Burford/Rosser SDR debate.

Greg Nowell GN842 at CNSVAX.Albany.Edu
Fri Apr 30 13:56:34 PDT 1999


But as for Barkley's contention that SDR's are all backed pound for pound, dollar for dollar, with deposits of already existing money, I can see no evidence for this. This is the fundamental point I am trying to clarify here. Of course I am not saying that SDR's literally are printed. I am saying that they create credit.


On an unrelated matter I had occasion to consult the Britannica's description of the IMF (I'm using Pauly's Who Elected the Bankers? in a class, and its a pretty decent book). They wrote words to the effect that "the creation of Special drawing rights permanently expanded international liquidity." This is a way of saying they were created ex nihil by the consent of the governing parties.

Un peu d'histoire. To see how this would work, consider the primitive case of the Bank of England at its inception in 1690 something. It went something like this (the numbers are made up, but this is how it went down):

20 or so investors were asked to put up L5,000 each in gold. (=L100,000). The bank had negotiated a monopoly of the government's business. In exchange for the monopoly, the bank, having raised its capital by guaranteeing the investors 3%, turned around and lent L900,000 to the government at 8%. Its payout was L3000 (on the paid in capital) and its return on the loan to the govt was L72,000 per annum, and if you conclude that banks are the first institutioanlized form of leverage, you would be right. Pretty neat, and all they did was print bank notes for the L900,000. The convertibility of the notes to gold was "guaranteed" by the L100,000 "cover" or "reserve." *What you have here therefore is a permanent expansion of liquidity.*

Conceptually the SDR expansion is not far afield. The member states had a paid in capital of so many billions of their own currency which was the "cover" or "reserve" of the IMF's operations. Basically they "expanded liquidity" by issuing a greater liability (SDRs, the international monetary equivalent of a note) without increasing paid-in capital. You an think of the SDR as a piece of paper (or book entry) which is "redeemable" against other currencies according to its "price" which is set as some kind of weighted average against the currencies paid in to the IMF as capital. Mainly the big important currencies.

The IMF's action was functionally equivalent to changing its own capital and/or reserve requirements, over which most CBs have control in most countries. It is a recognized form of affecting "high powered money" and actually has more bang for the buck than open market operations, and is less frequently messed with because of that fact. It would be as if the Bank of England decided to expand its paper liabilities (bank notes) from L900,000 to L1,500,000 or some other number, without changing the gold "cover."

The IMF's status as a bank has not been rendered more precarious as a result because A) paid in capital has been increased from time to time and B) direct lines of credit with major central banks, who offer the IMF discount-window style resources, but with a good deal more jawboning and much less automaticity than is present in the national systems. That is to say the IMF can borrow at one rate and then relend, making money (in theory, but often) on the spread. Contributions to the IMF whether as paid in capital or as loans are carried as "assets" (investments) on the books of member governments.

HOWEVER, we can't say that the SDR is "not backed" at a fixed ratio. There is a ratio, but the IMF is capable of altering that ratio. The ratio was one thing and then it was made into antoher thing. This is a far cry from saying that we could inflate our way out of the world's woes by issuing more SDRs. This is the something for nothing idea of which Keynes was so critical. It would be analogous to saying that because the Central Bank can alter the reserve requirement or monetize at will we have no need for taxes. This idea is floated from time to time, and has proponents of one stripe or another over at PKT, but I don't buy it.

So to conclude. Rosser is right, there is a ratio of backing for an SDR. But that ratio can be changed by a vote of the member states (whose votes are weighted by paid in capital). So Burford is also right, there is a something-for-nothing quality on those relatively few occasions when the bank has increased SDR liquidity by changing its own reserve requirements. But such expansions of SDR alter the fiscal position of the IMF qua bank, i.e., its ratio of paid in capital to liabilities. It probably wouldn't be a good idea to expand SDRs indefinitely without also increasing paid in capital.

One might envison scenarios in which one wanted to create a world currency, which you could do by "monetizing" other assets (such as other currencies or other govt debt issues) with SDRs. But I imagine the conversion of the IMF into a de facto central bank would involve some very hairy portfolio decisions. And it still wouldn't get you something for nothing.

-- Gregory P. Nowell Associate Professor Department of Political Science, Milne 100 State University of New York 135 Western Ave. Albany, New York 12222

Fax 518-442-5298

More information about the lbo-talk mailing list