Can tooth fairies help us in our great economic and financial crisis? Actually, yes. They can help deliver a major expansion of the resources of the International Monetary Fund by a method envisaged at its founding in 1944 by the greatest economist of all time, John Maynard Keynes.
The mechanism for doing this is to expand the issue of what the IMF calls Special Drawing Rights (SDR), what Keynes considered to be “paper gold.” At Thursday’s summit of the G20 in London, this is one of the important items on the agenda. SDRs could be a major contribution to the world’s crisis of liquidity and lack of demand. Moreover, some members of the G20 are going to support the revolutionary suggestion made earlier this month by Zhou Xiaochuan, the boss of China’s central bank, to use SDRs as a worldwide reserve currency to replace the dollar and the euro, at present the two most important world reserve currencies.
What do the fairies have to do with it? Well, SDRs are created almost literally at the stroke of a pen. As if by magic, in fact. And this is an accounting transaction within a ledger of accounts which can then be used to bolster the financial reserves of any IMF member country. For the IMF can allocate these SDRs to any of its members—especially those in desperate need—giving these countries a costless asset for which interest is neither earned nor paid. Recipient countries, with important provisos, can use these SDRs to purchase the currencies of other IMF members who are in a healthier financial state than they are. Richer countries can also use them as a form of aid to poorer countries.
So far, there have been two major allocations of SDRs: one in 1970-72 and the second in 1979-81. In 1997 the board of the IMF agreed on a much larger allocation -double the total of the two allocations before. Three fifths of the member states have to agree to this before the IMF could start using them. So far over 130 members have agreed and the only thing holding it up is U.S. approval.
Thus, with another stroke of the pen, the U.S. could put this allocation into effect. It would have a powerful stimulating effect, especially for those countries at the bottom of the heap.
We have had to watch the future prospects of black Africa being sabotaged by the crass behaviour of the “white rich”: by Lehman Brothers and then by the other large number of Western banks and financial instutions that have followed it into a downward spiral. The tragedy of the present day is compounded by the knowledge that over the last decade well over half of black Africa has pulled itself up by its own bootstraps, achieving growth rates of 6% or more. (In some cases, like Nigeria and Mozambique, significantly more.) Now, over night growth , has been cut by at least half.
An important advantage of a new, large, SDR issue, compared with quota increases or borrowing from the fund (both also on the London agenda), is that it can be done fast. Another is that it does not create repayment obligations, which would increase the debt burden. Indeed, it will reduce it.
The more steps that are taken towards an SDR-based monetary system the better. As long as the world is dependent on the policies of a few reserve currency countries and the whims of the international capital markets, there can be no effective control of the aggregate volume of world liquidity. Moreover, by giving the G20 countries the ability to influence and even control world reserve growth, the pressing need to expand the global economy can be met without the risk of high inflation.
The IMF has played and continues to play, despite its chronic deficiency of resources, a crucial role in helping countries who take its loans to find a more efficient and disciplined road to growth. But the borrower-lender relationship has often been antagonistic, even though the advice and demands of the IMF have been more often right than wrong.
Although the SDR’s would come without formal conditions, it would inevitably increase the clout of the IMF. Only if the carrot of SDR allocation is there can the IMF use the stick of sound economic and financial choices in this time of difficult policy alternatives.
The tooth fairies have given the G20 a tool they could quickly agree to wield- and President Barack Obama, whilst in London, should commit the U.S. to sign up for it within a week or two at the most.