Bretton Woods Committee | Tue, Feb 19, 2019
By Dr. Warren Coats
Dr. Coats (Ph.D. U of Chicago) retired from the IMF in 2003 as Assistant Director of Monetary and Exchange Department. He was Chief of the SDR division of the Finance Department from 1982-1988. This blog post is a submission to the Bretton Woods@75 initiative: a global dialogue to honor 75 years of economic progress and to revitalize the spirit of Bretton Woods now and for the future.
Few initiatives would be more in keeping with the spirit and goals of the Bretton Woods Committee than the widespread use of a truly international currency—the IMF’s SDR. The deficiencies of the SDR allocated by the IMF and held on the books of its members and a few prescribed holders need not impede the use of the SDR as a unit of account in the private sector. The following outlines the suggested content of a board paper in which IMF staff report on actions they propose to encourage the development of market SDRs, and thus to build the foundation on which the SDR can become a more important international reserve asset. IMF staff should be encouraged to prepare such a paper.
Article XXII General Obligations of Participants
In addition to the obligations assumed with respect to special drawing rights under other articles of this Agreement, each participant undertakes to collaborate with the Fund and with other participants in order to facilitate the effective functioning of the Special Drawing Rights Department and the proper use of special drawing rights in accordance with this Agreement with the objective of making the special drawing right the principal reserve asset in the international monetary system.
In support of member obligations to make “the special drawing right the principal reserve asset in the international monetary system” the IMF proposes to facilitate and encourage the private market uses of the SDR for pricing and paying for globally traded goods, as well as for denominating financial assets. The breath, depth and liquidity of such uses of the U.S. dollar is an important factor in the dollar’s widespread use in international payments and as a reserve currency.
For most purposes, the SDR, based on the market values of five major currencies, provides a more stable value for traded goods than does pricing them in any one of its currencies. Being able to settle contracts denominated in SDR in an SDR-denominated currency would further enhance the attractiveness of pricing goods and contracts in SDRs. Furthermore, denominating borrowing and lending in SDRs would give more stable value to cross border contracts than would any single currency for the same reasons. Similarly, SDR bonds would generally provide investments and liquid assets with more stable values than would bonds denominated in a single currency. Active and liquid markets in such SDR assets would help provide an attractive infrastructure for making the SDR the “principal reserve asset in the international monetary system.”
Staff will consult with the World Bank and other international financial institutions directly and, where appropriate, through member executive directors for the purpose of encouraging the extensive use of the SDR in denominating all aspects of their financial activities (borrowing, lending, financial reporting).
Staff will consult with commodity exporters directly or, where appropriate, through their executive directors and marketing organizations to urge the invoicing of such exports in SDRs.
In addition to SDR bonds that have been issued in the past and might be issued in the future, the staff proposes to issue SDR bonds reflecting a package of sovereign bonds of the five basket currencies in a range of maturities following the proposal of Joseph Gagnon: https://piie.com/blogs/realtime-economic-issues-watch/currency-system-multi-polar-world. The purpose is to increase the amount of SDR assets available in the market.
Staff will develop model SDR bond contracts in consultation with the World Bank to facilitate the issuance of such bonds in the private sector. Staff will promote such SDR borrowing where it makes economic sense and will lead the development of secondary trading in SDR bonds and other assets.
Digital SDR currency
Staff will develop a procedure for issuing and using market SDRs following currency board rules and backed 100% by official SDRs or by an appropriate mix of sovereign debt of the five basket currencies.
Staff proposes the establishment of an IMF trust fund that would issue such SDRs (M-SDRs) to AAA or AA international banks upon their request and payment of the equivalent value of one or more of the five basket currencies (and would redeem them under similar arrangements). As with other IMF trusts, staff would approach the BIS to operationally manage the issuance and redemption of M-SDRs and the maintenance of the O-SDR asset backing (or its equivalent in the five currencies in the valuation basket). Banks offering M-SDR deposits/currency to their customers would be required to hold a 100% SDR reserve backing with the IMF SDR trust fund. The base money M-SDRs issued by the IMF trust fund would perform the same payment settlement function as do central banks for the base money they issue, with the critical difference that its depositors/participants would be global rather than national. This would enable virtually instantaneous final settlement of M-SDR payments globally.