Reforming the International Monetary System in the 1970s and 2000s: Would a Special Drawing Right Substitution Account Have Worked?

Abstract

Advocates of a more pluralistic international monetary and financial system seek to reduce reliance on a single national currency and to bring international liquidity under collective control. One recently revived proposal would transform US dollar official reserves into claims denominated in the IMF's key currency basket, Special Drawing Rights (SDRs). Drawing on new archival evidence and simulations, this article highlights issues that derailed earlier agreement on such an account and shortcomings of design and ambition revealed by

“Unusual, Unstable, Complicated, Unreliable and Temporary” Reinterpreting the Ebb and Flow of Globalization

“…The conflict between national and international interest was reflected in the persistent dispute between Germany (often with the Netherlands, Switzerland,France) on one side and the US on other over which side should adjust its policies to stabilize exchanges (Germany to inflate or the US to deflate). The identification of an 'exorbitant privilege' (Rueff 1967, McCauley 2015 provided by the dollar's dominant place in foreign exchange reserves seemed to many European observers to allow the US to escape the constraints of the pegged exchange rate system. This had been foreseen by Keynes in his proposal for a 'neutral' international unit of account (Bancor, with a fixed gold value) in his 1942 International Clearing Union scheme.…”

“…In 1974 the valuation of the SDR valuation was changed from a weight in gold to a basket of 16 currencies, reduced to 5 in 1981 and with a market interest rate attached to make it a more appealing asset. On the other hand, the C20's proposal to create a substitution account to help the SDR take over more of a role as a global reserve currency from the dollar was debated throughout the 1970s but ultimately lost traction in the early 1980s as the dollar exchange rate strengthened (McCauley and Schenk, 2015).…”

Triffin Dilemma and International Monetary System : Evidence from Pooled Mean Group Estimation

“…Like the Bretton Woods system, it is incapable of imparting an acceptable macroeconomic discipline to the world's economy because, being devoid of collectively accepted anchors, it encourages the persistence of unsustainable dynamics which spawn increasingly serious crises. Triffin's criticism of an international monetary system based on an exclusively national monetary policy is still valid, although today it demands a broader formulation, capable of taking into account the exchange rate anarchy and a multiplicity of influential monetary policies…" Both the view of Zhao ( 2009) and Padoa-Schioppa (2010) have been discussed by McCauley and Schenk (2014) in the BIS Working Papers on Reforming the international monetary system in the 1970s and 2000s. In their paper, they explore the idea of a substitution account that would have allowed central banks to diversify away from the dollar into the IMF's Special Drawing Right (SDR), comprised of US dollar, Deutsche mark, French franc, Japanese yen and British pound, through transactions conducted off the market.…”

Enhanced Special Drawing Rights: How China Could Contribute to a Reformed International Monetary Architecture

“…It should be noted that other commentators are not so sanguine; seeMcCauley (2015).©2018 Institute of World Economics and Politics, Chinese Academy of Social Sciences Enhanced Special Drawing Rights…”