Money by Fiat

WHILE the world's attention was--and is--focused on the war in Vietnam, the Presidential campaign in the United States, and student revolt practically everywhere, a group of unremarkable men were gathered in Stockholm to engineer what may be a remarkable feat. They were delegates from the nations whose combined economic strength holds the International Monetary Fund together, and they were assembled to put the finishing touches on an economic device that could lead to an effective world government.

The device was the SDR (Special Drawing Right), the IMF's answer to the need for an expanding supply of international currency which does not require that the U.S. run a deficit or that South Africa and the Soviet Union sell their gold. SDR's will never exist except on the books of the IMF; they are strictly fiat money. They are currently called SDR's because no better name has evolved (the IMF would probably welcome suggestions). They are no more and no less than their name implies; they are the right of a member nation of the IMF, under special circumstances, to finance a balance-of-payments deficit by a transfer of the requisite amount of whatchamacallits to the accounts of other nations wishing to exchange their reserves of its currency.

The SDR was agreed upon, in principle, last fall in Rio de Janeiro by these same nations. The Stockholm Conference was and still is necessary to formalize the scheme by specifying the circumstances under which a nation may use its SDR's. It must also fix some sort of limit, probably adjusted to a nation's volume of trade and size of GNP, to which the nation may draw, and decide the manner in which the proposal must be ratified by IMF members.

DESPITE the obstructionist tactics of France (which is generally opposed to the change, but, if it should occur, wishes to be part of a board regulating the granting of SDR's--an annoying and arrogant, if not illogical, position), the SDR will probably be approved by the fixed proportion of IMF members. It could be in effect as early as next year.

The reasons for its adoption are quite clear. At present there are two major types of reserves being held by nations to finance deficits and satisfy their normal transactions demands for a freely exchangeable currency: dollars and gold. The reserves of gold which the members of the IMF may legitimately hold have been frozen; they may neither sell nor buy gold on the open market without losing their right to exchange dollars for gold at the $35 an ounce price; they can only exchange a fixed amount of "$35 gold" among themselves. The U.S. is trying desperately to eliminate its balance-of-payments deficit, so the source of dollars promises to dry up or at least stop flowing so freely.

However, as world trade increase, the amount of reserves required for transactions purposes will increase, as will the amounts required by nations for precautionary hedging against future deficits. As a nation's volume of trade expands, so does the range in which a possible deficit or surplus may lie, and unless a nation is willing to allow its exchange rate to fluctuate to absorb the surplus of deficit, the resources for financing deficits must increase. This adds up to an increasing demand for reserves at a time when the supply of gold is zero and the supply of dollars is decreasing. Faced with the alternatives of creating some sort of international currency, experimenting with freely fluctuating exchange rates, or returning to the pure gold standard, the majority of the members of the IMF indicated a preference for the first.

The SDR, when it becomes operative, will be rather restricted. There will probably be some board, consisting of both permanent and elected members, to regulate the extension of SDR's as well as explicit regulations limiting the circumstances under which they may be extended. But the institution, once started, will steadily expand in both the scope and depth of its power; the circumstances will not have to be quite so special, and the limit on drawing will be raised.

THERE WILL be a good deal of pressure for an expansion of the SDR's power from the member nations, particularly the underdeveloped nations. Because they must import large quantities of machinery and other producers' goods, they have chronic balance-of-payments difficulties and will demand more and more credit in the form of SDR's. For exactly the same reason they lack large reserves of dollars and particularly of gold. Fearing the operation of Gresham's Law (that the best currency drives out all others as a store of value) with gold being the most highly-prized form of reserves, they will press for the mandatory use of SDR's, with all other reserves being converted into SDR's at the then current rates.

What will gradually evolve is a world central bank more or less analogous to the Federal Reserve System, with power over individual nations similar, if not so complete, to the power the Fed has over member banks. It may be 20 or 30 years before the nations of the world will realize that their economic autonomy has been seriously compromised, that in fact it no longer exists. At that point, if not sooner, the nations will develop some sort of political control over the system.

As nations become increasingly linked to an international currency, and as they exploit their comparative advantages and trade comprises a larger share of their total product, they will become increasingly vulnerable to the kind of economic sanctions a central bank is capable of applying. The ability of a nation to long defy world opinion or conduct itself in a manner a majority of other nations think improper (the U.S. in Vietnam or South Africa and Southern Rhodesia within their border), would be significantly reduced.

In a classic Marxist fashion, the political "superstructure" would scramble to catch up to a profound change in the economic structure. However, the men who will preside over that change are characters who would horrify any respectable Marxist: the bankers of Western Europe and North America. It makes you wonder, at times, whether capitalism doesn't still have a few more useful functions to fulfill.