Kenneth R. Szulczyk
grants long-term loans to developing countries. They use the loans for economic development
and build a country’s infrastructure, such as highways, bridges, power plants, and water supply
systems. World Bank sells bonds in the international markets to raise funds for its projects.
Countries created the International Monetary Fund (IMF) to be the lender of the last
resort. The IMF grants loans to countries that experience balance-of-payment deficits.
Consequently, the IMF is similar to a central bank because a central bank can grant emergency
loans to its banks during a financial panic or crisis. Thus, the IMF should stabilize international
payments and promote international trade. Moreover, the IMF collects and standardizes
international economic data. The IMF has 181 members and opens membership to any
independent nations. If a country wants to join the IMF, then this country contributes capital
based upon a formula. A country pays one-fourth of the capital in gold and three-fourths in that
country’s own currency. IMF relaxed it gold requirement, and countries can pay using strong
currencies such as euros, pounds sterling, Special Drawing Rights, U.S. dollars, or yens.
Consequently, the IMF gains financial capital because the IMF possesses gold and a pool of
foreign currencies that it can lend to countries.
The IMF helps countries that are experiencing balance-of-payments deficits. For example,
Britain has a balance-of-payments deficit, and it borrows from the IMF. The British government
needs U.S. dollars, so the British government or central bank gives pounds and receives dollars
from the IMF to finance its balance-of-payments deficit. Thus, the U.S. dollars decrease while
British pounds increase in the IMF’s currency pool. When Britain repays the loan with interest,
it repays in a currency that is acceptable to IMF, and then the IMF returns the British pounds.
The IMF created Special Drawing Rights (SDRs) in 1969 because IMF officials believed a
gold and reserve asset shortage would cause an international crisis. Each member country of the
IMF receives a proportion of new SDRs. Between 1968 and 1971, the IMF created $10 billion
worth of SDRs. By 2010, the IMF has issued 204 billion of SDRs, approximately worth $308
billion. When a country experiences a balance-of-payments deficit, it can use its SDRs as money
to obtain foreign currencies from the IMF.
Are SDRs money? Originally, the IMF priced a SDR based on gold’s weight. Then the IMF
officials switched the SDR’s value to a basket of strong currencies, containing the euro, British
pound, Japanese Yen, and U.S. dollar. Consequently, the IMF defines the SDR as a “unit of
account,” which comprises one function of money, and it establishes exchange rates with the
four currencies. Moreover, the countries can use SDRs to obtain foreign currencies from the
IMF that suggests the SDR is money. However, the IMF considers SDRs to be a credit
instrument. Many governments and international investors are worried about the depreciating
U.S. dollar and the depreciating euro. Some people suggested the SDR should become the new
international currency. Thus, international trade would not collapse if the United States or
European enters a severe economic depression.
The U.S. Treasury accepts the new SDRs on behalf of the United States. Then it issues
certificates that are claims to the SDRs and sells these certificates to the Federal Reserve.
Consequently, SDR certificates become assets to the Federal Reserve.
Although the countries abandoned the Bretton Woods system in 1971, the World Bank and
IMF still live. Subsequently, governments use a variety controls, measures, and standards for