Hegemons, IOs, and markets: the case of the substitution account

Abstract

For eighteen months between 1978 and 1980, the International Monetary Fund and IMF members attempted to reform the international monetary system by establishing a substitution account. Designed to enhance the stability of the monetary system, the proposed substitution account would have accepted dollar deposits from foreign central banks, in return issuing certificates denominated in special drawing rights. The collapse of negotiations about the account in early 1980 confirms the hypothesis of hegemonic stability theorists that the distribution of systemic costs is problematic in the absence of a hegemonic power. The case thereby qualifies recent assertions that a small group of nations can supply stability to the international economy. However, two factors outside the realm of hegemonic theory also helped produce the outcome of the negotiations: the division of power within the United States between Congress and the Executive, and changes in international market conditions during 1979 and early 1980.