THE INTERNATIONAL MONETARY FUND'S PROPOSED SUBSTITUTION ACCOUNT AND THE REFORM OF THE INTERNATIONAL MONETARY SYSTEM

The purpose of this dissertation is to examine the contribution of a Substitution Account to the overall reform of the international monetary system.;Since the collapse of the Bretton Woods Agreement in 1971, the international community has been trying to reform the system. A Committee on reform of the international monetary system and related issues was formed by the International Monetary Fund's Board of Governors in 1972. Among the specific items considered by the Committee was the establishment of a Substitution Account.;The proposed Substitution Account envisages that all member countries in the IMF deposit U.S. dollars (or possibly of other reserve currencies) in the account and receive claims denominated in SDRs (Special Drawing Rights). The deposited dollars are to be invested in U.S. government securities for a specified interest rate. The account would pay to the depositors the full combined market interest rate of the SDR.;The account is to be permanent and it is to be administered by the Fund. The claims issued by the account are to be marketable and exchangeable between the members of the International Monetary Fund (IMF). The size of the account could be on the order of ;This dissertation examines this concept as it stood at the end of 1980, and analyzes the proposal as to whether it will direct reform in the right direction. It also examines the effects on: exchange market stability, euro-markets, asset diversifications, the recycling process, production of oil, the enhancement of the role of the SDR, and the economic impact on various country groupings.;As there is little or no discussion in the economic literature about the subject, it was necessary to discuss in detail the specifics and modalities of the Substitution Account as envisaged by the Fund. The approach used in this thesis is analytical in nature, using appropriate data whenever posssible to verify various conclusions.;Special attention is devoted to the role of the SDR in the system, especially as operations in SDRs continue to be relatively limited. It is important to note that a major reason to adopt the Substitution Account is to enhance the role of the SDR as the principal international reserve asset.;It is found that the Substitution Account will, indeed, have a significant benefit on the international adjustment process in various ways. It will be helpful as a process of orderly reserve diversification and will thus stabilize exchange markets. In particular, it will provide a stable reserve asset and the oil exporting countries will be willing to maintain and even expand their oil production. This will moderate oil prices, because by giving surplus oil-exporting countries a desirable and diversified reserve asset, they will have an incentive to produce more oil than they require for their domestic financial needs. This will also indirectly improve the recycling process. Finally, special forms of the Substitution Account may directly help the recycling and adjustment process.