Triffin dilemma

The Triffin dilemma or Triffin paradox is the conflict of economic interests that arises between short-term domestic and long-term
international objectives for countries whose currencies serve as global reserve currencies. This dilemma was first identified in the
1960s by Belgian-American economist Robert Triffin, who pointed out that the country whose currency, being the global reserve
currency, foreign nations wish to hold, must be willing to supply the world with an extra supply of its currency to fulfill world
demand for these foreign exchange reserves, thus leading to a trade deficit.

The use of a national currency, such as the U.S. dollar, as global reserve currency leads to tension between its national and global
monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account, as some
goals require an outflow of dollars from the United States, while others require an overall inflow
.

Specifically, the Triffin dilemma is usually cited to articulate the problems with the role of the U.S. dollar as the reserve currency
under the Bretton Woods system. John Maynard Keynes had anticipated this difficulty and had advocated the use of a global reserve
currency called 'Bancor'. Currently the IMF's SDRs are the closest thing to the proposed Bancor but they have not been adopted
widely enough to replace the dollar as the global reserve currency
.

In the wake of the financial crisis of 2007–2008, the governor of the People's Bank of China explicitly named the reserve currency
status of the US dollar as a contributing factor to global savings and investment imbalances that led to the crisis. As such the Triffin
Dilemma is related to the Global Savings Glut hypothesis because the dollar's reserve currency role exacerbates the U.S. current
account deficit due to heightened demand for dollars.

Contents
History
Onset during Bretton Woods era
The Balance of Payments dilemma
The Nixon Shock
Implication in 2008 meltdown
See also
References
External links

History

Onset during Bretton Woods era

Due to money flowing out of the country through the Marshall Plan, U.S. military budget and Americans buying foreign goods, the
number of U.S. dollars in circulation exceeded the amount ofgold that was backing them up in 1959.

By the autumn of 1960, an ounce of gold could be exchanged for $40 in the London market even though the official rate in the
United States was $35. This price difference was due to price controls on gold in the US which was fixed by the US government in
1933 following the implementation of Executive Order 6102. In USD terms, the price of gold had not changed in 27 years, this did
not allow true price discovery by the free market. This price was fixed following the enactment of E.O. 6102, where the US
government purchased gold from US citizens under threat of fines and/or jail time at a rate of $20.67/oz then revalued the gold
overnight to $35/oz.
The solution to the Triffin dilemma for the United States was to reduce dollars in circulation by cutting the deficit and raising interest
rates to attract dollars back into the country. Some economists believed both these tactics, however, would drag the U.S. economy
into recession.

In support of the Bretton Woods system and to exert control over the exchange rate of gold, the United States initiated the London
Gold Pool and the General Agreements to Borrow (GAB) in 1961 which sustained the system until 1967, when runs on gold and the
devaluation of the pound sterling were followed by the demise of the system.

The Balance of Payments dilemma

In order to maintain the Bretton Woods system, the U.S. had to run a balance of payments current account deficit to provide liquidity
for the conversion of gold into U.S. dollars. With more U.S. dollars in the system than were backed with gold under the Bretton
Woods agreement, the U.S. dollar was overvalued. This meant that the United States had less gold as foreign governments started
converting U.S. dollars to gold and taking it offshore. Foreign speculators were not a direct part of the gold flow out of the US, as
under the Bretton Woods Agreement, only governments could exchange US currency for physical gold. Additionally, while the
Bretton Woods Agreement was in place, direct speculation by US citizens who were banned from owning any gold other than jewelry
following Executive Order 6102 which was enacted in 1933 by President Franklin D. Roosevelt and enabled the US Government to
confiscate all gold coinage, gold certificates, and gold bullion held by any citizen, did not contribute to the price imbalance and
arbitrage opportunity via a wide disparity of gold prices between the US and other markets. A price ceiling had been enacted which
fixed the price of gold at $35/oz USD following the previously mentioned gold confiscation from US citizens in 1933. As with all
price controls, this caused supply and demand imbalances and an arbitrage opportunity which rapidly depleted the United States gold
reserves. This led to less gold in the country and caused the US Dollar to become more overvalued, leading to a self-propagating
cycle. Furthermore, the US had to run a balance of payments current account
surplus to maintain confidence in the U.S. dollar.

As a result, the United States 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.

The Nixon Shock

In August 1971, PresidentRichard Nixon acknowledged the demise of the Bretton W
oods system. He announced that the dollar could
no longer be exchanged for gold, which soon became known as the Nixon shock. Although it was announced as a temporary
measure, it was to remain in effect. The "gold window" was closed.

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
IMF.[1][2]
March 2009 proposed strengthening existing global currency controls, through the

This would involve a gradual move away from the U.S. dollar as a reserve currency and towards the use of IMF special drawing
rights (SDRs) as a global reserve currency.

Zhou argued that part of the reason for the original Bretton Woods system breaking down was the refusal to adopt Keynes' bancor
which would have been a special international reserve currency to be used instead of the dollar
.

American economists such as Brad DeLong agreed that on almost every point where Keynes was overruled by the Americans during
[3]
the Bretton Woods negotiations, he was later proved correct by events.

Zhou's proposal attracted much international attention;[4] in a November 2009 article published in Foreign Affairs magazine,
economist C. Fred Bergsten argued that Zhou's suggestion or a similar change to the International Monetary System would be in the
best interests in both the United States and the rest of the world.[5] While Zhou's proposal has not yet been adopted, leaders meeting
in April at the 2009 G-20 London summit agreed to allow 250 billion SDRs to be created by the IMF, to be distributed to all IMF
members according to each country's voting rights.

On April 13, 2010, the Strategy, Policy and Review Department of the IMF published a comprehensive report examining these
aforementioned problems as well as other world reserve currency considerations, recommending that the world adopt a global reserve
currency (bancor) and that a global central bank be established to administer such a currency.[6] In this report, the current issues with
having a national global reserve currency are addressed. The merits, difficulties and effectiveness of establishing a multi-currency
reserve system are weighed against that of the SDRs, or "basket currency" strategy, and those of establishing this new "global reserve
currency". A new multilateral framework and "multi-polar system" for managing capital flows and national debts is also called for,
but the IMF cautions that it prefers a gradual shift to this new framework, rather than a sudden change.

See also
Bretton Woods system
Dollar hegemony
Exorbitant privilege
Reserve currency

References
1. Jamil Anderlini in Beijing (2009-03-23)."China calls for new reserve currency"(http://www.ft.com/cms/s/0/7851925a-
17a2-11de-8c9d-0000779fd2ac.html). Financial Times. Retrieved 2009-04-13.
2. Zhou Xiaochuan. "Reform the International Monetary System"(http://www.bis.org/review/r090402c.pdf)(PDF). Bank
for International Settlements. Retrieved 2010-01-11.
3. The reason why is simple enough to understand: o T maintain the reserve currency status, money-as-debt must be
created to maintain international liquidity (provide the money for transactions to take place).
This debt accumulates
over time, and eventually becomes large enough that international creditors begin to question whether or not it can
ever be paid back. When that day comes, the status of that currency as a reserve currency is called into question.
Hence the "dilemma" in the name."Review of Robert Skidelsky, John Maynard Keynes: Fighting for Britain 1937–
1946" (http://econ161.berkeley.edu/Econ_Articles/reviews/skidelsky3.html). Brad Delong, University of California at
Berkeley. Retrieved 2009-06-14.
4. Geoff Dyer in Beijing (2009-08-24)."The dragon stirs" (http://www.ft.com/cms/s/0/671a76ec-a950-11de-9b7f-00144f
eabdc0.html?catid=176&SID=google). Financial Times. Retrieved 2009-09-18.
5. C. Fred Bergsten (Nov 2009). "The Dollar and the Deficits"(http://www.foreignaffairs.com/articles/65446/c-fred-bergs
ten/the-dollar-and-the-deficits). Foreign Affairs. Retrieved 2009-12-15.
6. IMF Strategy, Policy and Review Department, Approved by Reza Moghadam (2010-04-13)."Reserve Accumulation
and International Monetary Stability"(http://www.imf.org/external/np/pp/eng/2010/041310.pdf) (PDF). IMF Strategy,
Policy and Review Department. Retrieved 2010-04-13.

External links
System in Crisis (1959–1971)
Triffin, Robert. Britannica Book of the Year, 1994. Encyclopædia Britannica Online. 6 April 2006
The Federal Reserve
Zhou Xiaochuan "Reform the International Monetary System" People's Bank of China, 23 March 2009

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