Make Way for the SDRs

U.S. Federal Reserve Chairman William McChesney Martin, looking uncommonly cheery, hailed the agreement as a "milestone," U.S. Treasury Secretary Henry Fowler was positively expansive. Said he: "This is the most ambitious and significant effort in the area of international monetary affairs since Bretton Woods."

What had happened was that representatives of the Group of Ten,* meeting in London, after years of haggling had agreed on a way to revamp the free world's overworked, undercapitalized monetary system. Basically, the plan would create artificial reserves to supplement gold, the dollar and the pound. Known as SDRs (for "special drawing rights"), they are, in effect, little more than bookkeeping entries supported by the prestige of the International Monetary Fund. Members of IMF must agree to pledge their reserves to back up the SDRs, but they will not actually make additional contributions.

Each nation will participate in proportion to its IMF deposits. The U.S., for example, accounts for 24.59% of the fund's resources.

Trade in Jeopardy. The need for some supplement to gold has long been apparent to most monetary experts. In recent years, the situation has become especially acute as hoarders have stashed away huge quantities of the metal, thus depriving international trade of its most valued medium of exchange.

Without sufficient new gold, U.S. dollars and British pounds have been relied on as the world's two most trustworthy currencies for trade. This, in turn, has led to undue pressure on dollars and pounds, which if allowed to continue, could stagnate foreign trade. So far, at least, international trade continues to thrive, and has actually doubled in the past ten years. But the worrisome fact remains that during this same period, world reserves have grown by barely 40%.

For Britain and the U.S., whose currencies and balance of payments have borne the brunt of the increased world trade, the de-emphasis of gold and hard currency should bring some relief. The London agreement still awaits approval, however, by the 106 nations of the International Monetary Fund, which meets later this month in Rio de Janeiro. At that time, the plan will be spelled out in further detail. Remaining to be decided, for instance, is the amount of special drawing rights to be created. Best estimate is between $1 billion and $2 billion for a start. Though small in amount, the SDRs should, nevertheless, give the fund's membership an opportunity to test the new concept. If the drawing rights prove effective, they may be expected to be increased. As the Federal Reserve's Martin noted: "Like any new asset it must earn acceptance. You don't make a tree, a tree grows."

*Belgium, Britain, Canada, France, Italy, Japan, The Netherlands, Sweden, the U.S.

and West Germany.

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