The Paper Solution

After four years of bickering, bargaining and brain-racking compromise, 107 nations reached a historic agreement last week in Rio de Janeiro. They found a mutually satisfactory method for overhauling the free world's strained and out-of-date monetary system. Without dissent, finance ministers from the member countries of the powerful International Monetary Fund approved the cautiously controlled creation of what amounts to a new kind of international money--a combination of currency and credit that would supplement the gold, dollars and pounds that now bankroll world trade and investment.

Such an ambitious step has never before been attempted. The Rio agreement, in fact, is only a beginning; the accord must still be reduced to legal form and then ratified by national legislatures. Moreover, further agreement will be needed on when to put the plan into operation. Best guess: 1969 at the earliest.

Artificial Reserves. The new money goes by the awful label of S.D.R. (for "special drawing rights"). It will consist of wholly artificial reserves, set up as a separate fund on IMF's books and backed by lOUs in the currencies of participating countries. Nations will automatically be credited with S.D.R. in proportion to their regular IMF deposits, but only 30% of S.D.R. actually used need ever be repaid. The other 70% becomes a permanent increase in each country's liquid assets--"paper gold" that moneymen feel should some day become as coveted as the metal.

Considering S.D.R.'s complexity, it is just as well that tourists and businessmen will continue to pay their bills in national currencies. Governments alone will be eligible to use S.D.R. and even then only to settle international debts in limited quantity. The idea is to test the plan gently at first by creating between $1 billion and $2 billion worth of S.D.R. a year over a five-year period. But a solid decision remains some years off.

The need for such reform has grown more and more obvious to experts. World trade has doubled over the past decade, but reserves to finance it have grown only 40%. Last year hoarders squirreled away almost as much gold as the world mined; with increasing industrial demand for the metal (for everything from computer diodes to the skin of Titan III), the store of gold in the free world's central banks actually dwindled for the first time in modern history. So far, the U.S. and British balance-of-payments deficits have covered the gap, but if and when the deficits are brought under control, the resulting shortage of funds could cripple international commerce.

Thus Japanese Finance Minister Mikio Mizuta echoed the sentiment of most of the 2,200 delegates, bankers and officials in Rio when he called last week's agreement "the greatest step forward since the creation of the IMF" 23 years ago at Bretton Woods, N.H. It was also a considerable personal triumph for U.S. Treasury Secretary Henry Fowler, who had to overcome the fears of skeptical central bankers that the U.S. would use S.D.R. to cover up its chronic payments deficit.

Picaresque Assets. True to Gaullist form, the French insisted that the U.S. must end that deficit before any S.D.R. are created, but their stand won scant support from other countries. More worrisome was French Finance Minister Michel Debre's demand (supported by West Germany) that IMF's charter be revised to give the Common Market veto power over all future expansion of IMF reserves and the use of IMF loans by debt-laden countries. "If we don't get our way," threatened one European finance chief, "the Americans aren't going to get any monetary reform in the foreseeable future."

Delegates swept that squabble under the rug by calling for a report on rules changes next March. Meanwhile, they proceeded with their annual meeting's more pleasant activities: serious private talk well moistened at lunches, cocktail bashes and elegant dinners. To provide a suitably opulent setting, Brazil hastily completed the late architect Affonso Eduardo Reidy's beachfront Museum of Modern Art, despite some peculiarly Latin difficulties. University students wrecked the bulldozers that were about to demolish their subsidized, low-price restaurant, which blocked access to the imposing museum. Brazil's central bank bought off the students with a promise of free meals for 20 days, and quickly built a substitute restaurant near by.

With considerable finesse, the bank also thwarted efforts to drive Rio's ubiquitous ladies of the night off the streets. Convinced that the girls are a picaresque asset that visiting bankers would want to see, if not buy, the chief of the foreign-capital division struck a deal with the streetwalkers: the girls would be unbothered if they policed themselves and kept their diseased and theft-prone sisters out of action for the week.

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