Special drawing rights (SDRs) are a form of fiat international monetary reserves that substitute for gold as monetary reserves in the international economy. The SDR also serves as an international monetary unit of account in the accounts of the International Monetary Fund (IMF).
SDRs were born of a shortage of international gold reserves that arose in the 1960s. Participants at the annual meeting of the IMF in 1967 at Rio de Janeiro drafted an agreement to issue SDRs. Member countries ratified the agreement in 1969, and the first allocations of SDRs came forth in 1970. Each country received allocations of SDRs proportional to its quota of funds contributed to the IMF. The IMF receives its lending resources from the contributions of member countries, which are assigned individual quotas based on such factors as national income and volume of international trade.
Physically, SDRs are bookkeeping entries in accounts with the IMF. Known in some circles as paper gold, SDRs can be created with the stroke of a pen. At first the value of SDRs were fixed in terms of gold. In mid-1974 the gold valuation of SDRs was dropped in favor of a system that defined SDRs in terms of a “basket” of major international currencies. In 1981 the basket was simplified to five currencies, the United States dollar, German mark, French franc, Japanese yen, and British pound. The value of an SDR is based on a weighted average of the values of major international currencies. Every five years the IMF adjusts the weights, which determines the significance of each currency that enters into the value of an SDR. The IMF last adjusted the weights in 1995.
Individual countries may draw upon SDR accounts to settle international payments that could normally be settled with gold reserves or foreign exchange reserves. SDRs do not play a role in private international transactions, but, by international agreement, are accepted in intergovernmental transactions on a par with gold and foreign exchange. For example, the United States could buy French francs from France’s central bank by paying for them by drawing upon its SDR account at the IMF. The United States might use the French francs to buy goods and services from France or buy U.S. dollars in foreign exchange markets, propping up the value of the dollar.
The value of SDRs fluctuates on a daily basis, reflecting the daily fluctuations in the values of currencies in foreign exchange markets. The daily values of SDRs are reported in the foreign exchange tables in publications such as the Wall Street Journal. In time SDRs should replace gold and the United States dollar as the principal international monetary reserve. Already the IMF uses SDRs rather than a specific national currency as a unit of account in financial reports. Some countries define domestic currencies in terms of SDRs.
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