SPECIAL DRAWING RIGHTS: PAPER GOLD IN ACTION INTERNATIONAL FINANCE SERIES NO.23

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600030133-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 12
• Document Creation Date: December 22, 2016
• Document Release Date: October 31, 2011
• Sequence Number: 133
• Publication Date: September 1, 1970
• Content Type: IM

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W C- _ ..Vi) ?/I i .r..ff-.
God Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Special Drawing Rights: Paper Gold In Action
International Finance Series No. 23
~o~fidentiaF-
ER IM 70-132
September 1970
Copy No. 6
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by Pn unauthorized person is prohibited by law.
GROUP 1
Excluded Iron, aulon,o11C
downorodino and
dednuifie,Uon
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
September 1970
Social Drawing Ri hits:
Paper Gold In Action
Introduction
Throughout the 1960s, many of the world's
economists, monetary officials, and politicians were
increasingly preoccupied with the growing need for
greater international liquidity. Their efforts
culminated in the creation of Special Drawing Rights
(SDRs) or "paper gold," which through a simple
bookkeeping entry at the International Monetary Fund
(IMF) provide a new type of liquidity as permanent
as gold itself.
This memorandum, prepared to coincide with the
forthcoming IMF annual meeting, reviews major develop-
ments leading to the first SDR allocation on 1 Janu-
ary 1970, examines trends in the use of SDRs, and
makes some observations regarding their future.
Background
1. SDRs were created to insure continued growth
of international liquidity. In the postwar period as
a whole, world reserves of gold and foreign exchange
(principally US dollars and pounds sterling) increased
slightly more than 2% a year (see the chart). World
trade and other international transactions grew far
faster than reserves. In 1954, world reserves were
Note: This memorandum was produced soZeZy by CIA.
It was prepared by the Office of Economic Research.
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COMPOSITION OF WORLD RESERVES*
.. S ecial
Drawing
Foreign
Excha,'ge and
Reserve positions
In the IMF
1948 1933 1958 1963 1967 1960 1969 Jan. 1, 1970
'Excluding Institutional (International Monetary Fund, flank for International Settlements) gold,holdings.
70707 7.70
equal to 67% of total world imports. By 19.'i9, the
ratio had fallen to 30% (see Table 1).*
2. In spite of their slow growth, world re-
serves were considered adequate until the early
1960s. Reserves outside the US grew considerably
faster than 2%, and through the 1950s the US had
reserves to spare. Moreover, official reserves
were supplemented by various forms of international
credit -- often referred to as "conditional liquidity."**
Because merchandise, trade accounts for only a
small portion of international transactions, this
ratio is considered a less than satisfactory indi-
cator. Its widespread use, however, stems, from the
fact that data on world imports, unlike those of
many other current account items and capital flows,
are easily obtainable.
** The basic difference between conditional liquidity
and reserve assets such as gold -- that is, uncondi-
tional liquidity -- is the same as between credit and
money. The most common forms of conditional liquidity
are the IMF credit tranches and central bank swap
arrangements like those the Federal Reserve has con-
cZuded with the Bank for International Settlements
in Basel and 14 central banks worldwide. Faced with
payments difficulties, a country can often borrow
short-term foreign exchange under one or both of these
options.
2 -
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3. By the mid-1960s, however, the earlier
pattern of reserve creation could no longer be
sustained. Gold production began to level off,
while an increasing part of overall production
went into private uses as official gold holdings
fell. With sterling a weak currency, the only
available means of increasing reserves abroad was
through continued deficits in the US balance of
payments. But the United States no longer had
excess gold reserves, and other countries had
become reluctant to accept large additions to
their dollar holdings.
4. At the 1967 IMF annual meeting held in Rio
de Janeiro, member nations reached a historic agree-
ment to create a new form of unconditional liquidity,
a facility based on Special Drawing Rights in the
IMF, which would assure future increases in world
reserves. In the period following the Rio Confer-
ence, the agreement was ratified by parliaments
of 60% of the IMF member nations having 80% of
weighted voting power, and then formalized through
the deposit with the IMF of instruments of partici-
pation by members having 85% of the weighted voting
power. The first annual allocation', totaling $9.5
billion over three years, was made on 1 January
1970.*
5. The initial allocation of more than $3.4
billion in SDRs immediately raised the average
reserve-import ratio by about one and one-half per-
centage points (see Table 1). This amount is less
than the $3.5 billion originally agreed upon because
11 countries declined to accept the new facility
(see paragraph 11). More noteworthy, however, was
the fact that with the addition of the new facility
gold, for the first time in history, accounted for
less than half of total world reserves (see the
chart).
6. SDRs in their final form represent a series
of compromises. Early discussions revealed strong
* SDRe are expressed in terms of a unit of value
equivalent to 0.888671 gram of fine gold. This is
also the gold content of the US dollar at its present
par value.
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concern about the form the new facility should take.
Consequently, the SDR is both money and a form of
credit. A country can use the entire amount of its
SDR allocation in any manner it sees fit,* but to
prevent SDRs from being consistently and indiscrimi-
nately used in favor of gold or foreign exchange,
the IMF's Articles of Agreement require a country
to maintain in its reserves an average daily SDR
balance over the first five-year period equal to
30% of its net cumulative allocation. Furthermore,
the amount of SDRs allocated -- $3.5 billion in 1970
and set at $3 billion for each of 1971 and 1972 --
was a compromise between the United States' proposal
of $5 billion per year and the European estimates
of a need not exceeding $2 billion annually.**
7. Opponents of SDRs argued that the plan con-
tained inherent weaknesses. In particular, some
believed that SDRs would enable deficit countries
such as the United States to avoid the painful
measures necessary to bring payments back into
equilibrium, while at the same time allowing them
to continue exporting their inflation. These fears
have thus far been largely unfounded, primarily owing
to the relative calm pervading world financial mar-
kets since the changes in parities of the French
franc and the Deutschemark in August and October 1969,
respectively, and the subsequent normalization of
gold sales to monetary authorities by South Africa.***
In January 1970 the two major Middle East antag-
onists, the UAR and Israel, used their entire first
year's SDR quotas. Both have been accused in so
doing of furthering hostilities. Nevertheless, from
a legal point of view the only stipulation with re-
gard to these transactions is that, between now and
the end of 1974, these two countries repurchase --
"reconstitute" in IMF jargon -- enough SDRs to raise
their overall average SDR balance during the period
to a level equal to 30% of their allocations.
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Trends in the Use of SDRs
8. After eight months of operation the United
States -- having used only $20 million of its initial
allocation of $867 million -- has become the largest
net recipient of SDRs (see Table 2). To be sure,
by year's end this will most likely change as more
SDRs are used to redeem a portion of the dollars
held by foreign central banks -- that is, those in
excess of their requirements. Still, while many of
the world's money managers try to cope with infla-
tionary pressures, there is little evidence to indi-
cate that the introduction of SDRs has seriously
impeded their efforts.
9. The net use of SLRs has been less than
anticipated, reflecting the relative stability of
the international monetary system and, to a lesser
extent, the increasing availability of dollars re-
sulting from the large US payments deficit in
1970. (Table 3 contains a list of the countries
whose SDR net transfers during the first eight months
of 1970 exceeded $5 million.) At the end of August
1970, participants' net transfers of SDRs for
balance-of-payments or reserve purposes totaled $525
million. Of this amount, $253 million were trans-
ferred to the IMF General Account* for repayment of
credit or service charges. Another $272 million in
SDRs were exchanged for currency, almost entirely
under the designation system.**
10. More than half of the Fund's 116 members
have already participated in SDR transactions. A
total of 22 countries are presently net recipients
Subsequent to the allocation of SDRs on 1 January
1970, operations of the Fund have been conducted
under the auspices of two accounts. AZZ former
operations of the Fund, including sales of currencies
to members, are handled through the General Account.
SDR transactions among member countries are admin-
istered through a new account, the Special Drawing
Account.
'4'' Certain countries are designated each quarter
to accept SDRe on the basis of their reserve
strength or balance-of-payments position. The trans-
ferring countries receive in exchange currencies
"convertible in fact," currencies of those countries
whose signatures have in most cases been affixed to
Article VIII of the'Fund [Footnote continued on p. 6].
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while those transferring SDRs number 42, including
17 that have used all or virtually all of their
first SDR allocation. As was to be expected, the
less developed members, including Greece and Turkey,
have made the greatest use of SDRs. These presently
account for nearly 60% of the total. The United
Kingdom is responsible for another 23%.
11. Of the remaining inactive 52 countries, 41
are participants in the. scheme but have yet to
transfer or i:eceive SDRs, 10 have declined to partic-
ipate in the plan, and one only recently joined the
Fund. The 10 members not participating include
Ethiopia, Iraq, Kuwait, Lebanon, Libya, Nepal,
Portugal, Saudi Arabia, Singapore, and Thailand.
Although a participant, the Republic of China did
not wish?SDRs to be allotted to it in the first period.
The Yemen Arab Republic, which became a member of
the Fund and the Special Drawing Account in May,
will also receive its initial SDR allocation in the
second r' riod .
Outlook
12. SDRs are now a permanent and increasing part
of the world financial system. In less than two
years, SDRs will account for about 10% of total
world liquidity. And before the end of the three-
year introductory period, in late 1972, Fund members
will again decide upon the level of a second period
of SDR allocations. If the present rate of about
$3 billion annually were sustained through the 1970s,
SDRs could account for more than one-fourth of world
reserves by 1980. SDRs not only should insure a con-
tinued growth of world liquidity but also should be a
stabilizing influence on the international monetary
system. Unlike reserve currencies, SDRs cannot be
extinguished by being exchanged for gold -- they can
only be traded among central banks. And unlike gold,
there are no private uses for SDRs that compete with
their use as an international currency.
13. Nevertheless, SDRs are not soon likely to
supplant the dollar in the international monetary
system. Foreign central banks need working balances,
which are presently denominated largely in dollars.
Agreement, which confirms their Willingness to re-
nounce the use of exchange restrictions on current pay-
ments.
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Moreover, the private demand for dollars will prob-
ably continue to increase, as has been demonstrated
by the growth of the Eurodollar market. To be sure,
excess dollar holdings of foreign central banks can
now be used to purchase SDRs where formerly the only
alternative to holding dollars was to demand gold
from the United States and risk a monetary crisis.
In years to come, the decision to hold excess dollars
over SDRs will be based largely on the belief that
the risk is less than the interest rate differential,
at present about 7%.*
14. As confidence in the new facility increases,
the role of SDRs should expand. For example, there
has been much discussion about using SDRs as a form
of aid to the less developed countries. A certain
percentage of individual country allocations could
be placed at the disposal of the International
Development Agency (ID O, the "soft loan" window of
the World Bank. While a form of SDR aid is likely
to be discussed during the forthcoming IMF Annual
Meeting, this is not likely to become a reality for
at least several years.
?The IMF eurren'tZy pays interest on SDRs in excess
of allocations at the rate of 1-1/2% per year, pay-
able in SDRe. These payments are made in SDRs ob-
tained from countries whose present holdings are
below allocation. A charge of 1-1/2% is correspond-
ingly applied against the shortfall.
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Ratio of Reserves to Imports
Selected Years 1954-70
1954
1959
196 4
1969
1 U ~anuary
1570
World total a/
67.2
53.6
43.9
30.3
31.6
Developed countries
71.7
56.7
46.9
29.9
31.1
Of which:
United States
195.6
114.7
82.2
44.0
46.3
Common Market
countries
41.7
48.4
48.9
27.6
28.4
EFTA countries
40.0
35.4
32.5
27 '.4
28.6
Japan
30.8
36.7
26.8
25.4
26.3
Less developed countries
55.7
44.6
28.2
32.0
33.8
a. Excluding Communist countries except Yugos avia.
Table 2
Major Recipients of Special Drawing Rights
1 January-31 August 1970
SDR Holdings
as of 31 August 1970
Country
Initial
Allocation
(Million US $)
Million US $
Percentage
of
Initial
Allocation
United States
866.9
961.2
ill
West Germany
201.6
250.1
124
Netherlands
87.4
112.4
129
Belgium
70.9
93.9
132
Japan
121.8
142.5
117
Canada
124.3
144.7
116
Austria
29.4
38.2
130
South Africa
33.6
39.1
116
Australia
84.0
89.0
106
Venezuela
42.0
47.5
113
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Major Users of Special Drawing Rights
1 January-31 August 1970
SDR Holdings
as of 31 August 1970
Net Amount
Percentage
of
Transferred
Initial
Country
(Million US $)
Million US $
Allocatio
n
United Kingdom
122.7
287.2
70
India
47.4
78.6
62
Indonesia
34.8
0
0
Italy
29.4
75.6
72
United Arab Republic
25.1
0.1
Colombia
20.9
0.1
Pakistan
20.2
11.4
36
Iran
20.0
1.0
5
Yugoslavia
19.1
6.1
24
Philippines
18.5
0
0
Turkey
18.0
0.1
Greece
16.8
0
0
Israel
15.1
0
0
Morocco
14.4
0.7
5
Ceylon
13.1
0
0
Denmark
10.0
17.4
64
Sudan
9.4
0.1
2
Uruguay
8.8
0.4
4
Burma
.8.1
0
0
Syrian Arab
Republic
6.4
0
0
Ghana
6.0
5.6
48
Tunisia.
5.9
0
0
Dominican Republic
5.4
0
0
a. Less t a
9
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