Just over four years ago, we highlighted a recently declassified top secret 1968 telegram to the Secretary of State from the American Embassy in Paris, in which the big picture thinking behind the creation of the IMF's Special Drawing Right (rolled out shortly thereafter in 1969), or SDRs, was laid out. In that memo it was revealed that despite what some may think, the fundamental driver behind the promotion of a supranational reserve paper currency had one goal in mind: allowing the US to "remain masters of gold."
Specifically, this is among the top secret paragraphs said on a cold night in March 1968:
"If we want to have a chance to remain the masters of gold an international agreement on the rules of the game as outlined above seems to be a matter of urgency. We would fool ourselves in thinking that we have time enough to wait and see how the S.D.R.'s will develop. In fact, the challenge really seems to be to achieve by international agreement within a very short period of time what otherwise could only have been the outcome of a gradual development of many years."
This then puts into question just what the true purpose of the IMF is. Because while its stated role of preserving the stability in developing, and increasingly more so, developed, countries is a noble one, what appears to have been the real motive behind the monetary fund's creation, was to promote and encourage the development of a substitute reserve currency, the SDR, and to ultimately use it as the de facto buffer and intermediary, for conversion of all the outstanding "barbarous relic" hard currency, namely gold, into the fiat of the future: the soon to be newly created SDR. All the while, and increasingly more so as more countries converted their gold into SDR, such remaining hard currency would be almost exclusively under the control of the United States.
Well, in the intervening 44 years, the SDR never managed to take off, the reason being that the dollar's reserve currency status was exponentially cemented courtesy of both the great moderation of the 1980s and the derivative explosion of the 1990s and post Glass Steagall repeal 2000s, when the world was literally flooded with roughly $1 quadrillion in USD-denominated derivatives, inextricably tying the fate of the world to that of the dollar.
However, back in 1974, shortly after Nixon ended the Bretton Woods system, and cemented the dollar's fate as a fiat currency, no longer convertible into gold, the future of the SDR was still bright, especially at a time when the US seemed set to suffer a very unpleasant date with inflationary reality following the 1973 oil crisis, leading to a potential loss of faith in the US dollar.
Which brings us to the topic of today's article: the international monetary system, reserve currency status, SDRs, and, of course, gold... again.
Below is a memo written in 1974 by Sidney Weintraub, Deputy Assistant Secretary of State for International Finance and Development, to Paul Volcker, when he was still just Under Secretary of the Treasury for Monetary Affairs and not yet head of the Federal Reserve.
The memo is a continuation of the US thinking on the issue of the then brand new SDR, the fate of paper currencies, and the preservation of US control over reserve currency status. Most importantly, it addresses several approaches to dominating gold as well as the US' interest of banning gold from monetary system and capping the free market price, contrasted by the opposing demands of various European deficit countries (sound familiar?) on what the fate of gold should be at a time when the common European currency did not exist, and some European countries were willing to fund their deficits with gold: something the US naturally was not happy about. [...]