With flexible exchange rates there is no international money and no seignorage. Under the gold standard, the international money is produced at cost and there is no seignorage.

Under the dollar standard or with SDRs, international money is costless to produce. The question is whether there is seigniorage, and what to do with any seigniorage which exists under SDRs.

In the eyes of many, the United States has been exploiting the rest of the world through extracting seigniorage, issuing dollars which the rest of the world holds in exchange for goods and services on the one hand and securities and direct investments on the other. It was claimed by President de Gaulle of France, for example, that the dollar standard required France to finance U.S. intervention in the war in Vietnam.

On one showing, there is no seigniorage when the foreign holder of dollars is paid interest. Non-interest-bearing currency yields seigniorage, as do demand deposits. But time deposits which pay interest have a cost to the issuer of the liability, representing the present discounted value of the stream of income paid out to the holder.

This view is disputed. It is said in Europe, for example, that the deposits held in dollars are involuntary, in the sense that the European central banks would rather have gold or domestic assets or would rather see their bank statements reduced both by claims on the United States and by liabilities to domestic depositors.

Under this circum stance, interest paid to a depositor is "like meals served to a kidnap victim, hardly an offset to the loss of liberty." The counter to this view is that the European countries that are experiencing a capital inflow do not have to hold the offsetting dollars. They could lower their interest rates and expand the money supply, which would partly repel the inflow of capital and partly assist in its real transfer in goods and services.

European central banks acquire dollars because they have high liquidity preference, preferring liquidity to real assets. The difference between what the United States earns by lending long and what it pays out by borrowing short is its net return for financial inter mediation and the European markets' payment for staying liquid with malfunctioning capital markets.

The beauty of the gold standard (if countries were willing to follow the "rules of the gold-standard game") is that, like the rule of free trade, it defuses this sort of highly political debate. The world finds itself in a transitional state, where it can no longer believe the claptrap that gold is immutable, eternal, impartial," as President de Gaulle claimed, and is no longer willing to let a vestigial remnant of an ancient dogma dictate economic behavior.

It has not yet achieved the state of grace, however; in which it can fashion new rules for optimum world money and count on all nations carrying them out under any and all circumstances.