of reserves that countries would wish to hold for any given rate of increase in nominal reserves. This is so because the lower the yield on reserves compared with other assets that countries might expect to be able to acquire by running less favorable balances of payments, the higher, in the short run, may be the rate of inflation that the authorities are prepared to tolerate, and although this effect will be only temporary it may bring about a once-for-all reduction in the amount of real reserves. The long-term effects on trade and exchange policy will be mixed, since the influence of reduced real reserves on balance of payments policies will be offset by the reduced yield on reserve holdings, but it is at least possible that the net effect may be to lead to more severe and widespread balance of payments restrictions and to more frequent devaluations.

While the quantitative importance of some of these interactions is uncertain, it would seem that the question of the interest to be paid on SDRs is one that deserves further thought. We cannot, however, overlook the distributional aspect of the problem, since an increase in interest on SDRs would induce a transfer of income from countries with a debtor position to countries with a creditor position in SDRs: the former might often, although by no means always, be relatively poor, the latter relatively rich.

A link between SDRs and economic development?

Domestic money is created as the counterpart of bank credit. Newly created money is not distributed among the population by a rationing procedure but accrues initially to those who receive bank credit, presumed to be those who can use it most productively. A single instrument, the national banking system, is used to serve a double purpose—that of supplying the optimal amount of liquidity and that of promoting the best use of the national capital.

In the sphere of international reserve creation, a different course has been adopted. Newly created reserves are rationed out among countries virtually as a gift in predetermined proportions. Some people have been surprised at this solution, since they had always imagined that international reserves would have to be created by a process analogous to that adopted for domestic money creation. Others have regretted it as the loss of an opportunity to kill two birds with one stone. For international liquidity, the second bird would be the promotion of an optimal distribution of world capital, not however in a purely commercial or economic sense but rather in a social sense, taking account of the desirability of richer countries assisting poorer ones. In other words, they would like to use SDR creation to help to finance the development of poorer countries.

A typical scheme would be one in which some proportion, fixed or variable, of newly issued SDRs would be allocated to the International Development Association and other institutions for financing development. The acceptance obligations associated with the amounts allocated for development would be assumed by all participating countries in proportion to quotas. The development institutions could sell the SDRs allocated to them to the countries receiving individual allocations in exchange for convertible currency, which could then be used as and when required to finance projects in the developing countries.

The allocation of SDRs to development institutions would, of course, require an amendment of the Articles of Agreement.

The strongest arguments in favor of a scheme of this kind are the following:

(1) It would probably increase the total amount of development aid accruing to the poorer countries. While there might well be some offsetting decline in the amount of aid provided directly by individual donor countries, the fact that the aid provided under the scheme would appear to governments and legislatures as a deduction from an allocation received by the country as a quasi-gift from heaven, together with considerations of prestige, humanitarianism, and special interest that would speak against too great a reduction of national aid, makes it likely that some net increase in the quantity of aid would result.

(2) Almost certainly also there would be some net increase in aid provided (a) through international institutions, (b) for well-considered projects, and (c) in a form that did not require the proceeds to be spent on the products of particular countries. In other words, there would be some improvement in the quality of aid.

The strongest arguments against any compulsory linking of the provision of aid with the receipt of SDRs appear to be the following:

(1) If the link is in fact likely to result in a net addition to the amount of development aid provided by the richer countries, it can only be because one or another of the national authorities involved in decisions to grant aid—the civil servants, the ministers, the parliament, or the electorate—is being tricked into greater generosity by the fact that aid giving and reserve receiving come in a single “package.” Of course, the whole process of representative democracy is riddled with “package deals” of all kinds. Nevertheless, many may feel that there is some constitutional impropriety about this one.

(2) Insofar as the amount of SDRs created varies from basic period to basic period, the amount of aid provided for less developed countries may tend to vary also, in a way that has nothing to do with variations in the need for such aid. The force of this objection is reduced by the fact that the timing of the actual provision of aid associated with the SDRs will not coincide with that of the SDR creation itself, and may perhaps be made to vary somewhat less. Moreover, variations in the amount of SDRs created are likely to decline in importance as the SDR gradually comes to account for a larger and larger proportion of both total reserves and reserve changes.

(3) The fact that a proportion of any SDRs received in allocation would involve the provision of aid and would, therefore, have to be earned through additional exports might well have an adverse effect on the willingness of important creditor countries to vote for adequate proposals to allocate SDRs, or even to accept allocations when voted. This might be particularly so for countries that, because of the structure of their trade or because of temporarily inadequate competitive power, appeared unlikely to be able to secure additional exports (despite the increase in imports in the developing countries) in an amount equal to the additional aid that they would be financing. This danger might be particularly great in the early years of a link arrangement, before its modus operandi had become familiar.

(4) It has been argued that the link would be a particularly inflationary way of putting SDRs into circulation, since the SDRs would, in effect, have to be earned through additional exports, and that therefore it would be inappropriate to introduce such a link in a world environment that is already too inflationary. This might be questioned on the grounds that under modern methods of demand management any additional exports arising from this cause in industrial countries would be taken into account, in the same way as any other factors affecting the current account balance of payments, in determining the fiscal and monetary policies to be pursued. From an institutional standpoint, however, it seems likely that the additional taxation required to offset the inflationary pressure arising from aid would be more easily obtained if the aid in question did than if it did not appear as public expenditure in the budget. Against this possibility that the link might increase inflationary pressure, one may set the possibility that it would improve its timing. For, insofar as the degree of world inflation was taken into account in determining the amount of SDRs to be created, there would be some tendency to countercyclical variation in the amount of aid financing carried out via the SDRs.

It would probably be difficult at this time for advocates of the link to secure the acceptance of an amendment to the Articles of Agreement authorizing the allocation of SDRs for the purpose of development financing. Such an amendment is unlikely to be attempted until ministers and civil servants in industrial countries become more generally convinced that some way must be found of increasing aid above the levels for which they can secure direct parliamentary authorization.

Should users of SDRs have the right to transfer them freely without designation and without meeting a requirement of need?

The Fund is empowered to prescribe certain transactions in which transfers of SDRs may be made, by agreement between the participants, without designation, and also to prescribe certain transactions that may be made without meeting the requirement of need. In both cases this power can be exercised for transactions that would help participants to meet the reconstitution requirement, or that would offset a misuse of SDRs, or that would bring the holdings of both participants closer to their net cumulative allocations.

If use of SDRs were completely free from the requirement of need, countries that wished to reduce the proportion of their reserves held in the form of SDRs could do so irrespective of their balance of payments positions, provided that other participants refrained from reversing the transaction. If participants in general desired to hold a lower proportion of SDRs in reserves than that which total SDRs bear to total reserves, the velocity of circulation of SDRs might rise very high.

Relaxation of the system of designation or guidance of SDR transfers could take place along a number of different routes. The scope for voluntary transactions (i.e., transfers to a willing transferee) might be extended, even indefinitely, while retaining in the background the right of users to transfer SDRs willy-nilly to designated participants. The only danger in this course would be that if SDRs became a coveted reserve asset some participants with good connections might be able to attract to themselves an undue proportion of these assets while others, who might need them more urgently, e.g., to fulfill their reconstitution obligations, were unable to obtain them.

To abolish the system of designation entirely, and with it the obligation to accept transfers of SDRs, would be a much more radical course and would risk undermining altogether an asset whose value is derived mainly from the fact that it is accepted at a fixed rate in exchange for currency.

A third possibility would be to extend the obligation to accept transfer of SDRs to undesignated participants. This, while somewhat less radical than the second course, would mean that countries in a strong reserve and balance of payments position could never be sure that they might not be called upon to acquire a disproportionate share of total SDRs up to the limits of their holding obligations—a fact that might make them reluctant to increase those obligations by voting in favor of new allocations of SDRs. Again, countries in a weak payments position might find themselves unwillingly acquiring SDRs that they would then be obliged, on pain of exhausting their stocks of intervention currency, to pass on immediately to other participants.

It seems clear that it would be unwise to venture any distance down the second or even the third of the paths described above. Just how far the Fund should go in freeing transactions between a willing transferor and a willing transferee from the requirements of designation and of need is a matter on which sound judges may differ. Doubtless, as the SDR becomes established, greater freedom in its use can be envisaged. Adoption of adequate and flexible interest rates for SDRs might facilitate greater liberalization in this respect. I am personally very skeptical, however, that any substantially freer use of SDRs under conditions in which their price in terms of currencies is fixed would produce a distribution of SDRs as acceptable as that which results from observance of the requirement of need combined with a predominance of designated transactions.

Should currencies be convertible into SDRs?

At present, participants are entitled to demand SDRs in exchange for currency only if they are in danger of being unable to fulfill their obligation to maintain an average balance of SDRs equal to 30 per cent of their net cumulative allocations. In that event they have a right to purchase SDRs, either from the General Account of the Fund or from another participant whom the Fund shall specify.

It might be thought to be advantageous if a more general right to convert currencies into SDRs were extended to countries in payments surplus. Such countries are not presently able to convert currencies in general into gold, but their ability to convert U.S. dollars into gold is an important element in their willingness to accumulate dollars to whatever extent is required to prevent their rates of exchange from appreciating beyond the prescribed margins above par value. If SDRs are to become an increasingly important element in reserves, relative to gold, it might be argued that countries should be able to convert currencies generally, or at least their intervention currency, into SDRs.

Such a right of conversion into SDRs, however, even if confined to conversion of intervention currency, would appear to be neither necessary nor desirable. A right to convert U.S. dollars into SDRs is unnecessary, since surplus countries can always, if they wish, convert into gold, and since the normal method of designating the recipients of transfers of SDRs will ensure that a proportion of their reserve accumulation will over time accrue to them in the form of SDRs. Again, an unconditional right to convert dollars into SDRs would be impracticable as long as the SDRs constitute only a small part of the total reserves of the United States as of other countries. If, on the other hand, countries were merely given a right to convert dollars into gold or SDRs at the choice of the United States, it is difficult to see that they would be any better off than they are at present. On the one hand, they would no doubt gain a possibility, which they do not have at present, of obtaining SDRs for dollars, provided that the United States agreed, even when the latter was accumulating reserves. On the other hand, they would lose the right, which they have at present, to obtain gold (rather than SDRs) for dollars, when the United States is losing reserves.2

Any right to secure conversion into SDRs, whether confined to U.S. dollars or of a more general character, would tend to run counter to the mechanism for distributing SDRs through the designation of transferees, unless the right to convert were confined to cases where the converting country was deemed to have an unduly low holding of SDRs and unless the countries required to convert were selected by a system of designation analogous (in reverse) to that used for transferees. It was in part because of the complications involved in such dual arrangements that no general system of conversion was provided for in the initial design of the SDR.

Should SDRs become the standard for par values?

At the present time the par values of currencies are measured essentially in terms of gold weight, either in ounces of gold or in U.S. dollars of a fixed gold weight, i.e., in effect, in thirty-fifths of an ounce of gold. The same is true of SDRs. In other words, gold is the standard, or numeraire, for par values.

Now anything real or imaginary can serve as a numeraire for par values. Pounds of cheese or angels’ wings would do just as well as gold. This is so because all that matters is the relative par values of currencies and of any other things whose par values are measured in terms of the numeraire.

The only significance of choosing some real asset as numeraire is to fix the par value of that asset itself, at least in certain contexts, at unity. Just how significant this is depends on the circumstances in which that par value is applicable. For gold it is applicable if the monetary authority of any country wishes to buy or sell gold. This is particularly important for a country, such as the United States, that maintains the exchange value of its currency by buying and selling gold for that currency but also for other countries that may wish to increase or reduce their stocks of intervention currency by buying and selling gold from and to the United States or each other. It is also important for certain transactions between the General Account of the Fund and its members. The fact that gold has a fixed par value is important to all countries that hold gold in their reserves.

It is sometimes suggested that gold should be replaced by SDRs as the standard for par values. It is not entirely clear how much would be accomplished by this. To be sure, the par value of the SDR itself would thereby be implicitly fixed at unity. But this would alter nothing, since the value of the SDR is already explicitly fixed in terms of gold, which is the present standard. To be sure, the par value of gold would cease to be implicitly fixed, but it would immediately become necessary—in view of the importance of monetary gold as a reserve medium—to give it an explicit par value; and if this were fixed, again nothing would be changed.

Some of those who advocate making SDRs the standard believe that to displace gold from this particular “throne” would facilitate par value changes on the part of the U.S. dollar, which might otherwise be inhibited by a fear that the increase in the dollar price of gold that would be involved might weaken confidence in the dollar as a reserve currency and lead subsequently to conversions of dollars into gold. This, however, would be avoided only if it were agreed that the “par value” of gold should always change pari passu with that of the U.S. dollar. While it is not inconceivable that the par value of gold might be made subject to change by a procedure less cumbersome than that presently provided for a “uniform change in par values,” it seems unlikely that countries with substantial gold reserves would readily agree that its value should always vary with that of the U.S. dollar. Only, perhaps, if the countries in question became convinced that the dollar would never be adjusted relative to gold but could be adjusted relative to SDRs alone might they prefer the latter arrangement to one in which they themselves had to do all the exchange rate adjustment vis-à-vis both dollars and gold.

Pooling of other reserve assets in exchange for SDRs

It is sometimes suggested that the SDR should become in effect the only reserve medium except for working balances of intervention currency. The following appears to me the simplest way of achieving this. All participants would surrender to the Fund their holdings of gold and currency in excess of agreed working balances and would receive SDRs in exchange. The Fund would hold the reserve currencies thus acquired indefinitely or over a long period of amortization. However, any new accumulation of reserve currencies in the hands of any country in excess of the limit of its working balance would be surrendered to the Fund for SDRs, and any country running short of working balances could obtain them from the Fund in exchange for SDRs. If as a result of these transactions the Fund was accumulating reserve currencies, it would present them to the issuer in exchange for SDRs: similarly, if the Fund was losing reserve currencies, it would buy them from the issuer with SDRs.

Developments of this kind would, of course, require substantial amendment of the Fund Articles, to which it would be extremely difficult, for many years to come, to obtain agreement. However, they would carry with them very important advantages. At one stroke would be eliminated (a) the possibility of a crisis in the monetary system arising out of the widespread conversion of reserve currencies into gold or other reserve currencies, (b) the possibility of unplanned increase or reduction in the amount of world reserve assets arising out of the deficits or surpluses of reserve center countries, or out of official conversions of reserve assets, and (c) the necessity to restrict the use and to control the transfer of SDRs. The system of guidance of SDR transfers would, in effect, be replaced by the obligation to sell excess currency balances to, and the right to buy working balances of currencies from, the Fund in exchange for SDRs. Indeed, the whole system of intercountry transfers of SDRs might well be replaced by transactions with the Fund.

Should private individuals be allowed to hold and use SDRs?

The holding of SDRs by private individuals is sometimes advocated on no very clear grounds—as if SDRs would somehow lack credibility as a “real” asset until they were bought and sold on private markets.

Clearly, to permit SDR transactions with private individuals would make it very difficult to retain the present system of limiting the use of SDRs by monetary authorities to the financing of payments deficits and of controlling the distribution of SDRs by designating transferees. Even if steps were taken to ensure that transactions in SDRs between monetary authorities and private individuals took place only at prices in the vicinity of parity, countries that wanted to get rid of SDRs could force down the dollar value of their currencies by buying dollars and thus make it profitable for the market to purchase SDRs from them (unless, indeed, sales to the market as well as to other authorities were made subject to the requirement of need). Again, countries that wanted to accumulate more than their normal share of SDRs might sell dollars against their own currency, thus pushing up their exchange rate to the point at which it would pay the market to sell them SDRs. Such a competition for SDRs might be as disturbing to exchange markets as the opposite tendency.

Those who advocate private holding of SDRs probably envisage that the whole apparatus of control and guidance over the use and transfer of SDRs would be abolished and that the SDR would, to a greater or lesser extent, take the place of the dollar as a means of market intervention to keep exchange rates in the vicinity of relative par values. This would amount to the institution of an SDR standard of the type of the pre-World War I gold standard (although with provision for Fund authorization of par value changes). To make this possible, a sufficient number of important countries would have to be prepared to buy and sell SDRs without limit in the vicinity of par for private as well as for official transactions. There would, moreover, probably have to be a wide private market in SDRs. (This might not be entirely impossible, when the total issue of SDRs becomes sufficiently large, in view of its stability of value and the fact that it bears interest.)

There are undoubtedly many who would prefer an international to a national intervention currency. For one thing, such an arrangement (like that discussed in the section, Pooling of other reserve assets in exchange for SDRs) would compel the United States to finance any payments deficit out of its reserves. However, it has at least one serious drawback—namely, the danger that variations in the private holdings of SDRs, inspired possibly by anticipations of par value changes, might give rise, from time to time, to drains on official reserve stocks. It would seem strange if countries, having combined to segregate private and official holdings of gold primarily in order to prevent private hoarding from depleting reserves, were to set up a new mechanism that would permit similar depletion to occur through another channel.

Les DTS: quelques problèmes et possibilités

Résumé

L’étude commence par un bref historique et une description sommaire des principales caractéristiques du nouvel instrument de réserve fiduciaire international, le Droit de Tirage Spécial du Fonds Monétaire International, facilité créée en 1969 et émise pour la première fois en 1970.

L’auteur examine ensuite certains problèmes qui se sont posés et l’évolution ultérieure éventuelle de cet instrument de réserve telle qu’elle est envisagée dans les écrits des théoriciens. Les problèmes étudiés ont trait essentiellement à l’incidence sur le besoin de DTS, de l’estimation, d’une part, du besoin de croissance des réserves totales et, d’autre part, de l’offre éventuelle d’autres instruments de réserve. Parmi les possibilités envisagées figurent 1) la variation du taux de l’intérêt à verser et à percevoir sur les DTS; 2) la création d’un lien entre l’émission de DTS et le financement du développement économique; 3) la libéralisation des transferts de DTS; 4) la convertibilité éventuelle des monnaies nationales en DTS; 5) l’institution des DTS comme étalon des parités; 6) le remplacement par les DTS de tous les autres instruments de réserve; et 7) la permission accordée aux établissements privés de détenir leurs propres DTS, et l’utilisation de ces derniers comme moyen d’intervention sur le marché pour maintenir la stabilité des taux de change.

Los DEG: Ciertos problemas y posibilidades

Resumen

Este trabajo comienza con una breve descripción de las características principales y la evolución hasta la fecha del nuevo activo fiduciario de reserva internacional, los Derechos Especiales de Giro del Fondo Monetario Internacional, establecido en 1969 y emitido por primera vez en 1970.

Se presenta después un examen de algunos de los problemas que se han planteado y las posibilidades que se han apuntado en la literatura para la futura evolución de esta modalidad. Los referidos problemas se relacionan principalmente con la estimación de la necesidad de crecimiento total de las reservas y la oferta prevista de otros activos de reserva, en cuanto que afectan la necesidad de crear DEG. Las posibilidades consideradas incluyen: 1) la modificación del tipo de interés pagado y cobrado por los DEG; 2) la creación de un vínculo entre la emisión de DEG y la financiación del desarrollo económico; 3) la liberalización de las normas sobre transferencias de DEG; 4) la concesión de convertibilidad de las monedas nacionales en DEG; 5) la adopción de los DEG como nivel fijo para la medición de las paridades; 6) la sustitución de todos los demás activos de reserva por DEG; y 7) la autorización a las instituciones privadas para que puedan disponer de los DEG, y la conversión de estos últimos en el instrumento de intervención en el mercado para la estabilización de los tipos de cambio.

*

Mr. Fleming, Deputy Director in the Research Department, is a graduate of Edinburgh University. He was formerly a member of the League of Nations Secretariat, Deputy Director of the Economic Section of the U.K. Cabinet Offices, U.K. representative on the Economic and Employment Commission of the United Nations, and visiting Professor of Economics at Columbia University. He is the author of numerous articles in economic journals.

1

This paragraph has been updated since the paper was originally presented in September 1970.

2

This statement requires some qualification, since countries’ right to obtain gold, rather than SDRs, for dollars is affected, even at present, by the right of the United States, when losing reserves, to compel these countries, if designated, to accept SDRs for dollars.