Tuesday, July 7, 2015

Converting the SDR into Something People Can Use

Regular readers of this blog know that I have mentioned more than once the idea that the SDR used inside the IMF could be tweaked into something for use outside the IMF as a true global currency. When this idea is brought up, I can just imagine the reaction from most people.         . . . . What are you talking about?

That's a fair question and it deserves an in depth answer. I will use the Q&A format below to try and provide more information on this concept. It's not something that just sprung from my imagination. I will use some easily verifiable documentation links to show this is a real idea that has been discussed for a long time. 

Q: What is an SDR (Special Drawing Right)?

A: It's an internal form of currency used inside the IMF between central banks. You can read the IMF definition right here. You can think of it as "world money" like Jim Rickards calls it. But you cannot own it as things stand today:

"It can be held and used by member countries, the IMF, and certain designated official entities called "prescribed holders"—but it can not be held, for example, by private entities or individuals."

Q: If I Cannot Own it, How could it be a "global currency"?

A: Right now it cannot function as a global currency for use in the private sector by commercial banks or individuals. Some rules would need to be changed for that to happen. However, rules can be changed.

Q: What makes you believe the SDR could become a true "global currency" if the rules do not permit that? Has this ever been discussed at official levels?

A: The links below will provide documentation for various papers and articles that have discussed this idea. In addition, the idea of such a currency (called the bancor) has been around since the days of John Maynard Keynes. Here is some detailed history on Keynes original idea.

Below are links to documentation on this concept with some key quotes below the links:

from page 2:

"The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies."

Though the super-sovereign reserve currency has long since been proposed, yet no substantive progress has been achieved to date. Back in the 1940s, Keynes had already proposed to introduce an international currency unit named “Bancor”, based on the value of 30 representative commodities. Unfortunately, the proposal was not accepted. The collapse of the Bretton Woods system, which was based on the White approach, indicates that the Keynesian approach may have been more farsighted. The IMF also created the SDR in 1969, when the defects of the Bretton Woods system initially emerged, to mitigate the inherent risks sovereign reserve currencies caused. Yet, the role of the SDR has not been put into full play due to limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system." 

from page 11:

. . . . 

"To resolve this problem a new Global Reserve System—what may be viewed as a greatly expanded SDR, with regular or cyclically adjusted emissions calibrated to the size of reserve accumulations—could contribute to global stability, economic strength, and global equity. Currently, poor countries are lending to the rich reserve countries at low interest rates. The dangers of a single-country reserve system have long been recognized, as the accumulation of debt undermines confidence and stability. But a two (or three) country reserve system, to which the world seems to be moving, may be equally unstable. The new Global Reserve System is feasible, non-inflationary, and could be easily implemented, including in ways which mitigate the difficulties caused by asymmetric adjustment between surplus and deficit countries."

from page 26-27:

A sui generis Global Currency 

"From SDR to bancor. A limitation of the SDR as discussed previously is that it is not a currency. Both the SDR and SDR-denominated instruments need to be converted eventually to a national currency for most payments or interventions in foreign exchange markets, which adds to cumbersome use in transactions. And though an SDR-based system would move away from a dominant national currency, the SDR’s value remains heavily linked to the conditions and performance of the major component countries. 

A more ambitious reform option would be to build on the previous ideas and develop, over time, a global currency. Called, for example, bancor in honor of Keynes, such a currency could be used as a medium of exchange—an “outside money” in contrast to the SDR which remains an “inside money”.

Dr. Warren Coats - A Global Currency for a Global Economy

The above link is an article we recently ran here on the blog that covers an article by former IMF senior official Dr. Warren Coats that calls for expanding the SDR into a global currency for use outside the IMF.

Added Update January 2016 - Interview with Dr. Warren Coats - Dr. Coats answers some questions about his Real SDR Proposal

Added Update April 2017 - Dr. Coats presents the Real SDR Proposal at Kemp Forum

Added Update May 2017 - A Deeper Dive into the Real SDR Proposal


The primary point of this blog post is to establish from easily verifiable documented sources that the idea of a global currency for use outside the IMF (based on the SDR used inside the IMF) is out there. Current rules at the IMF do not permit the SDR to be used in this way. But, as we can clearly see from the above documentation, the idea of changing the rules some day to allow use outside the IMF does exist inside the system. 

If you combine the above evidence with the fact that today we have new technology that makes it possible for a digital form of global currency to be available, the idea does not seem so far fetched. A digital version of a new global currency would be attractive to the current banking system for a variety of reasons and the technology already exists.

It would also raise concerns from some that individual privacy and freedom could be jeopardized if such a global currency system were made mandatory and people were forced to use it to the exclusion of other forms of money or currency. So, how a system like this would be implemented would be critical in gaining public acceptance. 

If the currency were available as just another choice for people to consider, it should not attract much opposition. If it were mandated from a central global institution to be used to the exclusion of all other currencies or forms of money, we could expect a substantial negative public reaction.

Also, there are obstacles to this idea becoming reality. The rules would have to change which would require some kind of consensus at the IMF. As we have seen, getting consensus at the IMF for change can be difficult. We also have the BRICS nations clearly building a separate financial system that could complicate things as well if they go their own way.

For these reasons and others, I don't expect to see anything like this emerge in the near future. But, over time, it is a very realistic possibility. Especially if we do get another major global financial crisis that takes out the US dollar as the primary global reserve currency. That could open the door to a new supranational global reserve currency based on the SDR used at the IMF. It could come in a digital (mobile money) form. Absent a crisis, the change would likely unfold gradually. Time will tell.

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