Artificial Currency

Artificial currency definition

The most common artificial currency definition states that an artificial currency is a substitute for any other currency in general public circulation. Generally used in situations where a number of different currencies must be balanced and weighed against each other, the most common type of artificial currency is the Special Drawing Rights system used by the International Monetary Fund (IMF) to allow many different member nations to pay dues and transfer funds in an equitable manner. The European Currency Unit was another form of artificial currency that was commonly used before the advent of the Euro; as a unit of a composite monetary system, it allowed investors to diversify their holdings across a number of different currencies throughout the European Economic Community.

Special Drawing Rights

Created by the IMF in 1969 in order to facilitate and promote international trade among its members, the Special Drawing Rights artificial currency is used to help set relative values for world currencies, to allow equitable comparison of currencies and contributions, and to measure trade deficits and surpluses throughout the world. The original purpose of Special Drawing Rights was to allow a move away from gold and silver trading on the international market, instead focusing on the real values of currencies and allowing trade on that basis alone. Today, Special Drawing Rights are also used to transfer funds between nations and to pay dues and other payments owed to the IMF and the Universal Postal Union among other organizations, and to transfer the roaming charges accrued by some mobile telephone service providers.

Quotas and how they are determined

The value of a unit of Special Drawing Rights currency is determined by calculating the sum of the value of specified units of four different world currencies; currently, those currencies are the Euro, the U.S. dollar, the Japanese yen, and the British pound. The IMF allocates a quota, or portion of value, to each participating nation. In essence, this provides a loose estimate of each nation’s net value on the world economy, and provides a measure of its economic and political stability. Special Drawing Rights are calculated in U.S. dollars, and nations can often borrow against their allocated quota in order to pay down international debt in this artificial currency. Much like traditional currencies, nations can earn interest on Special Drawing Rights when their subscriptions exceed their allocated quota; conversely, interest is charged when a nation’s subscriptions fall below the quota rate.