Money: The Paper Solution

After four years of bickering, bargaining and brain-racking compromise, 107 nations reached a historic agreement last week in Rio de Janeiro. They found a mutually satisfactory method for overhauling the free world's strained and out-of-date monetary system. Without dissent, finance ministers from the member countries of the powerful International Monetary Fund approved the cautiously controlled creation of what amounts to a new kind of international money—a combination of currency and credit that would supplement the gold, dollars and pounds that now bankroll world trade and investment.

Such an ambitious step has never before been attempted. The Rio agreement, in fact, is only a beginning; the accord must still be reduced to legal form and then ratified by national legislatures. Moreover, further agreement will be needed on when to put the plan into operation. Best guess: 1969 at the earliest.

Artificial Reserves. The new money goes by the awful label of S.D.R. (for "special drawing rights"). It will consist of wholly artificial reserves, set up as a separate fund on IMF's books and backed by lOUs in the currencies of participating countries. Nations will automatically be credited with S.D.R. in proportion to their regular IMF deposits, but only 30% of S.D.R. actually used need ever be repaid. The other 70% becomes a permanent increase in each country's liquid assets—"paper gold" that moneymen feel should some day become as coveted as the metal.

Considering S.D.R.'s complexity, it is just as well that tourists and businessmen will continue to pay their bills in national currencies. Governments alone will be eligible to use S.D.R. and even then only to settle international debts in limited quantity. The idea is to test the plan gently at first by creating between $1 billion and $2 billion worth of S.D.R. a year over a five-year period. But a solid decision remains some years off.

The need for such reform has grown more and more obvious to experts. World trade has doubled over the past decade, but reserves to finance it have grown only 40%. Last year hoarders squirreled away almost as much gold as the world mined; with increasing industrial demand for the metal (for everything from computer diodes to the skin of Titan III), the store of gold in the free world's central banks actually dwindled for the first time in modern history. So far, the U.S. and British balance-of-payments deficits have covered the gap, but if and when the deficits are brought under control, the resulting shortage of funds could cripple international commerce.

Thus Japanese Finance Minister Mikio Mizuta echoed the sentiment of most of the 2,200 delegates, bankers and officials in Rio when he called last week's agreement "the greatest step forward since the creation of the IMF" 23 years ago at Bretton Woods, N.H. It was also a considerable personal triumph for U.S. Treasury Secretary Henry Fowler, who had to overcome the fears of skeptical central bankers that the U.S. would use S.D.R. to cover up its chronic payments deficit.