Triffin dilemma

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The Triffin dilemma (less commonly the Triffin

paradox) is the observation that when a national
currency also serves as an international reserve
currency (as the US dollar does today), there are
fundamental conflicts of interest between domestic
and international economic objectives. This dilemma
was first identified by Belgian-American economist
Robert Triffin in the 1960s, who pointed out that the
country issuing the global reserve currency must be
willing to run large trade deficits in order to supply
the world with enough of its currency, to fulfill world
demand for foreign exchange reserves.
The use of a national currency as global reserve
currency leads to a tension between national
monetary policy and global monetary policy. This is
reflected in fundamental imbalances in the balance of
payments, specifically the current account: to
maintain all desired goals, dollars must both overall
flow out of the United States, but dollars must at the
same time flow in to the United States. Currency
inflows and outflows of equal magnitudes cannot
both happen at once.
The Triffin dilemma is usually used to articulate the
problems with the US dollar's role as the reserve
currency under the Bretton Woods system, or more
generally of using a national currency as an
international reserve currency.
Contents
[hide]

• 1 History
o 1.1 Onset during Bretton Woods Era
o 1.2 The Nixon Shock
• 2 Implication in 2008 meltdown
• 3 See also

• 4 References

[edit] History

[edit] Onset during Bretton Woods Era

Thanks to money flowing out of the country through
the Marshall Plan, US defense-spending and
Americans buying foreign goods, the number of U.S.
dollars in circulation soon exceeded the amount of
gold backing them up.
By the early 1960s, an ounce of gold could be
exchanged for $40 in London, even though the price
in the U.S. was $35. This difference showed that
investors knew the dollar was overvalued and that
time was running out.
There was a solution to the Triffin dilemma for the
U.S.: reduce the number of dollars in circulation by
cutting the deficit and raising interest rates to attract
dollars back into the country.
Both these tactics, however, would drag the U.S.
economy into recession, a prospect new President
John F. Kennedy found intolerable, although he did
sign an executive order allowing the US Treasury "to
issue silver certificates against any silver bullion,
silver, or standard silver dollars in the Treasury."
This would create competition to the Federal Reserve
Notes (dollars) that were overvalued.
To maintain the Bretton Woods system and exert
control over the exchange rate of gold, the US
entered into the London Gold Pool in 1961 which
sustained the system until 1967 when runs on gold
and the devaluation of the pound sterling caused
rapid deterioration of the system.
[edit] The Nixon Shock
In August 1971, President Richard Nixon
acknowledged the demise of Bretton Woods system.
He announced that the dollar could no longer be
exchanged for gold, which soon became known as
the Nixon shock. The "gold window" was closed.
In order to maintain the Bretton Woods system the
US had to:
a) run a balance of payments current account deficit
to provide liquidity for the conversion of gold into
US dollars. With more US dollars in the system the
citizens began to speculate, thinking that the US
Dollar was overvalued. This meant that the US had
less gold as people starting converting the US dollars
to gold and taking it offshore. With less gold in the
country there was even more speculation that the US
Dollar was overvalued.
b) run a balance of payments current account surplus
to maintain confidence in the US Dollar.
Obviously, the US was faced with a dilemma because
it is not possible to run a balance of payments current
account deficit and surplus at the same time.
[edit] Implication in 2008 meltdown
In the wake of the Financial crisis of 2007-2008, the
governor of the People's Bank of China explicitly
named the Triffin Dilemma as the root cause of the
economic disorder, in a speech titled Reform the
International Monetary System. Zhou Xiaochuan's
speech of 29 March 2009 proposed strengthening
existing global currency controls, through the IMF. [1]
[2]
This would involve a gradual move away from the
US dollar as a reserve currency, and towards the use
of SDRs (IMF Special Drawing Rights) as a global
reserve currency.
Dr Zhou argued that part of the reason for the
original Bretton Woods system breaking down was
the refusal to adopt Keynes's Bancor which would
have been a special international currency to be used
instead of the dollar.
American economists such as Brad Delong have
agreed that on almost every point where Keynes was
overruled by the Americans during the Bretton
Woods negotiations, he was later proved correct by
events.[3]
Dr Zhou's proposal attracted much international
attention; [4] in a November 2009 article published in
Foreign Affairs magazine, economist C. Fred
Bergsten argued that Dr Zhou's suggestion or a
similar change to the International Monetary System
would be in the United States' best interests as well as
the rest of the world's.[5] While Dr Zhou's proposal
has not yet been adopted, leaders meeting in April at
the 2009 G-20 London summit did agree to allow
$250 Billion of SDRs to be created by the IMF, to be
distributed to all IMF members according to each
country's voting rights.
[edit] See also
• Bretton Woods system
• Exorbitant privilege
• Reserve currency
• Dollar hegemony

[edit] References
1. ^ Jamil Anderlini in Beijing (2009-03-23). "China calls for new reserve
currency". Financial Times. http://www.ft.com/cms/s/0/7851925a-17a2-11de-
8c9d-0000779fd2ac.html. Retrieved 2009-04-13.
2. ^ Zhou Xiaochuan (2009-03-23). "Reform the International Monetary System".
People's Bank of China. http://www.pbc.gov.cn/english/detail.asp?
col=6500&id=178. Retrieved 2009-04-13.
3. ^ "Review of Robert Skidelsky, John Maynard Keynes: Fighting for Britain 1937-
1946". Brad Delong , Berkeley university.
http://econ161.berkeley.edu/Econ_Articles/reviews/skidelsky3.html. Retrieved
2009-06-14.
4. ^ Geoff Dyer in Beijing. "The dragon stirs". The Financial Times.
http://www.ft.com/cms/s/0/671a76ec-a950-11de-9b7f-00144feabdc0.html?
catid=176&SID=google. Retrieved 2009-09-18.
5. ^ C. Fred Bergsten. "The Dollar and the Deficits". Foreign Affairs.
http://www.foreignaffairs.com/articles/65446/c-fred-bergsten/the-dollar-and-the-
deficits. Retrieved 2009-12-15.

• System in Crisis (1959-1971)

• "Triffin, Robert." Britannica Book of the Year, 1994. Encyclopædia Britannica
Online. 6 Apr. 2006 <http://search.eb.com/eb/article-9113363>.
• <http://www.john-f-kennedy.net/thefederalreserve.htm>
• "Reform the International Monetary System" People's Bank of China

Retrieved from "http://en.wikipedia.org/wiki/Triffin_dilemma"

Categories: International economics | Economics paradoxes

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