October 28, 2012
Robert Triffin is another of those characters from the 1960s, whom I
generally regard as well-meaning but sorely lacking in technical
understanding. This was true across the board in those days, whether
Keynesian, Monetarist, "Austrian" or whatever. That's why I say that
the main reason the world gold standard system disappeared in 1971
was not because of any particular inherent flaw in the gold standard
system (except for their mismanagement of it), but rather because
people didn't know how it was supposed to work. Also, they didn't
know what it was for, and I include the gold-standard advocates of
the time in that characterization. From reading Alan Greenspan's
1967 paper "Gold
and Economic Freedom," you probably get the impression that
the purpose of a gold standard system is to prevent government
Triffin is remembered primarily for "Triffin's Dilemma," which we
will look at below. Unfortunately, I haven't had the time to read
what Triffin actually wrote, so I can't really comment on that.
Often, what an economist says, and what other people say he said,
are different. For example, David Ricardo was basically a gold
standard guy, working to put Britain back on a gold standard system
after the pound was floated in 1798 due to the Napoleonic Wars.
However, he is now remembered for "Ricardian equivalence," which was
not really Ricardo's main interest at all, and constituted just some
minor comments in one of his books.
Here is how the IMF describes "Trffin's Dilemma:"
Ah, yes. The "Balance of Payments"! I said already that this is a
Testifying before the U.S. Congress in 1960, economist Robert
Triffin exposed a fundamental problem in the international
If the United States stopped running balance of payments deficits,
the international community would lose its largest source of
additions to reserves. The resulting shortage of liquidity could
pull the world economy into a contractionary spiral, leading to
If U.S. deficits continued, a steady stream of dollars would
continue to fuel world economic growth. However, excessive U.S.
deficits (dollar glut) would erode confidence in the value of the
U.S. dollar. Without confidence in the dollar, it would no longer
be accepted as the world's reserve currency. The fixed exchange
rate system could break down, leading to instability.
Triffin proposed the creation of new reserve units. These units
would not depend on gold or currencies, but would add to the
world's total liquidity. Creating such a new reserve would allow
the United States to reduce its balance of payments deficits,
while still allowing for global economic expansion.
14, 2012: Book Notes: The Age of Inflation, by Jacques
From the IMF description, you might have the impression that the
United States was running a balance of payments deficit (i.e., a
current account deficit) -- perhaps one of catastrophically large
The U.S. current account balance was generally positive during those
decades. An economist who wants to get all huffy and puffy about
some statistic, when he can't even get the plus or minus sign right,
is generally one who I don't pay much more attention to.
Now, it is true that central banks around the world were
accumulating U.S. debt assets (Treasury bonds), as part of their
monetary operating systems, as is normally the case in a currency
board arrangement such as the Bretton Woods system was. They were
even accumulating U.S. dollar banknotes, to use in transactions. OK,
so what? That is how a monetary system is supposed to operate. The
currency manager has to accumulate some kind of reserve asset, with
the majority of it typically in debt instruments, as has been the
case in gold standard systems (and also floating fiat currency
systems) for the past three hundred years. What difference does it
make if the debt is owed by the U.S. government or some other
government, or some other borrower? There is no difference at all,
besides a few minor consequences.
The actual problem of those days was the fact that dollar base money
was consistently in excess of demand -- in other words, a "dollar
glut" as the IMF page describes. The result was that the value of
the dollar was consistently sagging beneath its gold parity, and
consequently, the U.S. Treasury and Federal Reserve were having
redemption requests into gold bullion. The solution was to reduce
the dollar monetary base, thus bringing supply in line with demand
and supporting the dollar's value to meet its promised gold parity.
This is just the normal operating mechanisms of any gold standard
system, which were not being very well observed in those days. This
contraction of base money supply would not be recessionary, because
we wouldn't be raising the currency's value (beyond the small amount
that it deviated from its parity, typically of less than 10%).
Instead, the effect would most likely be an economic positive,
because people could go about their business without worrying if
their currency is going to have some kind of accident.
The basic issue during the Bretton Woods era was the conflict
between a gold standard policy (i.e., keeping the dollar's value at
$35/oz.), and a domestic monetary policy which was a sort of
Keynesianism-lite. I say "lite" because the gold standard policy
precluded more aggressive attempts at Keynesian funny money. This
contradiction was managed, not very effectively, with capital
controls during that time. Triffin did touch on this topic somewhat
tangentially, when he described a conflict between domestic
interests (the desire to "fine tune" the economy with Keynesian
funny money) and international interests (the world gold standard
system). However, Triffin generally failed to correctly identify the
problem, or the proper solution. This led him down some rather
bizarre paths. He eventually became an advocate of the IMF's
"Special Drawing Rights," which were a currency basket of major
international currencies, such as the U.S. dollar, British pound,
French franc, Japanese yen, German mark and so forth. However, all
of those currencies were also pegged to the dollar via the Bretton
Woods system, so they were, in effect, different versions of the
dollar. This SDR was supposed to take the place of gold bullion in
redemption, or serve as "paper gold" as it was termed at the time.
Imagine you are a German. The dollar is trading at $38/oz. on the
open market, compared to the official parity of $35/oz. You decide
to give your dollars back to the Fed and get gold in return. But,
instead of giving you gold, they give you SDRs. This SDR consists
mostly of dollars, with some German marks and other currencies.
Germans don't need German marks. They can make as many as they want
themselves. Thus, the effective transaction was dollars for dollars,
which is largely meaningless. The introduction of the SDR in 1969
marks the effective end of gold bullion redeemability. August 1971
really represented the official end. The consequence of the lifting
of the redeemability requirement was the end of the Bretton Woods
gold standard system.
Thus, we find that Triffin, by way of his misunderstanding of the
events of the time, basically became one of the architects and
promoters of the end of the Bretton Woods gold standard system. This
is why I say that the main reason the system ended was brute
ignorance. People at the time simply couldn't figure out what was
going on. (Apparently, they couldn't even figure out whether the
"current account balance" was positive or negative.) The solution
was as simple as having the Fed adopt a proper gold standard
operating mechanism to go with its gold standard policy, which would
lead the Fed to reduce the base money supply by selling some sort of
asset and absorbing the funds received in payment. In practice, we
would probably see the base money supply expand soon after, because
of the natural effects of an expanding economy, and also because a
currency that is being managed properly is much more popular (and
thus in demand) than one that is not.
There is no "Triffin's Dilemma," as it is commonly presented. The
real "dilemma" of the time was the conflict between a gold standard
policy and domestic money manipulation. It was a gold standard
policy but not a gold standard system. A gold
standard system includes a proper operating mechanism that
accomplishes the policy goal. The correct answer to the "dilemma" is
to make a choice, either between a gold standard system with a
proper automatic operating mechanism much like a currency board, or
with a floating fiat currency and funny money manipulation. The
proper choice is a gold standard system. No dilemma involved.
This "dilemma" is represented today as the "currency trilemma."
2, 2011: The Currency "Trilemma"
The "currency trilemma" basically states that there are three
1) A fixed currency value, an automatic operating system much like a
currency board, no capital controls, and no domestic "monetary
2) A floating fiat currency, a domestic "monetary policy" involving
interest rate targets, "quantitative easing" etc., and no capital
3) A fixed currency value, a domestic "monetary policy," and capital
However, the third option -- which the Bretton Woods system was --
is inherently unstable. Eventually, the fixed value policy and the
domestic monetary policy come into enough conflict that the system
blows up. Plus, to prevent this blow up from happening even faster,
you would need heavy capital controls, which are a problem in
themselves. Also, you don't really get that much effect from your
"domestic monetary policy" anyway, because it can never be very
aggressive, lest it blow up your fixed value policy and your capital
There is no real "trilemma," but rather a choice, between a
Classical system (#1, fixed value), and a Mercantilist system (#2,
floating fiat currency and "monetary policy.") This is just a
choice, like any choice. However, it is not an arbitrary choice: one
system is clearly better than the other. It is more like the
"choice" of becoming a meth addict, or not using meth at all. After
literally thousands of years of experience, we know the likely
consequences of becoming a funny-money addict, just as we know the
likely consequences of becoming a meth addict.
26, 2009: Two Monetary Paradigms
When people of that time talked about the "balance of payments" and
the "current account balance," they mostly weren't talking about the
actual balance of payments or the actual current account balance,
which as we have seen don't match their narrative at all. They were
really talking about the inherent conflict of the time between the
gold standard policy and a funny-money operating mechanism, and the
consequences of that conflict. Unfortunately, it seems like people
still can't figure this stuff out, which is pretty pathetic really,
and still talk about "Triffin's Dilemma" like it was some sort of
serious topic of consideration, and not just a historical artifact
of a time of rather piteous economic misunderstanding.