Always the bridesmaid, never the bride: the history and future of IMF special drawing rights as an international reserve currency

Abstract

Special Drawing Rights (SDRs), the synthetic reserve asset issued by the IMF since the 1970s, have been touted as an alternative to the dollar as the world’s primary reserve asset since 1971 and still receive vocal support today. It is striking, then, that the SDR accounts for a mere 0.5% of world reserves today and are mostly considered an irrelevant oddity. In this essay, I seek to explain the SDR’s failure to catch on using archival evidence from the US National Archives and IMF. I argue that the political compromises necessary to reach agreement on the SDR’s creation left it incapable of playing a major reserve role by design and incapable of adapting to the rapidly changing international monetary system of the 1970s. Further, the national interest of the United States in supporting the dollar’s reserve role and lack of consistent support for the SDR in Europe left it without the political support it needed during 1970s’ reform discussions; even short periods of support were conditioned on alignment with American and European objectives and evaporated when interests changed. I conclude by assessing the conditions under which the SDR might see an expanded role and argue that such conditions are unlikely to materialize in the near future.

Keywords:

• special drawing rights
• International Monetary Fund
• reserve currency
• dollar
• international monetary reform

Acknowledgments

The author is grateful to Professor Niall Ferguson and Professor Charles Maier for their guidance and comments during the writing of this article.

Notes

1. The French were greatly influenced by the report of the G-10’s Ossola Group, which argued that a gold-linked reserve would tend to enhance the role of gold by allowing for additional gold conversions from countries like the United States without supplanting gold as a primary reserve asset (Report of the Study Group, 1965, p. 75).

2. The reconstitution requirement held that “a participant’s net use of its special drawing rights must be such that the average of its daily holdings of special drawing rights over a 5-year period will not be less than 30% of the average of its daily net cumulative allocations of special drawing rights over the same period,” and the designation requirement held that the Fund could require SDR holders to exchange them with another Fund member for currency in the event of special need, usually a balance of payments problem (Minutes of the Executive Board Meeting 69/86, 1969, p. 6).

3. As the international monetary system evolved away from gold, the SDR was changed from gold valuation to currency basket valuation in order to make it more competitive with currencies, rather than gold. As with other features of the SDR, however, the IMF was constantly playing catch-up with the international monetary system to make the SDR compatible with it and almost always losing that game.

4. In the minutes preceding the vote on the first allocation, Malek Merican, the Malaysian member of the Executive Board, explicitly noted the lack of developed nation support for an SDR-aid link and the failure to include it in the First Amendment (Minutes of the Executive Board Meeting 69/86, 1969, p. 6).

5. It is also worth commenting on the United States’ antipathy toward the vocal Mr. Schweitzer. If the financial press is to be taken as credible, American bitterness at his assertiveness led them to blackball him as Managing Director in an attempt to limit the growing influence of the IMF (The Road to Washington, 1972).

6. It is not uncommon in the Treasury papers of the period to find statements like “The objective of the above program is to maintain, despite limited convertibility, the reserve currency use of the dollar to the fullest extent possible” and repeated references to the value of deficit spending flexibility and/or the dollar standard (Bennett, 1972, pp. 3–4; Nelson, 1969, p. 6).

7. Under Shultz, the Treasury Department repeatedly lauded the SDR’s potential role in facilitating supplementary reserve growth. Shultz’s unwillingness to follow through on the SDR had far more to do with his priorities than any fundamental antipathy (U.S. Department of the Treasury, 1973, pp. 2–5).

8. The exchange risk was fairly minimal in the grand scheme of these. The US would have had a larger burden than other nations, but certainly not one it could not afford to bear.

Additional information

Notes on contributors

Joshua P. Zoffer

Joshua P. Zoffer recently graduated from Harvard University. He is the recipient of the 2013 Undergraduate Award in International Relations & Politics for the best undergraduate paper in international relations in the world and was the 2014 World Universities Debating Champion.