Special Drawing Rights

Perhaps no feature of the international monetary system is more shrouded in mystery and confusion for the nonexpert than the special drawing right, or SDR. This should not be the case, because the SDR is a straightforward device. The SDR is world money, controlled by the IMF, backed by nothing and printed at will. Once the IMF issues an SDR, it sits comfortably in the reserve accounts of the recipient like any other reserve currency. In international finance, the SDR captures the mood of the 1985 Dire Straits hit “Money for Nothing.”

Experts object to the use of the word “money” in describing special drawing rights. After all, individual citizens can’t obtain them, and if you walk into a liquor store and try paying for a few bottles of wine with SDRs, you will not get very far. However, SDRs do satisfy the traditional definition of money in many respects. SDRs are a store of value because nations maintain part of their reserves in SDR-denominated assets. They are a medium of exchange because nations that run trade deficits or surpluses can settle their local currency trade balances with other nations in SDR- denominated instruments. Finally, SDRs are a unit of account because the IMF keeps its books and records, its assets and liabilities in SDR units. What is different about SDRs is that citizens and corporations in private transactions cannot yet use them. But plans are already afoot inside the IMF to create just such a private market.

Another objection to treating SDRs as money is based on the fact that SDRs are defined as a basket of other currencies, such as dollars and euros. Analysts with this view say that SDRs have no value or purpose independent of the currencies in the basket and so they are not a separate form of money. This is incorrect for two reasons. The first reason is that the amount of issuance of SDRs is not limited by any amount of underlying currencies in the basket. Those underlying currencies are used to calculate value but not to limit quantity—SDRs can be issued in potentially unlimited amounts. This gives SDRs a quantity, or “float,” which is not anchored to the currencies in the basket. The second reason is that the basket can be changed. In fact, the IMF has plans now under way to change the basket so as to reduce the role of the U.S. dollar and increase the role of the Chinese yuan. These two elements—unlimited new issuance and a changing basket—give the SDR a role as money in international finance independent of the underlying basket of currencies at any point in time.

The IMF created the SDR in 1969 at a time of international monetary distress. Recurrent exchange rate crises, rampant inflation and dollar devaluation were putting pressure on global liquidity and the reserve positions of many IMF members. Several SDR issues were distributed between 1969 and 1981; however, the amounts were relatively small, equivalent to about $33.8 billion at April 2011 exchange rates. After that, no SDRs were issued for the next twenty-eight years. Interestingly, the original SDR from 1969 was valued using a weight of gold. The gold SDR was abandoned in 1973 and replaced with the paper SDR currency basket still in use today.

In 2009 the world again faced an extreme liquidity shortage from losses incurred in the Panic of 2008 and the subsequent deleveraging of balance sheets of financial institutions and consumers. The world needed money fast, and the leaders of the international monetary system went to the 1970s playbook to find some. This time the effort was directed not by the IMF itself but by the G20 using the IMF as a tool of global monetary policy. The amounts were huge, equivalent to $289 billion at the April 2011 exchange rate. This global emergency money printing went almost unnoticed by a financial press that was preoccupied with the collapse of stock markets and home prices at the time. Yet it was the beginning of a new concerted effort by the G20 and the IMF to promote the use of SDRs as the global reserve currency alternative to the dollar.

Dollars, euros and yuan would not disappear under this new SDR global currency regime; rather they would still be of use in purely domestic transactions. Americans would still buy milk or gasoline using dollars, the same way Syrians could do the same locally using their Syrian pounds. However, on globally important transactions such as trade invoicing, international loan syndicates, bank bailouts and balance of payments settlements, the SDR would be the new world money and the dollar would be a subordinate part, subject to periodic devaluation and diminution in the basket according to the dictates of the G20.

In addition to the direct printing of SDRs, the IMF has more than doubled its SDR borrowing capacity from a precrisis level of about $250 billion (equivalent) to a new level of $580 billion as of March 2011. These expanded borrowings are accomplished by loans from IMF members to the IMF, which issues SDR notes in exchange. The borrowings were designed to give the IMF capacity to lend to members in distress. Now the IMF is positioned to perform the two key functions of a true central bank—money creation and lender of last resort—using the SDR as its form of money under the direction of the G20 as its de facto board of governors. The vision of the creators of the SDR in 1969 is now coming to fruition on a much grander scale. The day of the global central bank has well and truly arrived.

Even with these expanded issuance and borrowing facilities, the SDR is still far from being able to replace the dollar as the dominant international reserve currency. In order for the SDR to succeed as a reserve currency, SDR holders will require a large liquid pool of in-vestible assets of various maturities that holders can invest their reserve balances in to achieve a return and preserve value. This requires an SDR bond market with public and private instruments and a network of primary dealers and derivatives to provide liquidity and leverage. Such markets can emerge piecemeal over long periods of time; however, the G20 and IMF do not have the luxury of time, because other liquidity sources are drying up. By 2011 the Fed was facing the limits of its ability to provide global liquidity single-handed. The Chinese yuan was not yet ready to assume a reserve currency role. The euro had problems of its own, stemming from the sovereign debt crisis of its peripheral members. The IMF needed to fast-track the emergence of the SDR. Some kind of road map was required. On January 7, 2011, the IMF provided the map.

In a paper entitled “Enhancing International Monetary Stability—a Role for the SDR?,” the IMF presented a blueprint for the creation of a liquid SDR bond market, the antecedent to replacing the dollar as the global reserve currency with SDRs. The IMF’s paper identifies both potential issuers of SDR bonds, including the World Bank and regional development banks, and potential buyers, including sovereign wealth funds and global corporations. The study contains recommended maturity structures and pricing mechanisms, as well as detailed diagrams for the clearance, settlement and financing of such bonds. Suggestions are made to change the SDR basket over time so as to enhance the weight of the Chinese yuan and to diminish the weight of the dollar.

The IMF study is optimistic about the speed and stealth with which this could be accomplished. “Experience . . . suggests the process may be relatively fast and need not involve significant public support,” it states. And the IMF took no pains to disguise its intentions, explaining, “These securities could constitute an embryo of global currency.” The paper also lays out a schedule for SDR money printing, suggesting that $200 billion per year of new SDR issuance would get the global currency off to a good start.

Private organizations and scholars have also contributed to this debate. One group of multinational economists and central bankers, guided by Nobelist Joseph Stiglitz, has suggested that SDRs could be issued to IMF member countries and then deposited back with the IMF to fund its lending programs. This would accelerate the IMF’s ascension to the role of global central bank even more quickly than the IMF itself has proposed. Adding the role of depository to the already implemented roles of currency issuer and lender of last resort would make the IMF a global central bank in all but name. The rise of a global central bank and a world currency would leave the U.S. dollar and the Federal Reserve in a subordinate position by default.

Here in all its technical IMF-speak glory is the global power elite’s answer to the currency wars and the potential collapse of the dollar. Triffin’s dilemma would be solved once and for all, because no longer would a single country bear the burden of providing global liquidity. Now money could be printed globally, unconstrained by the balance of trade of the leading reserve currency issuer.

Best of all, from the IMF’s perspective, there would be no democratic oversight or accountability on its money printing operations. While the IMF was drawing up its plans for a global SDR currency, it also proposed more than doubling the IMF voting rights of Communist China at the expense of democratic members such as France, the United Kingdom and the Netherlands, among others. Interestingly, these new voting arrangements made the top twenty members of the IMF more closely resemble the list of the twenty nations in the G20. The two groups of twenty are not quite identical but they are converging quickly.

The IMF is explicit in its antidemocratic leanings, what it calls “political considerations.” The SDR blueprint calls for the appointment of “an advisory board of eminent experts” to provide direction on the amount of money printing in the new SDR system. Perhaps these “eminent experts” would be selected from among the same economists and central bankers who led the international monetary system to the brink of destruction in 2008. In any case, they would be selected without the public hearings and press scrutiny that come in democratic societies and would be able to operate in secret once appointed.

John Maynard Keynes famously remarked, “There is no subtler, surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” If not one man in a million understands debasement, perhaps not one in ten million understands the inner workings of the IMF. It remains to be seen whether we can gain a fuller understanding of those inner workings before the IMF implements its plan to displace the dollar with SDRs.

In the end, the IMF’s plan for the SDR as announced in its blueprint document is an expedient, not a solution. It confronts the imminent sequential failure of fiat money regimes by creating a new fiat money. It papers over the problems of paper currencies with a new kind of paper.

However, the plan has two potentially fatal flaws that may stand in its way. The first is timing—could the IMF’s new SDR solution be implemented before the next financial crisis? Creation of a new currency as envisioned by the IMF would take at least five years, perhaps longer. With growing budget deficits in the United States, an unresolved sovereign debt crisis in Europe and asset bubbles in China, the world may not make it to a widely available SDR without a collapse of the monetary system first.

The second flaw in the IMF’s plan involves the role of the United States. The United States has enough voting power in the IMF to stop the SDR plan in its tracks. The expansion of SDR printing and borrowing since 2009 has been accomplished with U.S. agreement, in keeping with the Obama administration’s preference for multilateral rather than unilateral solutions to global issues. A new U.S. administration in 2012 might take a different view, and there is room for the IMF’s dollar replacement strategy to emerge as a 2012 campaign issue. But for now, the SDR is alive and well and a strong entrant in the global currency sweepstakes.

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