What are Special Drawing Rights (SDRs) and What are their Purpose?

Definition

SDRs are defined in terms of a basket of major currencies used in international trade and finance. At present, the currencies in the basket are, by weight, the United States dollar, the euro, the Japanese yen, and the pound sterling. Before the introduction of the euro in 1999, the Deutsche Mark and the French franc were included in the basket. The amounts of each currency making up one SDR are chosen in accordance with the relative importance of the currency in international trade and finance. The determination of the currencies in the SDR basket and their amounts is made by the IMF Executive Board every five years.

The exact amounts of each currency in the basket, and their approximate relative contributions to the value of an SDR, in the past were and currently are:^[1]

Purpose

SDRs are used as a unit of account by the IMF and several other international organizations. A few countries peg their currencies against SDRs, and it is also used to denominate some private international financial instruments. For example, the Warsaw convention, which regulates liability for international carriage of persons, luggage or goods by air uses SDRs to value the maximum liability of the carrier.

In Europe, the Euro is displacing the SDR as a basis to set values of various currencies, including Latvian lats. This is a result of the ERM II convergence criteria which now apply to states entering the European Union.

SDRs were originally created to replace Gold and Silver in large international transactions. Being that under a strict (international) gold standard, the quantity of gold worldwide is relatively fixed, and the economies of all participating IMF members as an aggregate are growing, a perceived need arose to increase the supply of the basic unit or standard proportionately. Thus SDRs, or "paper gold", are credits that nations with balance of trade surpluses can 'draw' upon nations with balance of trade deficits.

So-called "paper gold" is little more than an accounting transaction within a ledger of accounts, which eliminates the logistical and security problems of shipping gold back and forth across borders to settle national accounts.

Joseph Stiglitz has argued that usage by central banks of SDRs as foreign exchange reserve could be viewed as the prelude to the creation of a single world currency.^[2] It must be understood that Gold and Silver have filled the role as global currencies for several thousand years of recorded history, and that the SDR as a storage of value is not a normal fiat currency.

It has also been suggested that having holders of US dollars convert those dollars into SDRs would allow diversification away from the dollar without accelerating the decline of the value of the dollar.^[3][4]

http://en.wikipedia.org/wiki/Special_Drawing_Rights