Reforming the International Monetary System in the 1970s and 2000s: Would an SDR Substitution Account Have Worked?

38 Pages Posted: 29 Apr 2014

See all articles by Robert N. McCauley

Robert N. McCauley

Bank for International Settlements (BIS)

Catherine R. Schenk

University of Glasgow - Economic and Social History

Abstract

This paper analyses the discussion of a substitution account in the 1970s and how the account might have performed had it been agreed in 1980. The substitution account would have allowed central banks to diversify away from the dollar into the IMF's Special Drawing Right (SDR), comprised of US dollar, Deutsche mark, French franc (later euro), Japanese yen and British pound, through transactions conducted off the market. The account's dollar assets could fall short of the value of its SDR liabilities, and hedging would have defeated the purpose of preventing dollar sales. In the event, negotiators were unable to agree on how to distribute the open-ended cost of covering any shortfall if the dollar's depreciation were to exceed the value of any cumulative interest rate premium on the dollar. As it turned out, the substitution account would have encountered solvency problems had the US dollar return been based on US Treasury bill yields, even if a substantial fraction of the IMF's gold had been devoted to meet the shortfall at recent, high prices for gold. However, had the US dollar return been based on US Treasury bond yields, the substitution account would have been solvent even without any gold backing.

Keywords: Special Drawing Right, substitution account, reserve currency, financial cycle, foreign exchange reserves, International Monetary Fund

JEL Classification: E4, F3, N2

Suggested Citation

McCauley, Robert N. and Schenk, Catherine R., Reforming the International Monetary System in the 1970s and 2000s: Would an SDR Substitution Account Have Worked?. BIS Working Paper No. 444. Available at SSRN: https://ssrn.com/abstract=2423281

Robert N. McCauley (Contact Author)

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

Catherine R. Schenk

University of Glasgow - Economic and Social History ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

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