The Special Drawing Rights

The economic benefits of international money are substantial--- the political benefits probably alter as the countries making up the currency area change.

Also, there are strong economic reasons for believing that it is difficult to create a single currency in part because it wants to build a monetary rival to the dollar--- a little bit of the political purpose, though not an unworthy one.

Despite the increase in the Fund's capacity to make short-term loan, it became increasingly evident that additional resources were needed if the Fund was to solve some of the problems of the international monetary system.

After much debate and long deliberations on the part of the Fund itself, the Group of Ten, the finance ministers, and the governors of the central banks of the Fund members, new drawing rights, called Special Drawing Rights (SDRs) were created.

At its annual meeting in 1969, the Fund authorized the creation over the ensuing three years of SDRs to a value of $9.5 billion units, or since each unit has the value of $1, the equivalent of $9.5 billion. An initial allocation of SDRs amounting to about the equivalent of $3.4 billion was made on January 1, 1970; an additional allocation of about $2.9 billion was made on January 1, 1972.

Participants in the program are able to use their SDRs to meet balance of payments deficits in a way similar to that in which they use their holdings of gold and foreign exchange reserves. A participant with balance of payments problems instructs the IMF to draw down the balance of its SDR account in exchange for an equivalent amount of convertible currency to be used to reconstitute its reserves or finance its international transactions.

When so instructed, the IMF designates one or more of the other participants, usually with a strong balance of payments position, to transfer convertible currencies to the participant making the request. The SDR accounts of the participants furnishing the convertible currency are increased by the equivalent of the amount of the currency abroad.

Although the SDRs are designed primarily to finance countries that are in a difficult balance of payments position, and not to improve the composition of a participant's international reserves, they can be used under certain circumstances for some other purposes.

Thus a participant could use them to purchase its currency that was held by another participant, provided the latter consented. That provision was of importance to the United States in its past efforts to protect its monetary gold stock. A reduction in foreign holding of dollars would have reduced the potential demand for the reimbursement of those holdings in gold.