Reserve currency consolidation, gold policy and financial flows to developing countries: Mechanisms for an aid-augmented substitution account

Abstract

This article examines various ways in which the consolidation of reserve currencies through the operation of a Substitution Account may be used to generate additional financial flows to developing countries. Minimum reference is made to current plans and developments and attention is instead focussed on the principal underlying issues. Section 1 describes the basic purpose of a Substitution Account and attempts to put this into the general context of international monetary reform. Section 2 catalogues the central problems that are associated with reserve currency consolidation and illustrates the range of differing versions of a Substitution Account that are available. Section 3 examines various ways in which an Account might be constructed to induce a flow of financial resources to developing countries, while Section 4 attempts to quantify the size of these flows. Section 5 demonstrates how the principle of substitution might also be applied to gold. Section 6 examines the likely acceptability of the various proposals discussed in this paper.