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Date: 13 August 2014
The IMF, the SDR, and the Dollar: One Big Happy Family
The SDR is a fake currency issued by the International Monetary Fund.
It
was invented in 1969, the first year of the Nixon administration. It
was a stop-gap measure to save the fixed exchange rate system of
currencies, which came into existence in 1946, when the 1944 Bretton
Woods system was implemented.A fixed exchange rate is a government-imposed price control on currency prices. It cannot survive. No price control system ever does. This is the heart of the matter. When you think "fixed exchange rates," think "price control."
The controls never worked well. There were devaluations. But they were always overnight operations -- denied by government officials right up to the devaluation.
BRETTON WOODS
Bretton Woods was a bureaucrat-engineered Rube Goldberg system. It was developed mainly by a Communist agent in the Treasury, Harry Dexter White. This Soviet connection was denied by liberals for over 60 years, but a book by an economist with the Council on Foreign Relations, Benn Steil, has settled the issue. Here is the CFR's review of the book. In April 2013, the CFR's journal, Foreign Affairs, ran article by the book's author. The article was titled, "Red White."
White thought that capitalism would collapse within a decade. He thought the USSR would become the dominant economic power. The IMF was White's way to make the transition. He thought it would fail, and said so. The Truman administration therefore ignored the IMF. Steil writes:
Truman's State Department effectively mothballed the fund, dismissing the assumptions that had underwritten White's earlier belief in it: that Soviet cooperation would continue into the postwar period; that Germany's economic collapse could be safely, and indeed profitably, managed; that the British Empire could be peaceably dismantled; and that short-term IMF credits would be sufficient to reestablish global trade. These assumptions had been based on "misconceptions of the state of the world around us," Dean Acheson, Truman's final secretary of state, later reflected, "both in anticipating postwar conditions and in recognizing what they actually were when we came face to face with them. . . . Only slowly did it dawn upon us that the whole world structure and order that we had inherited from the nineteenth century was gone and that the struggle to replace it would be directed from two bitterly opposed and ideologically irreconcilable power centers."In short, the IMF was correctly seen as a useless bureaucracy. It still should be.
The Bretton Woods agreement was an extension of the gold exchange standard, which was a bureaucratic replacement for the full gold coin standard. The full gold coin standard ended in the fall of 1914, when Europe's governments all stole the depositors' gold in each nation's commercial banks. Then each government had its central bank inflate to help pay for the war: taxation by inflation.
The gold exchange system was cobbled together at the Genoa Conference in 1922. The system rested on this asssumption: the convertibility of two major currencies into gold. Two nations stood behind this: Great Britain and the United States. It was a government-to-government arrangement. Great Britain defaulted in 1931. It went off the gold coin standard: 1925-31. The U.S. defaulted in early 1934: it henceforth demanded $35 for an ounce of gold, not $20. It stiffed the world's governments. It had already stiffed the American people, whose gold it had confiscated, beginning the previous April: Roosevelt's Executive Order 6102.
In 1969, the U.S. government was about to stiff the world's governments again -- big time. They had bought Treasury IOU's on the assumption they could get gold at $35 an ounce at any time. On August 15, 1971, Nixon unilaterally closed the gold window. The rest of the world now sat on Treasury IOU's that were no longer backed by gold.
It still does.
THE SDR
In 1969, the fixed-rate system was coming apart. Britain's devaluation in November 1967 was the biggie. There was too much monetary inflation in Britain. Prices were rising. The fixed rate of exchange could not hold. Britain was running out of dollars to hold up the pound's international value. Finally, the government gave up. It devalued.
Next, it was the United States' turn.
Lyndon Johnson was fighting two wars, both of which America lost: the war in Vietnam and the war on poverty. He lowered marginal income tax rates in 1964 to 70% from 99%. He refused to raise taxes. The phrase was popular: "guns and butter." By 1969, there was price inflation. There was also a run on the federal government's gold supply, because foreign governments demanded payment, which they could do under Bretton Woods. France was the main "culprit." The U.S. Treasury was experiencing a classic bank run.
Here was what the International Monetary Fund did, according to Wikipedia. It created a new fiat non-currency, the SDR.
Special drawing rights (XDR - aka: SDR) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF). The XDR is not a currency per se. It instead represents a claim to currency held by IMF member countries for which they may be exchanged. As they can only be exchanged for Euro, Japanese yen, pounds sterling, or U.S. dollars, XDRs may actually represent a potential claim on IMF member countries' nongold foreign exchange reserves, which are usually held in those currencies. While they may appear to have a far more important part to play or, perhaps, an important future role, being the unit of account for the IMF has long been the main function of the XDR.Can SDR's replace a major currency? No.
Special drawing rights were created by the IMF in 1969 and were intended to be an asset held in foreign exchange reserves under the Bretton Woods system of fixed exchange rates. 1 XDR was initially defined as 1 USD, equal to 0.888671 g of gold. After the collapse of that system in the early 1970s the XDR has taken on a far less important role. Acting as the unit of account for the IMF has been its primary purpose since 1972.
The IMF itself calls the current role of the XDR "insignificant". Developed countries, who hold the greatest number of XDRs, are unlikely to use them for any purpose. The only actual users of XDRs may be those developing countries that see them as "a rather cheap line of credit".
One reason XDRs may not see much use as foreign exchange reserve assets is that they must be exchanged into a currency before use. This is due in part to the fact private parties do not hold XDRs: they are only used and held by IMF member countries, the IMF itself, and a select few organizations licensed to do so by the IMF. Basic functions of foreign exchange reserves, such as market intervention and liquidity provision, as well as some less prosaic ones, such as maintaining export competitiveness via favorable exchange rates, cannot be accomplished directly using XDRs. This fact has led the IMF to label the XDR as an "imperfect reserve asset".
Another reason they may see little use is that the number of XDRs in existence is relatively few. As of January 2011, XDRs represented less than 4% of global foreign exchange reserve assets. To function well, a foreign exchange reserve asset must have sufficient liquidity, but XDRs, due to their small number, may be perceived to be an illiquid asset. The IMF says, "expanding the volume of official SDRs is a prerequisite for them to play a more meaningful role as a substitute reserve asset".So, SDR's are not a currency. They were never intended to be a currency. They are accounting assets that can be exchanged for one of four major currencies by central banks. They are temporary stopgap majors used by governments to delay the day of reckoning: their refusal to supply a handful of foreign currencies on demand. They slow "bank runs" on national treasuries, but not for long.
The SDR is tied to the dollar. "Due to fluctuating exchange rates, the relative value of each currency varies continuously and so does the value of the XDR. The IMF fixes the value of one XDR in terms of U.S. dollars every day."
Richard Cooper, an economist who has taught at Harvard and Yale, has been a high-level advisor for 50 years. He is a member of the Council on Foreign Relations, the Trilateral Commission, and the Aspen Strategy Group. I would have to describe him as well-connected. In a speech honoring the Bretton Woods' 70th anniversary in May, he said this:
I cite this background to indicate that I have been a supporter of what became the SDR from the beginning, and also of increasing its role in the international monetary system. I consider myself one of the many grandfathers of the SDR, and have nostalgic feelings towards it. If I had a magic wand, I would transform all of today's official foreign exchange and gold reserves, beyond working balances, into SDRs. As indicated below, I would also enlarge the capacity of the IMF to issue SDRs, and engage in regular and as needed irregular issuances of SDRs. . . .
As I indicated above, I would prefer an SDR-based international monetary system. But we have no magic wand to bring it about. It would therefore have to be negotiated by governments, and the negotiations, we know from past efforts to negotiate changes in the international monetary system, would be difficult and likely contentious. Would the gains from shifting to an SDR-based system exceed the costs, given the many other issues on the international negotiating agenda -- climate change, non-proliferation, international financial regulations, and the future of the trading system, to name only four -- and the limited capacity of leaders to handle many high-level issues at once? I do not know the answer, but even to ask the question suggests doubts.In 1974, I heard him give a speech at the Committee on Monetary Research and Education. He predicted that, by 2010, there would be a new international monetary order. He is older now. He knows better.
CONCLUSION
There are a few people who think the IMF's SDR's will replace the U.S. dollar. I suggest that you ignore such speculation. Something may replace the dollar someday. It will not be the SDR.
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