What is the Triffin dilemma?
Topic of Study [For H2 History Students]:
Paper 1: Understanding the Global Economy (1945-2000)
Section B: Essay Writing
Theme II Chapter 1: Problems of economic liberalisation
Historical background: An international creditor
In the post-WWII phase, the USA provided substantial financial aid to facilitate post-war economic reconstruction. One key example is the Marshall Plan, which amounted to about $13.2 billion (1948-1952) that benefited Western Europe.
In addition, the USA supported the establishment of the Bretton Woods System (BWS). By pegging the US dollar (USD) to gold, the USA helped to set up a system of fixed exchange rates, in which one ounce of gold was equivalent to USD35. Both foreign governments and central banks could exchange dollars for gold. Given that the USD was ‘as good as gold’, the monetary system enabled international transactions denominated in the greenback.
The Dollar Glut & The Gold Pool
With the globalisation of the Cold War by the late 1950s, the USA stepped up its efforts to form alliances with other countries, exerting its economic might to convince foreign leaders to join its ideological cause. However, the outflow of USD to foreign economies eventually exceeded the amount of gold that backed the monetary system.
For instance, the central banks of Western European nations and Japan had accumulated USD, building up their currency reserves. Central banks in turn could exchange these dollars for gold, threatening the stability of the system.
But as these ratios began to shift, confidence began to erode in the credibility of the American commitment to dollar convertibility and thus in the structure of the Bretton Woods system. By the end of 1959, the United States’ money gold stock had been surpassed in value by foreign-held external dollar liabilities. By 1965, America’s stock of gold reserves had been surpassed by the external dollar liabilities held by foreign monetary authorities. Foreign investors, both official and private, had growing grounds for questioning the ability of the United States to continue honoring its commitment to convert these liabilities into gold at a fixed price.
An excerpt taken from “Global Imbalances and the Lessons of Bretton Woods” by Barry Eichengreen.
On 1 November 1961, the central banks of the USA and seven other European nations (Germany, United Kingdom, Switzerland, Netherlands, Belgium, Italy and France) created the London Gold Pool. By doing so, the fixed exchange rate system under the Bretton Woods could be maintained by keeping the price of gold stable.
However, the Gold Pool eventually collapsed in March 1968 as the pegged price of gold remained low such that France withdrew from the collaboration.
The Dilemma
Belgian-American economist Robert Triffin revealed a flaw in the international monetary system.
If the USA stopped running its balance of payment deficits, the global economy would face a liquidity crunch. This would then plunge the economy into a contractionary spiral.
If the USA continued to run its balance of payment deficits, the global economy would continue to grow. However, the dollar glut problem would gradually erode confidence in the US dollar. Over time, the view of the US as a reliable reserve currency would fade, thus causing the gold-dollar fixed exchange rate system to collapse.
One the one hand, US spending in the rest of the world was viewed as a positive thing as it provided a pool of dollars outside the US which could be used to finance trade and fuel economic growth the world over; the dollar was the world’s key currency and uniquely acceptable everywhere.
However, on the other hand, the size of the dollar pool raised questions about the currency’s convertibility into gold and suggested a growing confidence problem for the dollar that could only be eased if US spending overseas was dramatically reduced. Thus there was a dollar confidence crisis looming if US spending overseas continued, and a world liquidity crisis likely if US spending was curtailed: a dilemma indeed.
An excerpt taken from “The Euro Its Origins, Development and Prospects” by Chris Mulhearn and Howard R. Vane.
True enough, the fears of an impending collapse of the international monetary system were realised on 15 August 1971.
What can we learn from this article?
Consider the following question:
– How far do you agree that the USA was a driving force in shaping the development of the global economy in the 20th century?
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