Wednesday, July 1, 2009

An International Replacement for Treasury Notes Is Born

Another major step in the demise of the dollar as the world's reserve currency has just taken place.

The Executive Board of the International Monetary Fund (IMF)has approved a framework today for the issuance of notes to member countries and their central banks. The notes will not be denominated in dollars, but in SDR's and are clearly an alternative to Treasury notes for central banks and others cleared to trade in the notes.

Under the framework, members may sign agreements to purchase IMF notes up to a limit set by the member. Several members have already expressed their interest in buying IMF paper, with China signaling its intention to invest up to US$50 billion, and Brazil and Russia up to US$10 billion each.

The IMF would issue notes at times when loan disbursements are made to members receiving financial assistance from the IMF. Once purchased by member governments, or their central banks, the notes would be tradable within the official sector, which includes all IMF members, their central banks, and 15 multilateral institutions—those which are designated holders of Special Drawing Rights.

The principal of the notes will be denominated in SDR, the Fund’s unit of account, which is a currency basket composed of the U.S. dollar, Euro, Japanese Yen, and Pound sterling. Interest payments will be made quarterly, at the official SDR interest rate, which is a weighted average of 3-month interest rates in these currencies.

The notes have a maximum maturity of five years, which is consistent with the maximum maturity of IMF lending under Stand-By Arrangements and Flexible Credit Line arrangements. Commitments under such IMF lending arrangements have increased to more than SDR 100 billion (about US$150 billion) in the past year, as the Fund has responded flexibly to members’ financing needs during the global crisis.

“This framework for issuing the IMF notes marks a significant step forward in our continuing drive to make sure the IMF can respond effectively to member countries’ needs in these challenging and uncertain times,” the Managing Director Dominique Strauss-Kahn underscored.

Special thanks to Hans Palmstierna.


  1. Wenzel,

    Doesn't the IMF and the SDR system rely on inflation amongst member nations to make the exchanges possible? I was reading Hazlitt's compilation of journalism on the Bretton Woods agreements and the founding of the IMF and it seems like it was a system set up to enhance US monetary hegemony. Therefore, some turn by the world's nations to the IMF and its SDRs as an attempt at diversifying monetarily seems to be nothing but a turn even more inward into US monetary hegemony.

    What don't I understand about this institution, this monetary mechanism and this news development?

  2. Interesting, they left out the 108 Billion Obama and congress just loaned the IMF, eh?

  3. @Taylor

    It doesn't have to be inflationary if they don't print excessive amounts of money. But given that it is a basket of currencies that are all inflating to various degrees it will ultimately become very inflationary.

    To me this looks like it is the U.S. attempt to keep its foot in the door, with their major influence over the IMF. Chima, Russia and the rest of the world get the much desired alternative to the dollar, but the dollar is a significant part of the alternative. A house of mirrors with a couple of jacked open windows.

  4. Is it backed by something of intrinsic value or is it printed by fiat?

  5. Like all money, it is ultimately backed by the the portion of property and services the owners of property and service are willing to exchange for a given number of units of money.