Commercialize the SDR

BERKELEY – Zhou Xiaochuan, the governor of the People’s Bank of China, made a splash prior to the recent G-20 summit by arguing that the International Monetary Fund’s Special Drawing Rights should replace the dollar as the world’s reserve currency. His reflections elicited nothing if not mixed reactions.

Sympathizers acknowledged the contradictions of a system in which a national unit is used internationally. Central banks understandably seek more reserves as their economies grow. But if those reserves mainly take the form of dollars, then their rising demand allows the United States to finance its external deficit at an artificially low cost. In turn, this allows unsustainable imbalances to build up, leading to an inevitable crash. Recent events have highlighted this problem – and Governor Zhou thus was right to call for a different system.

But skeptics question whether the SDR could ever replace the dollar as the world’s leading reserve currency, for the simple reason that the SDR is not a currency. It is a composite accounting unit in which the IMF issues credits to its members.

Those credits can be converted into dollars and other currencies at the Fund, and can be used in official transactions among IMF member countries. But they cannot be used in the other transactions in which central banks and governments engage. They cannot be used to intervene in foreign-exchange markets, or in other transactions with market participants. This means that the SDR is not an attractive unit for official reserves.