International Liquidity and Foreign Aid

Before the end of this year, the Special Drawing Rights machinery of the International Monetary Fund should come into operation, ushering in a new era of multilaterally created international reserves. This is no small matter. The international community has not heretofore created anything so deadly serious as money.

Nor will creation begin on a niggling scale. The principal financial countries agreed in July to support activation of $9.5 billion in this new international money over the next three years, and the other members of the Fund will surely go along with this decision. This quite respectable sum adds new interest to an old issue: Is it practical to link a man-made stream of liquidity to foreign aid? At a time of faltering foreign aid, the issue takes on added importance.

It is an intriguing question. Nevertheless, it should not obscure the fact that the primary interest of all countries-rich and poor alike-lies in the success of Special Drawing Rights as a basic reform of the international monetary system, and specifically, as a means of avoiding growing restrictions on trade, aid and investment. From this standpoint, the new reserves will come none too soon. Gold and dollars have dried up as sources of new international liquidity.

Gold fell victim to the persistently held speculative dogma that the monetary price would have to rise. This credo was so stubbornly believed that in recent years new gold production went largely into private hands-as a bet on a rise in price-rather than to monetary reserves. During the four months of speculative madness that followed devaluation of sterling in November 1967, the international monetary system actually lost over $3 billion in gold reserves to the private market. When the active gold-pool countries decided in March 1968 to insulate monetary gold from these private pressures, the drain stopped. Under the two-tier arrangement they set up, the world's stock of monetary gold is kept virtually stable, remaining by far the largest single element in total reserves, but new gold production is for all practical purposes demonetized. It moves haltingly, but inexorably, into the market to satisfy the variety of demands for gold as a commodity, at whatever price these demands will support. It is no longer, however, a serious potential source of new international liquidity.