A global currency? No. A dollar substitute? Maybe.

Trouble in 1969

At that time, the US dollar was tied to gold. France in particular had been complaining for years about the “unfair” privileges given the dollar by its role as the prime reserve currency. SDRs addressed this concern as their value is based on a pool of major currencies rather than just one.

In a 1969 Monitor article about the creation of SDRs, I called it a “historic event.” Later developments, though, diminished any role for what was frequently called “paper gold.” The Bretton Woods international monetary system fell apart in 1973 when the US devalued the dollar against gold and subsequently let the dollar’s price be set on foreign exchange markets.

Today there are only 21.4 billion SDRs, held largely by central banks. A US dollar buys about 0.66 SDRs today.

Substitute for greenback

In late 2007, C. Fred Bergsten, director of the Peterson Institute for International Economics in Washington, proposed the creation of a “substitution account” at the IMF that could use SDRs to buy unwanted US dollars from central banks of China and other nations. Foreigners, including sovereign wealth funds and private investors now hold some $20 trillion in dollars. His idea was to avoid “the mother of all monetary crisis” should the dollar’s value plunge, lowering US living standards as import prices rise dramatically.

As an official at the US Treasury at a time of double-digit dollar inflation, Dr. Bergsten had negotiated with other key nations for creation of such an account and came close to an agreement in 1980, he recalls. Since his proposal for a substitution account first appeared in the Financial Times, he has had requests for more details from Chinese officials.

Treasury Secretary Timothy Geithner and another high Treasury official, Ted Truman, are familiar with the idea. He suspects Mr. Geithner might resurrect the idea later this year. A 1997 proposal for doubling the number of SDRs would take only US approval to come into effect That would in effect modestly expand the world’s supply of credit (money) at a time of a global slump. This could be economically helpful.

Zhou, in his paper, outlines a “grand” plan of actions to expand the role of SDRs that could lead them to become “a super-sovereign reserve currency.” He adds, “It should be a gradual process that yields win-win results for all.”

China might consider any losses on its dollar holdings as a “subsidy” for the massive creation of jobs resulting from its huge trade surpluses, Bergsten suggested.

– This blog was contributed by Monitor columnist David R. Francis.

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