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,[1] 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.


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 of gold 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, President Richard Nixon acknowledged the demise of the Bretton Woods 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 March 2009 proposed strengthening existing global currency controls, through the IMF.[2][3]

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 the Bretton Woods negotiations, he was later proved correct by events.[4]

Zhou's proposal attracted much international attention;[5] 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.[6] 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.[7] 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


  1. ^ While named for Triffin, "French economist Jacques Rueff described the fatal weakness of foreign-exchange reserves in a 1932 lecture." John D. Mueller, Wall Street Journal, October 8, 2018, page A19.
  2. ^ Jamil Anderlini in Beijing (2009-03-23). "China calls for new reserve currency". Financial Times. Retrieved 2009-04-13.
  3. ^ Zhou Xiaochuan. "Reform the International Monetary System" (PDF). Bank for International Settlements. Retrieved 2010-01-11.
  4. ^ The reason why is simple enough to understand: To 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". Brad Delong, University of California at Berkeley. Retrieved 2009-06-14.
  5. ^ Geoff Dyer in Beijing (2009-08-24). "The dragon stirs". Financial Times. Retrieved 2009-09-18.
  6. ^ C. Fred Bergsten (Nov 2009). "The Dollar and the Deficits". Foreign Affairs. Retrieved 2009-12-15.
  7. ^ IMF Strategy, Policy and Review Department, Approved by Reza Moghadam (2010-04-13). "Reserve Accumulation and International Monetary Stability" (PDF). IMF Strategy, Policy and Review Department. Retrieved 2010-04-13.CS1 maint: Multiple names: authors list (link)

External links

2008–09 Keynesian resurgence

Following the global financial crisis of 2007–08, there was a worldwide resurgence of interest in Keynesian economics among prominent economists and policy makers. This included discussions and implementation of economic policies in accordance with the recommendations made by John Maynard Keynes in response to the Great Depression of the 1930s—most especially fiscal stimulus and expansionary monetary policy.From the end of the Great Depression until the early 1970s, Keynesian economics provided the main inspiration for economic policy makers in Western industrialized countries. The influence of Keynes's theories waned in the 1970s, due to stagflation and critiques from Friedrich Hayek, Milton Friedman, Robert Lucas, Jr. and other economists, who were less optimistic about the ability of interventionist government policy to positively regulate the economy or otherwise opposed to Keynesian policies. From the early 1980s to 2008, the normative consensus among economists was that attempts at fiscal stimulus would be ineffective even in a recession, and such policies were only occasionally employed by the governments of developed countries.In 2008, a rapid shift of opinion took place among many prominent economists in favour of Keynesian stimulus, and, from October onward, policy makers began announcing major stimulus packages, in hopes of heading off the possibility of a global depression. By early 2009 there was widespread acceptance among the world's economic policy makers about the need for fiscal stimulus. Yet by late 2009 the consensus among economists began to break down. In 2010 with a depression averted but unemployment in many countries still high, policy makers generally decided against further fiscal stimulus, with several citing concerns over public debt as a justification. Unconventional monetary policy continued to be used in attempts to raise economic activity. By 2016, increasing concerns had arisen that monetary policy was reaching the limit of its effectiveness, and several countries began to return to fiscal stimulus.

Balance of payments

The balance of payments, also known as balance of international payments and abbreviated B.O.P. or BoP, of a country is the record of all economic transactions between the residents of the country and the rest of the world in a particular period of time (e.g. a quarter of a year). These transactions are made by individuals, firms and government bodies. Thus the balance of payments includes all external visible and non-visible transactions of a country. It is an important issue to be studied, especially in international financial management field, for a few reasons.

First, the balance of payments provides detailed information concerning the demand and supply of a country's currency. For example, if Sudan imports more than it exports, then this means that the quantity supplied of Sudanese pounds by the domestic market is likely to exceed the quantity demanded in the foreign exchanging market, ceteris paribus. One can thus infer that the Sudanese pound would be under pressure to depreciate against other currencies. On the other hand, if Sudan exports more than it imports, then the Sudanese pound would be likely to appreciate.

Second, a country's balance of payments data may signal its potential as a business partner for the rest of the world. If a country is grappling with a major balance of payments difficulty, it may not be able to expand imports from the outside world. Instead, the country may be tempted to impose measures to restrict imports and discourage capital outflows in order to improve the balance of payments situation. On the other hand, a country with a significant balance of payments surplus would be more likely to expand imports, offering marketing opportunities for foreign enterprises, and less likely to impose foreign exchange restrictions.

Third, balance of payments data can be used to evaluate the performance of the country in international economic competition. Suppose a country is experiencing trade deficits year after year. This trade data may then signal that the country's domestic industries lack international competitiveness.

To interpret balance of payments data properly, it is necessary to understand how the balance of payments account is constructed.

These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers. It is prepared in a single currency, typically the domestic currency for the country concerned. The balance of payments accounts keep systematic records of all the economic transactions (visible and non-visible) of a country with all other countries in the given time period. In the BoP accounts, all the receipts from abroad are recorded as credit and all the payments to abroad are debits. Since the accounts are maintained by double entry bookkeeping, they show the balance of payments accounts are always balanced. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items.

When all components of the BoP accounts are included they must sum to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counterbalanced in other ways – such as by funds earned from its foreign investments, by running down currency reserves or by receiving loans from other countries.

While the overall BoP accounts will always balance when all types of payments are included, imbalances are possible on individual elements of the BoP, such as the current account, the capital account excluding the central bank's reserve account, or the sum of the two. Imbalances in the latter sum can result in surplus countries accumulating wealth, while deficit nations become increasingly indebted. The term "balance of payments" often refers to this sum: a country's balance of payments is said to be in surplus (equivalently, the balance of payments is positive) by a specific amount if sources of funds (such as export goods sold and bonds sold) exceed uses of funds (such as paying for imported goods and paying for foreign bonds purchased) by that amount. There is said to be a balance of payments deficit (the balance of payments is said to be negative) if the former are less than the latter. A BoP surplus (or deficit) is accompanied by an accumulation (or decumulation) of foreign exchange reserves by the central bank.

Under a fixed exchange rate system, the central bank accommodates those flows by buying up any net inflow of funds into the country or by providing foreign currency funds to the foreign exchange market to match any international outflow of funds, thus preventing the funds flows from affecting the exchange rate between the country's currency and other currencies. Then the net change per year in the central bank's foreign exchange reserves is sometimes called the balance of payments surplus or deficit. Alternatives to a fixed exchange rate system include a managed float where some changes of exchange rates are allowed, or at the other extreme a purely floating exchange rate (also known as a purely flexible exchange rate). With a pure float the central bank does not intervene at all to protect or devalue its currency, allowing the rate to be set by the market, the central bank's foreign exchange reserves do not change, and the balance of payments is always zero.


The bancor was a supranational currency that John Maynard Keynes and E. F. Schumacher conceptualised in the years 1940–1942 and which the United Kingdom proposed to introduce after World War II. The name was inspired by the French banque or ('bank gold'). This newly created supranational currency would then be used in international trade as a unit of account within a multilateral clearing system—the International Clearing Union—which would also have to be founded.

Feliks Młynarski

Feliks Młynarski (20 November 1884 – 13 April 1972) was a Polish banker, philosopher and economist.

Global financial system

The global financial system is the worldwide framework of legal agreements, institutions, and both formal and informal economic actors that together facilitate international flows of financial capital for purposes of investment and trade financing. Since emerging in the late 19th century during the first modern wave of economic globalization, its evolution is marked by the establishment of central banks, multilateral treaties, and intergovernmental organizations aimed at improving the transparency, regulation, and effectiveness of international markets. In the late 1800s, world migration and communication technology facilitated unprecedented growth in international trade and investment. At the onset of World War I, trade contracted as foreign exchange markets became paralyzed by money market illiquidity. Countries sought to defend against external shocks with protectionist policies and trade virtually halted by 1933, worsening the effects of the global Great Depression until a series of reciprocal trade agreements slowly reduced tariffs worldwide. Efforts to revamp the international monetary system after World War II improved exchange rate stability, fostering record growth in global finance.

A series of currency devaluations and oil crises in the 1970s led most countries to float their currencies. The world economy became increasingly financially integrated in the 1980s and 1990s due to capital account liberalization and financial deregulation. A series of financial crises in Europe, Asia, and Latin America followed with contagious effects due to greater exposure to volatile capital flows. The global financial crisis, which originated in the United States in 2007, quickly propagated among other nations and is recognized as the catalyst for the worldwide Great Recession. A market adjustment to Greece's noncompliance with its monetary union in 2009 ignited a sovereign debt crisis among European nations known as the Eurozone crisis.

A country's decision to operate an open economy and globalize its financial capital carries monetary implications captured by the balance of payments. It also renders exposure to risks in international finance, such as political deterioration, regulatory changes, foreign exchange controls, and legal uncertainties for property rights and investments. Both individuals and groups may participate in the global financial system. Consumers and international businesses undertake consumption, production, and investment. Governments and intergovernmental bodies act as purveyors of international trade, economic development, and crisis management. Regulatory bodies establish financial regulations and legal procedures, while independent bodies facilitate industry supervision. Research institutes and other associations analyze data, publish reports and policy briefs, and host public discourse on global financial affairs.

While the global financial system is edging toward greater stability, governments must deal with differing regional or national needs. Some nations are trying to systematically discontinue unconventional monetary policies installed to cultivate recovery, while others are expanding their scope and scale. Emerging market policymakers face a challenge of precision as they must carefully institute sustainable macroeconomic policies during extraordinary market sensitivity without provoking investors to retreat their capital to stronger markets. Nations' inability to align interests and achieve international consensus on matters such as banking regulation has perpetuated the risk of future global financial catastrophes.

Ideal money

Ideal Money (to be considered different than defining 'ideal money' without capitals) is a theoretical notion promulgated by John Nash (Nobel Laureate in Economics) to stabilize international currencies. It is a solution to the Triffin dilemma-the conflict of economic interests between the short-term domestic and long-term international objectives when a currency used in a country is also serving as world reserve currency.

Nash gave various lectures and written discourses on the subject he called Ideal Money. The first talk was given in 1995 (one year after Nash won the Nobel Prize for economics for his work on equilibrium theory nearly 50 years prior). Nash spent 20 years giving talks, in many different nations around the world, about how Ideal Money could be brought about internationally.

Nash said in an interview the basic idea for Ideal Money came to him in the late 1950s and early 1960s at a time when he fled the US to Europe in order to try to renounce his US citizenship and exchange his USD for the Swiss Franc (which he believed to be superior in quality from a perspective he describes in Ideal Money).

Impossible trinity

The impossible trinity (also known as the trilemma) is a concept in international economics which states that it is impossible to have all three of the following at the same time:

a fixed foreign exchange rate

free capital movement (absence of capital controls)

an independent monetary policyIt is both a hypothesis based on the uncovered interest rate parity condition, and a finding from empirical studies where governments that have tried to simultaneously pursue all three goals have failed.

The concept was developed independently by both John Marcus Fleming in 1962 and Robert Alexander Mundell in different articles between 1960 and 1963.

International monetary systems

An international monetary system is a set of internationally agreed rules, conventions and supporting institutions that facilitate international trade, cross border investment and generally the reallocation of capital between nation states. It should provide means of payment acceptable to buyers and sellers of different nationalities, including deferred payment. To operate successfully, it needs to inspire confidence, to provide sufficient liquidity for fluctuating levels of trade, and to provide means by which global imbalances can be corrected. The system can grow organically as the collective result of numerous individual agreements between international economic factors spread over several decades. Alternatively, it can arise from a single architectural vision, as happened at Bretton Woods in 1944.

List of eponymous laws

This list of eponymous laws provides links to articles on laws, principles, adages, and other succinct observations or predictions named after a person. In some cases the person named has coined the law – such as Parkinson's law. In others, the work or publications of the individual have led to the law being so named – as is the case with Moore's law. There are also laws ascribed to individuals by others, such as Murphy's law; or given eponymous names despite the absence of the named person.

Nixon shock

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.

Reserve currency

A reserve currency (or anchor currency) is a currency that is held in significant quantities by governments and institutions as part of their foreign exchange reserves. The reserve currency is commonly used in international transactions, international investments and all aspects of the global economy. It is often considered a hard currency or safe-haven currency. People who live in a country that issues a reserve currency can purchase imports and borrow across borders more cheaply than people in other nations because they do not need to exchange their currency to do so.

By the end of the 20th century, the United States dollar was considered the world's dominant reserve currency. The world's need for dollars has allowed the United States government as well as Americans to borrow at lower costs, granting them an advantage in excess of $100 billion per year.

Robert Triffin

Robert, Baron Triffin (5 October 1911 – 23 February 1993) was a Belgian-American economist best known for his critique of the Bretton Woods system of fixed currency exchange rates. His critique became known later as Triffin's dilemma.

Zhou Xiaochuan

Zhou Xiaochuan (Chinese: 周小川; pinyin: Zhōu Xiǎochuān) (born January 29, 1948) is a Chinese economist, banker, reformist and bureaucrat. Zhou was best known for his term as the Governor of the People's Bank of China, a position in which he served from 2002 to 2018. He was longest-serving central bank chief since the establishment of the People's Republic of China, steering the monetary policy of an economy amid structural transformation.

During his tenure, China became the second largest economy in the world and a consequential player in global financial markets. As such, Zhou was consistently ranked among the most influential global policy makers of his generation.Zhou has previously held leading posts in trade and financial organizations, serving as Vice-Governor of the People's Bank of China, Director of the State Administration of Foreign Exchange, Governor of China Construction Bank, and Chairman of the China Securities Regulatory Commission. He retired in 2018 after serving for several years past the typical retirement age for officials of his rank.


This page is based on a Wikipedia article written by authors (here).
Text is available under the CC BY-SA 3.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.