An international reserve asset that can be used to supplements members’ reserve assets such as gold, foreign currencies, and reserves on account with the International Monetary Fund (IMF). SDR was created in 1969 by the IMF. The value of the SDR is based on a basket of four currencies (U.S. dollar, British pound, Japanese yen, and the euro) and can be used to pay dues or kept in accounts with the IMF.
The SDR was created because the world was quickly outgrowing the Bretton Woods fixed exchange rate system, which came under pressure in the 1960s. The fixed exchange rate system was not able to regulate the growth of countries reserves in order to expand world trade. Gold and the U.S. dollar were the two most common reserve tools, but gold production was becoming inadequate and unreliable. The continuing use of the U.S. dollar as a reserve created a constant deficit in the United States, which threatened to undermine the dollar’s stability. To alleviate those problems, the SDR was created to be a new international reserve asset that the IMF administers.
However, the SDR is not a currency or a claim on the IMF. Instead, it is a potential claim on the currencies of IMF members. Holders of SDRs can exchange their SDRs for these currencies, and an SDR’s value as a reserve asset comes from the IMF members’ commitments to hold and accept SDRs.
Today the role of the SDR is limited, and it makes up only around 1 percent of IMF members’ non-gold reserves. The adoption of SDRs by private financial institutions has been limited. It is used primarily in transactions between the IMF and its members.