Historical Sketch

During the Second World War, the United States and Great Britain began designing the post-war economic and monetary order, which was described in the 1941 Atlantic Charter. In April 1944, an expert report recommended the establishment of the International Bank for Reconstruction and Development (IBRD), later World Bank, and the International Monetary Fund (IMF) and served as basis of the Bretton Woods conference in July 1944, where delegates from 44 nations signed the final act. The two institutions came into existence in December 1945.

Monetary History Overview

The post-war monetary order was based on the restoration of the gold standard but without circulating specie. Only the US Dollar was fully convertible into gold at a fixed rate of 35 Dollars per fine ounce. All other currencies were convertible into US Dollars at fixed rates, called "par values". By end December 1945, 34 states had signed the agreement, and the different par values of their currencies were established within one year. Throughout the years, more states joined the agreement and agreed on initial par values. Other states changed or suspended their par values when they were not able to stabilize the currencies. Some members never set any par value, thus never achieved convertibility. The communist countries led by the USSR never joined the agreement. Their currencies were pegged to the Soviet Ruble, which in turn nominally had a fixed relation to the US Dollar, therefore a par value in gold. The Ruble and all the attached currency were, however, not convertible, neither into gold nor US Dollars.

In 1967, the IMF Board of Governors decided to introduce the IMF Special Drawing Right (SDR) Unit as an alternative reserve medium and unit of account. It was created in January 1970, initially at par with the US Dollar. In July 1971, the United States suspended gold convertibility and in December of that year, the US Dollar was devalued by 7.9% against gold. In February 1973, another 10% devaluation followed. The SDR unit kept the gold peg at 35 per fine ounce and therefore appreciated against the US Dollar. As a consequence, the Bretton Woods system of fixed exchange rates began to disintegrate. The member countries partly followed one or both US Dollar devaluations, partly maintained the gold peg, which de facto meant re-pegging to the SDR unit. The majority of the countries with higher developed economies abandoned the system of fixed exchange rate in the early 1970s. By mid-1974, all par values had become inoperative. They were formally abolished in April 1978, long after the SDR unit had abandoned the gold peg.

The SDR unit re-pegged from gold to a weighted currency basket in July 1974. It contained 16 currencies of the IMF member countries that contributed more than 1% to the World’s exports. The basket was revised in July 1978 as the percentages had shifted and some countries had overtaken others in their economic contribution. The basket still contained 16 different currencies. The system was deemed too complicated, in particular as the number of currencies in the basket was likely to increase when the World's economy developed further. Therefore, the January 1981 version of the basket was restricted to five currencies only (United States, Germany, France, Great Britain, Japan). The relative weights were still determined by the countries' contribution to the World economy and would be revised every five years. In 1999, the introduction of the Euro reduced the basket to four currencies. The first real change occurred after 35 years, when China’s ascent as an economic power had been taken into account. Since October 2016, the Chinese Yuan has been added as the fifth component to the SDR unit.

The significance of the SDR unit as reference for other currencies has been small. In the mid-1970s, pegging currencies against the SDR unit became popular with developing countries, mainly in Africa and the Middle East, where a US Dollar peg was politically unwanted. Most have abandoned the practice during the 1980s or early 1990s. Myanmar abandoned the SDR peg in 2011, leaving just Libya to continue.

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