Third time lucky for scheme to support dollar?

Sir, Fred Bergsten ("How to solve the problem of the dollar", December 11) claims boldly that only one remedy to the collapsing US dollar would "satisfy all parties". His gold-and-silver bullet is a "substitution account" at the International Monetary Fund, an excellent idea that was thoroughly debated twice before being sadly and quietly buried, first in 1974 and again in 1980. Might the proposal succeed today, though it failed twice a generation ago?

The appeal of a substitution account is that central banks holding excess dollars could convert them into a diversified asset (special drawing rights or SDRs) without accelerating the dollar's decline or destabilising currency markets. Everyone gains. That advantage, though, runs up against two challenges.

First, someone has to absorb the exchange risk that central banks are shedding. To avoid a third demise, the scheme needs a risk-sharing formula that the US and other governments will accept.

Second, despite Dr Bergsten's assertion that claims would be "fully liquid", they might be less liquid than central banks need.

Past efforts to encourage development of a private market for SDRs have not succeeded, and it seems unlikely that one would emerge now without substantial and imaginative official support.

While the substitution account is not a magic bullet, it could be part of the solution. But the challenges noted above have to be met, and the idea should be considered alongside proposals for reducing financial excesses, promoting multilateral consultation on policy conflicts, and encouraging sovereign wealth funds to run on sound commercial principles.

James M. Boughton,
Historian,
Policy Development and Review Department,
International Monetary Fund
Washington, DC 20431, USA