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So, what is a Special Drawing Right, anyway?

So, what is a Special Drawing Right, anyway?

In today’s G-20 communiqué (just a fact sheet, really) world leaders pledged an additional $1.1 trillion in loans and debt guarantees to aid trade and help shore up the worst-ailing economies.

The fact sheet (let’s call it a fact sheet) notably included toothy regulatory measures and a lack of fiscal stimulus — which Britain, the United States, and China have undertaken, to the cold shoulder of most of continental Europe.

It also dramatically increased the budget of the IMF. The New York Times summarizes:

The most concrete measures relate to support for the International Monetary Fund, which has emerged as a “first responder” in this global crisis, making emergency loans to dozens of countries.

The Group of 20 pledged to triple the resources of the Fund to $750 billion — through a mix of $500 billion in loans from countries, and a one-time issuance of $250 billion in Special Drawing Rights, the synthetic currency of the Fund, which will be parceled out to all its 185 members.

So what on earth is a Special Drawing Right (SDR) anyway?

Basically: it’s a currency.

Back in 1969, the world economy was still suffering from the effects of the Great Depression and the world wars. At the Bretton Woods conference at the end of World War II, the heads of state attending decided against creating a global reserve currency, instead instituting a fixed-rate exchange system. 

Twenty-five years later, there weren’t enough key exchange assets — units of gold bullion and dollars — to keep up with the growing global economy. So, the IMF’s member states decided to create the SDR system.

A basket of stable major currencies — like the dollar, pound, and yen — determined its value. Some countries, like Latvia, pegged their currencies to the value of the SDR. But most just used their allocated portion in various international transactions.

But, just a few years after the IMF bothered to make the SDRs, the Bretton Woods fixed-rate system collapsed and the modern world currency market, where exchange rates float freely, emerged. This rendered the SDRs pretty much useless.

Indeed, the current market for SDRs, until the I.M.F. injection, was just $32 billion. The value of current oustanding U.S. currency? Just over $1 trillion.