Federal Reserve Board chairman Paul Volcker is correct in opposing a mischievous effort now under way in Congress that could have the effect of working against world recovery. He is criticizing an amendment attached to legislation enlarging the US commitment to the International Monetary Fund that would limit what are called ''special drawing rights'' - SDRs. SDRs are a form of international credit extended by the IMF that can be used by nations as though they were currency and thus help them meet major debt-repayment or financial problems.
Under terms of the amendment to the IMF legislation introduced by Congressman Neal of North Carolina, the US delegate to the IMF board could not vote for any new allocation of SDRs without a prior approval by Congress. Such a restriction, says Fed chairman Volcker, could ''adversely affect the functioning of the international monetary system.''
The House is scheduled to vote on the IMF legislation later this week. Why, you may ask, would proponents want to restrict SDRs? Because, say backers of the Neal amendment, issuing new SDRs could be used to ''bail out'' US banks that have overextended themselves in making loans to developing nations, and because the creation of new SDRs could trigger renewed world inflation.
But consider the alternative to issuing SDRs. What if a nation needed a quick infusion of liquidity to avoid financial default? Would it not be better to prevent such an event - even by bailing out a major bank, if that is necessary - than to allow a default that could endanger world financial stability? Given the fragility of world recovery, this hardly seems the moment to slap new restrictions on the international momentary system.
The Neal amendment should be rejected by the House.