epilogue

On March 24, 2008 Zhou gave a speech titled Reform the International Monetary System, and argued for a gradual but a certain change from the US Dollar to IMF’s SDR. The Special Drawing Right (SDR) was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. At that time, one SDR was equivalent 0.888671 grams of fine gold—which, was also the value of one U.S. dollar. However, after the collapse of the Bretton Woods system in 1973, the SDR was redefined as a basket of currencies consisting of the euro, Japanese yen, pound sterling, and U.S. dollar.

On one hand Beijing is urging it’s trade partners to use the Yuan in transactions, and on another Zhou is calling for a stronger “super-sovereign reserve currency” managed by the IMF; thus, putting pressure on the dollar. An alternative for the dollar is gathering momentum world-wide. But unless China lets its currency trade freely and lifts capital controls on the money going in and out of China, Yuan as a global currency, will just be a pipe-dream. Strengthening the SDR, however seems very much possible.

To do this not only SDR’s basket of currencies will have to be widened, but a lot accounting in world-wide financial markets and large asset pricing will have to be done in SDRs. Some airlines are already insuring passengers in SDRs. Such a system will be largely immune from the economic conditions in one country. Such a scheme has already got buyers in Russia and Brazil. I wonder what India is doing: The SDR composition gets reviewed in sometime in late 2010.

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