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

• Author: Catherine R. Schenk,Robert N. McCauley
• Date: 01 June 2015
• DOI: http://doi.org/10.1111/infi.12069
• Published date: 01 June 2015

Reforming the International

Monetary System in the 1970s

and 2000s: Would a Special

Drawing Right Substitution

Account Have Worked?

Robert N. McCauley

y

and Catherine R. Schenk

z

y

Monetary and Economic Department, Bank for International Settlements,

Basel, Switzerland, and

z

International Economic History, University of

Glasgow, Scotland, UK.

Abstract

Advocates of a more plur alistic inter national moneta ry 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 ba sket, Special Draw ing

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

The authors thank Michela S catigna for research assi stance and the Economic and S ocial Research

Council for support (grant RES- 062-23-2423). The authors t hank Steven Cecchetti an d Ted Truman

for comments and participants at the E conomic History Society Conference, Oxford (2012), a nd ADB/

HKIMR/CIGI conference, Hong Kong (2012). The v iews expressed are those of the auth ors and not

necessarily those of the Bank for International Sett lements or the University of Glasgow.

International Finance 18:2, 2015: pp. 187–206

DOI: 10.1111/infi.12069

© 2015 The Authors International Finance Published by John Wiley & Sons Ltd

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and

reproduction in any medium, provided the original work is properly cited.

subsequent developments. One design issue was account losses if US

dollar yields failed to exceed SDR yields enough to offset dollar

depreciation . In fact, uncovered in terest parity di d not hold and could

well have left the accoun t persistently i nsolvent. Anothe r shortcoming

was ambition: th e proposed account pr oved simply too sma ll to achieve

the desired lowering of the dollar’s share of foreign exchange reserves.

Any new proposal needs to address these shortcomings.

I. Introduction

The financial crisis of 2008 demonstrated the US dollar’s dominance in international

finance and prompted calls to reform the intern ational monetar y system (IMS).

European banks scrambl ed to retain dollar fundi ng for their huge glob al dollar

assets: a dollar shor tage gripped fund ing markets (McGuire and von Peter 2009). To

ease this shor tage, the Fede ral Reserve exte nded dollar credi t to major central

banks, eventually wit hout limit, and to selecte d emerging market centra l banks.

This demonstration of the dollar’s pre-eminence raised agai n the long-standing

issue of the advisa bility of the IMS’s reliance on a single national currency. James

(2009), Eichengreen (2011) and McKinnon (2012) have argued that US leadership

can stabilize a do llar-centred system. Others v iew ‘dollar hegemony’as incompatible

with pluralism, whi ch would instead entail collec tive (not national) control of g lobal

liquidity, fair sharing of any rents, no nat ional privileges, a nd protection against th e

hegemon’s errors or self-deal ing.

Atthesametime,thefinanc ial crisis brought ba ck into the spotlight a lon g-

standing alter native global re serve asset, t he Special Drawi ng Right (SDR). To

counter a contraction in pr ivate financing, the U S Treasury supported the proposal

of Edwin (Ted) Truman (2009a, 2009b) for a one-time increase in the allocation of

SDRs to International Monetar y Fund (IMF) membe rs in August 2009. The IMF also

signed bilateral agreements to issue SDR-denominated notes, which Ocampo

(2010a) interpreted as a step towards a larger transformation of dollars held in

official reserves. However, the SDR 161 billion in crease left SDRs sti ll with only a

single-digit percentage of global foreign exchange reserves (Ocampo 2010b, p. 331;

Obstfeld 2011).

The widely read March 2009 statement of Xiaochuan Zhou, governor of the

Peopl e’s Bank of China, invoked the Triffin dilemma in arguing for ‘an international

reserve currency that is disconn ected from individual n ations and is able to remain

stable in the long run , thus removing the inhe rent deficiencies caused by u sing

credit-based national currencies’(Zhou 2009). This was the generalized dilemma as

stated by Padoa-Schioppa (2012): national control of global liquidity does not in

general produce an outcome that is opt imal for the world. Zhou also advo cated

centralization of reser ves in the IMF through ‘an open-ended SDR-denom inated

188 Robert N. McCauley and Catherine R. Schenk

© 2015 The Authors International Finance Published by John Wiley & Sons Ltd