I have repeatedly pointed out that it is possible that the IMF's special drawing rights (SDRs) will become the world's reserve currency.
And as I noted in April 2009, there is some possibility that the "Bancor" will ultimately fill that role:
But you probably have not heard that:
government has floated a variant of this idea, suggesting a currency
based on 30 commodities along the lines of the "Bancor" proposed by
John Maynard Keynes in 1944.
Indeed, the head of the China's central bank wrote recently:
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.
Keynes proposed that the
Bancor was to be fixed in terms of 30 commodities, of which one would
be gold. The arguments for currency fixed on a basket of commodities
was that it would stabilize the average prices of commodities, and with
them the international medium of exchange and a store of value.
China's central banker said, the goal would be to create a 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”.
But Keynes' Bancor proposal did not only entail pegging SDR's to a basket of currencies:
proposed a global bank, which he called the International Clearing
Union. The bank would issue its own currency - the bancor - which was
exchangeable with national currencies at fixed rates of exchange. The
bancor would become the unit of account between nations, which means it
would be used to measure a country's trade deficit or trade surplus.
country would have an overdraft facility in its bancor account at the
International Clearing Union, equivalent to half the average value of
its trade over a five-year period. To make the system work, the members
of the union would need a powerful incentive to clear their bancor
accounts by the end of the year: to end up with neither a trade deficit
nor a trade surplus. But what would the incentive be?
proposed that any country racking up a large trade deficit (equating to
more than half of its bancor overdraft allowance) would be charged
interest on its account. It would also be obliged to reduce the value
of its currency and to prevent the export of capital. But - and this
was the key to his system - he insisted that the nations with a trade
surplus would be subject to similar pressures. Any country with a
bancor credit balance that was more than half the size of its overdraft
facility would be charged interest, at a rate of 10%. It would also be
obliged to increase the value of its currency and to permit the export
of capital. If, by the end of the year, its credit balance exceeded the
total value of its permitted overdraft, the surplus would be
confiscated. The nations with a surplus would have a powerful incentive
to get rid of it. In doing so, they would automatically clear other
As FT Alphaville's Izabella Kaminska reported recently, the IMF has recently floated the idea of SDR and perhaps ultimately Bancor as world reserve currency:
FT Alphaville missed this IMF paper when it first came out in April, 2010.
Authored by Reza Moghadam, director of the IMF’s strategy, policy and review department, it discusses how the IMF sees the International Monetary System evolving after the financial crisis.
the eyes of the IMF at least, the best way to ensure the stability of
the international monetary system (post crisis) is actually by
launching a global currency.
And that, the IMF says, is largely
because sovereigns — as they stand — cannot be trusted to redistribute
surplus reserves, or battle their deficits, themselves.
ongoing buildup of such imbalances, meanwhile, only makes the system
increasingly vulnerable to shocks. It’s also a process that’s
ultimately unsustainable for all, says the IMF.
All in all, the IMF believes there has simply been too much reserve hoarding going on:
Reserve accumulation has accelerated dramatically in the past decade, particularly since the 2003-4. At
the end of 2009, reserves had risen to 13 percent of global GDP,
doubling from their 2000 level, and over 50 percent of total imports of
goods and services. Emerging market holdings rose to 32 percent of
their GDP (26 percent excluding China). Twenty-seven of the top 40
reserve holders, accounting for over 90 percent of total reserve
holdings, recorded doubledigit average growth in reserves over
Holdings have also become increasingly concentrated, with over half the total held by only five countries.
These numbers exclude substantial foreign assets of the official sector
not recorded as reserves, including in sovereign wealth funds (SWFs),
and yet invested in liquid, dollar denominated financial instruments,
that have grown even more in recent years.1
course, in the first instance, the solution probably lies in closer
collaboration between sovereigns, most likely via the more active use
of such things as special drawing rights, says the IMF.
in the end, a global currency makes the most sense, the paper concludes
— especially since the SDR is currently just an accounting tool that
draws on the freely usable currencies of member states , not an actual
As they summarise:
48. 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
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”.
But before you get ready to burn your fiat currency, it’s not actually a turnaround the IMF sees being executed any time soon.
As they conclude:
is understood that some of the ideas discussed are unlikely to
materialize in the foreseeable future absent a dramatic shift in
appetite for international cooperation.
However, in a possible indication of how seriously the SDR is being taken, the U.S. Postal Service is quoting SDR to dollar conversion rates:
- Convert the U.S. dollar amount to the special drawing right (SDR) value and enter it in the SDR value block. For example:
(Here is the original web page, without highlighting.).
A search of the U.S. Postal Office website shows that - as of April 2008 - the relevant web page did not have any reference to SDRs. The most recent revisions to this web page were made on July 30, 2010. However, I cannot tell whether the references to SDRs were added in the most recent July revision, or in a previous edit.
am not implying that this is nefarious. I'm not entirely sure what this
means, but - as far as I can tell - no other currencies other than SDRs
and the U.S. dollar are mentioned in this section of the Postal Service
website. At the least, it is interesting.
The Swedish postal service is also purportedly giving SDR conversions.
Update: Further digging shows that
some postal services have adopted SDRs as part of the international
multilateral agreements of the Universal Postal Union, an international organization of postal services. See this website from the Czech Republic, for example, from October 2009.
The earliest reference to postal service use of SDR's which I have found is a January 2007 version of the Swedish post office's website, stating: Posten's
responsbility for lost or damaged International Parcel Post is limited
to SDR 40 per mailing + SDR 4.50 per kilogram of the gross product
weight, in accordance with the acts of the Universal Postal Union (UPU).