The Nixon shock was a series of economic measures undertaken by United States President Richard Nixon in 1971, in response to increasing inflation, the most significant of which were wage and price freezes, surcharges on imports, and the unilateral cancellation of the direct international convertibility of the United States dollar to gold.
While Nixon's actions did not formally abolish the existing Bretton Woods system of international financial exchange, the suspension of one of its key components effectively rendered the Bretton Woods system inoperative. While Nixon publicly stated his intention to resume direct convertibility of the dollar after reforms to the Bretton Woods system had been implemented, all attempts at reform proved unsuccessful. By 1973, the Bretton Woods system was replaced de facto by the current regime based on freely floating fiat currencies.
In 1944 in Bretton Woods, New Hampshire, representatives from 44 nations met to develop a new international monetary system that came to be known as the Bretton Woods system. Conference attendees had hoped that this new system would "ensure exchange rate stability, prevent competitive devaluations, and promote economic growth". It was not until 1958 that the Bretton Woods system became fully operational. Countries now settled their international accounts in dollars that could be converted to gold at a fixed exchange rate of $35 per ounce, which was redeemable by the U.S. government. Thus, the United States was committed to backing every dollar overseas with gold, and other currencies were pegged to the dollar.
For the first years after World War II, the Bretton Woods system worked well. With the Marshall Plan, Japan and Europe were rebuilding from the war, and countries outside the US wanted dollars to spend on American goods—cars, steel, machinery, etc. Because the U.S. owned over half the world's official gold reserves—574 million ounces at the end of World War II—the system appeared secure.
However, from 1950 to 1969, as Germany and Japan recovered, the US share of the world's economic output dropped significantly, from 35% to 27%. Furthermore, a negative balance of payments, growing public debt incurred by the Vietnam War, and monetary inflation by the Federal Reserve caused the dollar to become increasingly overvalued in the 1960s.
In France, the Bretton Woods system was called "America's exorbitant privilege" as it resulted in an "asymmetric financial system" where non-US citizens "see themselves supporting American living standards and subsidizing American multinationals". As American economist Barry Eichengreen summarized: "It costs only a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries had to pony up $100 of actual goods in order to obtain one". In February 1965 President Charles de Gaulle announced his intention to exchange its U.S. dollar reserves for gold at the official exchange rate.
By 1966, non-US central banks held $14 billion, while the United States had only $13.2 billion in gold reserve. Of those reserves, only $3.2 billion was able to cover foreign holdings as the rest was covering domestic holdings.
By 1971, the money supply had increased by 10%. In May 1971, West Germany left the Bretton Woods system, unwilling to revalue the Deutsche Mark. In the following three months, this move strengthened its economy. Simultaneously, the dollar dropped 7.5% against the Deutsche Mark. Other nations began to demand redemption of their dollars for gold. Switzerland redeemed $50 million in July. France acquired $191 million in gold. On August 5, 1971, the United States Congress released a report recommending devaluation of the dollar, in an effort to protect the dollar against "foreign price-gougers". On August 9, 1971, as the dollar dropped in value against European currencies, Switzerland left the Bretton Woods system. The pressure began to intensify on the United States to leave Bretton Woods.
To combat these problems, President Nixon consulted Federal Reserve chairman Arthur Burns, incoming Treasury Secretary John Connally, and then Undersecretary for International Monetary Affairs and future Fed Chairman Paul Volcker.
On the afternoon of Friday, August 13, 1971, these officials along with twelve other high-ranking White House and Treasury advisors met secretly with Nixon at Camp David. There was great debate about what Nixon should do, but ultimately Nixon, relying heavily on the advice of the self-confident Connally, decided to break up Bretton Woods by announcing the following actions on August 15:
Speaking on television on Sunday, August 15, when American financial markets were closed, Nixon said the following:
The third indispensable element in building the new prosperity is closely related to creating new jobs and halting inflation. We must protect the position of the American dollar as a pillar of monetary stability around the world.
In the past 7 years, there has been an average of one international monetary crisis every year ...
I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.
Now, what is this action—which is very technical—what does it mean for you?
Let me lay to rest the bugaboo of what is called devaluation.
If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today.
The effect of this action, in other words, will be to stabilize the dollar.
The American public believed the government was rescuing them from price gougers and from a foreign-caused exchange crisis. Politically, Nixon's actions were a great success. The Dow rose 33 points the next day, its biggest daily gain ever at that point, and the New York Times editorial read, "We unhesitatingly applaud the boldness with which the President has moved."
By December 1971, the import surcharge was dropped as part of a general revaluation of the Group of Ten (G-10) currencies, which under the Smithsonian Agreement were thereafter allowed 2.25% devaluations from the agreed exchange rate. In March 1973, the fixed exchange rate system became a floating exchange rate system. The currency exchange rates no longer were governments' principal means of administering monetary policy.
The Nixon Shock has been widely considered to be a political success, but an economic mixed bag in bringing on the stagflation of the 1970s and leading to the instability of floating currencies. The dollar plunged by a third during the 1970s. According to the World Trade Review's report "The Nixon Shock After Forty Years: The Import Surcharge Revisited", Douglas Irwin reports that for several months, U.S officials could not get other countries to agree to a formal revaluation of their currencies. The German mark appreciated significantly after it was allowed to float in May 1971. Further, the Nixon Shock unleashed enormous speculation against the dollar. It forced Japan's central bank to intervene significantly in the foreign exchange market to prevent the yen from increasing in value. Within two days August 16–17, 1971, Japan's central bank had to buy $1.3 billion to support the dollar and keep the yen at the old rate of 360 Yen to the dollar. Japan's foreign exchange reserves rapidly increased: $2.7 billion (30%) a week later and $4 billion the following week. Still, this large-scale intervention by Japan's central bank could not prevent the depreciation of US dollar against the yen. France also was willing to allow the dollar to depreciate against the franc, but not allow the franc to appreciate against gold (Page 14 Douglas). Even much later, in 2011, Paul Volcker expressed regret over the abandonment of Bretton Woods: "Nobody's in charge," Volcker said. "The Europeans couldn't live with the uncertainty and made their own currency and now that's in trouble."
The current world monetary system assigns no special role to gold; indeed, the Federal Reserve is not obliged to tie the dollar to anything. It can print as much or as little money as it deems appropriate. There are powerful advantages to such an unconstrained system. Above all, the Fed is free to respond to actual or threatened recessions by pumping in money. To take only one example, that flexibility is the reason the stock market crash of 1987—which started out every bit as frightening as that of 1929—did not cause a slump in the real economy.
While a freely floating national money has advantages, however, it also has risks. For one thing, it can create uncertainties for international traders and investors. Over the past five years, the dollar has been worth as much as 120 yen and as little as 80. The costs of this volatility are hard to measure (partly because sophisticated financial markets allow businesses to hedge much of that risk), but they must be significant. Furthermore, a system that leaves monetary managers free to do good also leaves them free to be irresponsible—and, in some countries, they have been quick to take the opportunity.
Debates over the Nixon Shock have persisted to the present day, with economists and politicians across the political spectrum trying to make sense of the Nixon Shock and its impact on monetary policy in the light of the financial crisis of 2007–2008.
In Japan during the 1970s, the economy was hit by the oil shock and the Nixon shock. Energy consumption dropped and industrial production increased. During the 1970s energy crisis, Japan introduced energy-saving measures and became a hub of miniaturization. The women's liberation movement in Japan, known as ũman ribu, began to gain momentum with feminist groups starting to form in 1970.In November 1973, a tissue shortage in Japan was reported by news agencies.1973–74 stock market crash
The 1973–74 stock market crash caused a bear market between January 1973 and December 1974. Affecting all the major stock markets in the world, particularly the United Kingdom, it was one of the worst stock market downturns in modern history. The crash came after the collapse of the Bretton Woods system over the previous two years, with the associated 'Nixon Shock' and United States dollar devaluation under the Smithsonian Agreement. It was compounded by the outbreak of the 1973 oil crisis in October of that year. It was a major event of the 1970s recession.Bimetallism
Bimetallism is a monetary standard in which the value of the monetary unit is defined as equivalent to certain quantities of two metals, typically gold and silver, creating a fixed rate of exchange between them.For scholarly purposes, "proper" bimetallism is sometimes distinguished as permitting that both gold and silver money are legal tender in unlimited amounts and that gold and silver may be taken to be coined by the government mints in unlimited quantities. This distinguishes it from "limping standard" bimetallism, where both gold and silver are legal tender but only one is freely coined (e.g. the moneys of France, Germany, and the United States after 1873), and from "trade" bimetallism, where both metals are freely coined but only one is legal tender and the other is used as "trade money" (e.g. most moneys in western Europe from the 13th to 18th centuries). Economists also distinguish legal bimetallism, where the law guarantees these conditions, and de facto bimetallism, where gold and silver coins circulate at a fixed rate.
In the 19th century, there was a great deal of scholarly debate and political controversy regarding the use of bimetallism in place of a gold or silver standard (monometallism). Bimetallism was intended to increase the supply of money, stabilize prices, and facilitate setting exchange rates. Some scholars argued that bimetallism was inherently unstable owing to Gresham's law, and that its replacement by a monometallic standard was inevitable. Other scholars claimed that in practice bimetallism had a stabilizing effect on economies. The controversy became largely moot after technological progress and the South African and Klondike Gold Rushes increased the supply of gold in circulation at the end of the century, ending most of the political pressure for greater use of silver. It became completely academic after the 1971 Nixon shock, since when all of the world's currencies have operated as more or less freely floating fiat money, unconnected to the value of silver or gold. Nonetheless, academics continue to inconclusively debate the relative use of the metallic standards.Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the United States, Canada, Western European countries, Australia, and Japan after the 1944 Bretton Woods Agreement. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent states. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained its external exchange rates within 1 percent by tying its currency to gold and the ability of the IMF to bridge temporary imbalances of payments. Also, there was a need to address the lack of cooperation among other countries and to prevent competitive devaluation of the currencies as well.
Preparing to rebuild the international economic system while World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference, also known as the Bretton Woods Conference. The delegates deliberated during 1–22 July 1944, and signed the Bretton Woods agreement on its final day. Setting up a system of rules, institutions, and procedures to regulate the international monetary system, these accords established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. The United States, which controlled two thirds of the world's gold, insisted that the Bretton Woods system rest on both gold and the US dollar. Soviet representatives attended the conference but later declined to ratify the final agreements, charging that the institutions they had created were "branches of Wall Street". These organizations became operational in 1945 after a sufficient number of countries had ratified the agreement.
On 15 August 1971, the United States unilaterally terminated convertibility of the US dollar to gold, effectively bringing the Bretton Woods system to an end and rendering the dollar a fiat currency. This action, referred to as the Nixon shock, created the situation in which the U.S. dollar became a reserve currency used by many states. At the same time, many fixed currencies (such as the pound sterling) also became free-floating.Canada in the Cold War
Canada in the Cold War was one of the western powers playing a central role in the major alliances. It was an ally of the United States, but there were several foreign policy differences between the two countries over the course of the Cold War.
Canada was a founding member of the North Atlantic Treaty Organization (NATO) in 1949, the North American Aerospace Defence Command (NORAD) in 1958 and played a leading role in United Nations peacekeeping operations – from the Korean War to the creation of a permanent UN peacekeeping force during the Suez Crisis in 1956. Subsequent peacekeeping interventions occurred in the Congo (1960), Cyprus (1964), the Sinai (1973), Vietnam (with the International Control Commission), Golan Heights, Lebanon (1978), and Namibia (1989–1990).
Canada did not follow the American lead in all Cold War actions, sometimes leading to tensions. Canada refused to join the Vietnam War and in 1984 the last nuclear weapons based in Canada were removed. Relations were maintained with Cuba and the Canadian government recognized the People's Republic of China before the United States.
The Canadian military maintained a standing presence in Western Europe as part of its NATO deployment at several bases in Germany – including long tenures at CFB Baden-Soellingen and CFB Lahr, in the Black Forest region of West Germany. Also Canadian military facilities were maintained in Bermuda, France and the United Kingdom. From the early 1960s until the 1980s, Canada maintained weapon platforms armed with nuclear weapons – including nuclear-tipped air-to-air rockets, surface-to-air missiles, and high-yield gravity bombs principally deployed in the Western European theatre of operations as well as in Canada.Credit theory of money
Credit theories of money (also called debt theories of money) are monetary economic theories concerning the relationship between credit and money. Proponents of these theories, such as Alfred Mitchell-Innes, sometimes emphasize that money and credit/debt are the same thing, seen from different points of view. Proponents assert that the essential nature of money is credit (debt), at least in eras where money is not backed by a commodity such as gold. Two common strands of thought within these theories are the idea that money originated as a unit of account for debt, and the position that money creation involves the simultaneous creation of debt. Some proponents of credit theories of money argue that money is best understood as debt even in systems often understood as using commodity money. Others hold that money equates to credit only in a system based on fiat money, where they argue that all forms of money including cash can be considered as forms of credit money.
The first formal credit theory of money arose in the 19th century. Anthropologist David Graeber has argued that for most of human history, money has been widely understood to represent debt, though he concedes that even prior to the modern era, there have been several periods where rival theories like metallism have held sway.Donald Nixon
Francis Donald Nixon (November 23, 1914 – June 27, 1987) was a
younger brother of United States President Richard Nixon.George Shultz
George Pratt Shultz (; born December 13, 1920) is an American economist, elder statesman, and businessman. He served in various positions under three different Republican presidents. Along with Elliot Richardson, he is one of two individuals to serve in four different Cabinet positions. He played a major policy role in shaping the foreign policy of the Ronald Reagan administration. In the 2010s, Shultz was a prominent figure in the scandal around biotech firm Theranos, continuing to support it as a board member in the face of mounting evidence of fraud.
Born in New York City, he graduated from Princeton University before serving in the United States Marine Corps during World War II. After the war, Shultz earned a PhD in industrial economics from the Massachusetts Institute of Technology (MIT). He taught at MIT from 1948 to 1957, taking a leave of absence in 1955 to take a position on President Dwight D. Eisenhower's Council of Economic Advisers. After serving as dean of the University of Chicago Graduate School of Business, he accepted President Richard Nixon's appointment as United States Secretary of Labor. In that position, he imposed the Philadelphia Plan on construction contractors who refused to accept black members, marking the first use of racial quotas by the federal government. In 1970, he became the first Director of the Office of Management and Budget, and he served in that position until his appointment as United States Secretary of the Treasury in 1972. In that role, Shultz supported the Nixon shock (which sought to revive the ailing economy in part by abolishing the gold standard) and presided over the end of the Bretton Woods system.
Shultz left the Nixon administration in 1974 to become an executive at Bechtel. After becoming president and director of that company, he accepted President Ronald Reagan's offer to serve as United States Secretary of State. He held that office from 1982 to 1989. Shultz pushed for Reagan to establish relations with Soviet leader Mikhail Gorbachev, which led to a thaw between the United States and the Soviet Union. He opposed the U.S. aid to rebels trying to overthrow the Sandinistas using funds from an illegal sale of weapons to Iran that led to the Iran–Contra affair.
Shultz retired from public office in 1989 but remained active in business and politics. He served as an informal adviser to George W. Bush and helped formulate the Bush Doctrine of preemptive war. He served on the Global Commission on Drug Policy, California Governor Arnold Schwarzenegger's Economic Recovery Council, and on the boards of Bechtel and the Charles Schwab Corporation. Since 2013, he has repeatedly advocated for a revenue-neutral carbon tax as the most economically sound means of mitigating anthropogenic climate change. He is a member of the Hoover Institution, the Institute for International Economics, the Washington Institute for Near East Policy, and other groups. Since the death of William Thaddeus Coleman Jr., Shultz is the oldest living former U.S. Cabinet member.Gold Standard Act
The Gold Standard Act of the United States was passed in 1900 (approved on March 14) and established gold as the only standard for redeeming paper money, stopping bimetallism (which had allowed silver in exchange for gold). It was signed by President William McKinley.
The Act made the de facto gold standard in place since the Coinage Act of 1873 (whereby debt holders could demand reimbursement in whatever metal was preferred—usually gold) a de jure gold standard alongside other major European powers at the time.
The Act fixed the value of the dollar at 25 8⁄10 grains of gold at "nine-tenths fine" (90% purity), equivalent to 23.22 grains (1.5046 grams) of pure gold.
The Gold Standard Act confirmed the United States' commitment to the gold standard by assigning gold a specific dollar value (just over $20.67 per Troy ounce). This took place after McKinley sent a team to Europe to try to make a silver agreement with France and Great Britain.
On April 19, 1933, the United States domestically abandoned the gold standard, whereafter independent states would remain assured of their US dollar holdings by an implied guarantee on their convertibility on demand: the Bretton Woods system formalized this international arrangement at the conclusion of World War II, before the Nixon shock unilaterally cancelled direct international convertibility of the US dollar to gold in 1971.History of monetary policy in the United States
This article is about the history of monetary policy in the United States. Monetary policy is associated with interest rates and availability of credit.Jamaica Accords
The Jamaica Accords were a set of international agreements that ratified the end of the Bretton Woods monetary system. They took the form of recommendations to change the "articles of agreement" that the International Monetary Fund (IMF) was founded upon. The agreement was concluded after meetings 7–8 January 1976 at Kingston, Jamaica by a committee of the board of governors of the IMF.The accords allowed the price of gold to float with respect to the U.S. dollar and other currencies, albeit within a set of agreed constraints. In practice the dollar had been floating in this way, in contravention of the articles of an agreement of the IMF, since the Nixon shock in 1971. The accords also made provisions for financial assistance to developing countries representing the Group of 77 member countries to compensate for lost earnings from the export of primary commodities. An amendment was made in 1978 to allow for the creation of Special Drawing Rights, described as "a rather cheap line of credit" for developing countries.Jennie Eisenhower
Jennie Elizabeth Eisenhower (born August 15, 1978) is an American actress. She has performed in a number of theater productions and had minor roles in some feature films. She is the great-grandchild and grandchild of Presidents Dwight D. Eisenhower and Richard Nixon, respectively.John Connally
John Bowden Connally Jr. (February 27, 1917 – June 15, 1993) was an American politician. He served as the 39th Governor of Texas and as the 61st United States Secretary of the Treasury. He began his career as a Democrat but switched to Republican in 1973.
Born in Floresville, Texas, Connally pursued a legal career after graduating from the University of Texas at Austin. During World War II, he served on the staff of James Forrestal and Dwight D. Eisenhower before transferring to the Asiatic-Pacific Theater. After the war, he became an aide to Senator Lyndon B. Johnson. When Johnson assumed the vice presidency in 1961, he convinced President John F. Kennedy to appoint Connally to the position of United States Secretary of the Navy. Connally left the Kennedy Administration in December 1961 to run for Governor of Texas, and he held that position from 1963 to 1969. In 1963, Connally was riding in the presidential limousine during Kennedy's assassination, and was seriously wounded. During his governorship, he was a conservative Democrat.
In 1971, Republican President Richard Nixon appointed Connally as his Treasury Secretary. In this position, Connally presided over the removal of the U.S. dollar from the gold standard, an event known as the Nixon shock. Connally stepped down from the Cabinet in 1972 to lead the Democrats for Nixon organization, which campaigned for Nixon's re-election. Connally was a candidate to replace Vice President Spiro Agnew after the latter resigned in 1973, but Nixon chose Gerald Ford instead. Connally sought the Republican nomination for president in the 1980 election, but withdrew from the race after the first set of primaries. Connally did not seek public office again after 1980 and died of pulmonary fibrosis in 1993.London Gold Pool
The London Gold Pool was the pooling of gold reserves by a group of eight central banks in the United States and seven European countries that agreed on 1 November 1961 to cooperate in maintaining the Bretton Woods System of fixed-rate convertible currencies and defending a gold price of US$35 per troy ounce by interventions in the London gold market.
The central banks coordinated concerted methods of gold sales to balance spikes in the market price of gold as determined by the London morning gold fixing while buying gold on price weaknesses. The United States provided 50% of the required gold supply for sale. The price controls were successful for six years until the system became no longer workable. The pegged price of gold was too low, and after runs on gold, the British pound, and the US dollar occurred, France decided to withdraw from the pool. The London Gold Pool collapsed in March 1968.
The London Gold Pool controls were followed with an effort to suppress the gold price with a two-tier system of official exchange and open market transactions, but this gold window collapsed in 1971 with the Nixon Shock, and resulted in the onset of the gold bull market which saw the price of gold appreciate rapidly to US$850 in 1980.Moscow Summit (1972)
The Moscow Summit of 1972 was a summit meeting between President Richard M. Nixon of the United States and General Secretary Leonid Brezhnev of the Communist Party of the Soviet Union. It was held May 22–30, 1972. It featured the signing of the Anti-Ballistic Missile (ABM) Treaty, the first Strategic Arms Limitation Treaty (SALT I), and the U.S.–Soviet Incidents at Sea agreement. The summit is considered one of the hallmarks of the détente at the time between the two Cold War antagonists.Presidential Recordings and Materials Preservation Act
The Presidential Recordings and Materials Preservation Act (PRMPA) of 1974 (Pub.L. 93–526, 88 Stat. 1695, enacted December 19, 1974, codified at 44 U.S.C. § 2111, note) is an act of Congress enacted in the wake of the August 1974 resignation of President Richard M. Nixon. It placed Nixon's presidential records into federal custody to prevent their destruction. The legislative action was intended to reduce secrecy, while allowing historians to fulfill their responsibilities.Snake in the tunnel
The snake in the tunnel was the first attempt at European monetary cooperation in the 1970s, aiming at limiting fluctuations between different European currencies. It was an attempt at creating a single currency band for the European Economic Community (EEC), essentially pegging all the EEC currencies to one another.
Pierre Werner presented a report on economic and monetary union to the EEC on 8 October 1970. The first of three recommended steps involved the coordination of economic policies and a reduction in fluctuations between European currencies.With the failure of the Bretton Woods system with the Nixon shock in 1971, the Smithsonian Agreement set bands of ±2.25% for currencies to move relative to their central rate against the US dollar. This provided a tunnel within which European currencies could trade. However, it implied much larger bands in which they could move against each other: for example if currency A started at the bottom of its band it could appreciate by 4.5% against the dollar, while if currency B started at the top of its band it could depreciate by 4.5% against the dollar.If both happened simultaneously, then currency A would appreciate by 9% against currency B. This was seen as excessive, and the Basel agreement in 1972 between the six existing EEC members and three about to join established a snake in the tunnel with bilateral margins between their currencies limited to 2.25%, implying a maximum change between any two currencies of 4.5%, and with all the currencies tending to move together against the dollar. This agreement also led to the formal end of the Sterling Area.
The tunnel collapsed in 1973 when the US dollar floated freely. The snake proved unsustainable, with several currencies leaving and in some cases rejoining. By 1977, it had become a Deutsche Mark zone with just the Belgian and Luxembourg franc, the Dutch guilder and the Danish krone tracking it. The Werner plan was abandoned.The European Monetary System followed the "snake" as a system for monetary coordination in the EEC.The Death of Money
The Death of Money is a 1993 book (and an article with the same title) by Joel Kurtzman, a former editor of Harvard Business Review. Kurtzman uses the "death of money" to refer to a change in the economic nature of money in the United States following Richard Nixon's removal of US dollar from the gold standard (as in the Bretton Woods system), informally referred to as the Nixon shock.
The concept of "death of money" also refers to the fundamental change in the nature of business transactions based on a complex, electronically managed system of valuations used for stocks, bonds, insurance policies, and other financial contracts that go beyond the simple, historic notion of money representing physical reserves. A simple view of this concept is that if everyone decides to cash out their bank account on a single day, there is no longer enough paper money to represent it.
Kurtzman discussed how the new electronic financial economy allows for new trends in securitization (e.g., the inclusion of mortgage-backed securities into compound and complex financial instruments), and warned of possible financial reversals.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 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.