One of the strangest things about “Triffin’s
Dilemma” is not that Robert Triffin said something
in the mid-1960s, but rather that people still take this stuff seriously a
half-century later. It’s basically nonsense. But, it seems that, in fifty
years, nobody has appeared to call a spade a spade. It just shows the very
low level of understanding that has characterized these issues for over half
For the last hundred and fifty years, some countries have operated gold
standard systems using a “reserve currency” as a reserve asset. In practice,
they don’t actually hold the currency – base money – but rather government
bonds denominated in that currency. Before 1914, this was mostly British
government bonds, and after 1944 it was U.S. Treasury bonds.
There is nothing particularly strange about this. Since 1700, and indeed
earlier, banks operating a gold standard system have generally held some form
of debt as a reserve asset. There isn’t really much difference between
holding the gold-linked debt of the domestic government or the gold-linked
debt of a foreign government.
Obviously, if a currency issuer (let’s assume central bank) holds British
government bonds as a reserve asset, then it will have to purchase said bonds
at some point. This is not inherently different that anybody buying a bond,
such as a private investor. You buy it, and then you own it. Not too
Does this cause a “current account deficit”? No, it does not. The current
account deficit basically reflects capital imports and exports, or, to put it
a slightly different way, the difference between domestic savings and
domestic investment. Let’s take a specific example: The savings rate
(financial capital generation) in Britain is 10% of GDP. Of this, 4% is used
domestically, and 6% goes into foreign investments. Thus, Britain runs a
“current account surplus” of 6% of GDP, which was actually the case in the
pre-1914 era, when the British pound was the world’s premier reserve
British investors end up with net financial and other assets (mostly bonds)
equivalent to 6% of GDP. However, this is a net figure: the gross figures
might be purchases of foreign assets of 10% of GDP, and sale of British
assets of 4% of GDP. Some of those gross sales of British assets could be British
government bonds purchased by foreign central banks. No problem with that.
Much the same thing was happening in the U.S. While Robert Triffin was wailing about the supposedly inevitable and
horribly destructive U.S. current account deficit, the U.S. was actually running a persistent current
Robert Triffin couldn’t figure out the
plus-or-minus sign on this basic statistic.
When the Bretton Woods system ended in 1971, the United States had run a
current account surplus every year since 1960.
Nevertheless, legions of people, including serious economists, have talked
about how the Bretton Woods system broke apart due to the “inevitable current
account deficit” caused by “Triffin’s Dilemma.”
For fifty years.
This is so stupid, I just have to laugh.
Robert Triffin was reacting to some genuine
problems in the Bretton Woods system. The problem had nothing to do with
“reserve currencies” or the balance of payments, but rather with the fact
that the United States was not properly operating a gold standard system to
keep the value of the dollar at its promised $35/oz. Bretton Woods parity.
At the time, the United States had a “gold standard policy” – the $35/oz.
parity – but it did not have a “gold standard system,” in other words, the
proper automatic currency-board-like operating procedures to implement the
Instead, the U.S. had a basically Keynesian interest-rate targeting system.
The value of the dollar naturally varied from its gold parity. Until 1971,
the U.S. didn’t get so aggressive with its discretionary “domestic monetary
policy” that it couldn’t keep things more-or-less in line, typically with
heavy-handed application of capital controls and various jiggering like the
“London Gold Pool.”
That changed in February 1970. William Martin, who had been the governor of
the Federal Reserve since 1951, was replaced by Arthur Burns. Burns was
handpicked by Richard Nixon to resolve the minor recession of the time with
an “easy money” policy.
Burns and the Nixonites decided that, to resolve
the recession, nominal GDP should grow by 9%. It was “nominal GDP targeting,”
which has become popular again among today’s generation of Keynesian economists,
who think they invented something new.
This 9% nominal GDP growth was to come via the printing press. Burns ramped
up money creation and lowered interest rate targets.
This “easy money” was totally contradictory to the policy of keeping the
value of the dollar at its $35/oz. Bretton Woods parity. On August 15, 1971,
Nixon resolved the conflict by effectively ending the U.S. gold standard
policy. The floating currency era began.
It was supposed to be temporary. Burns, Nixon and others didn’t really understand
that the money-printing strategy and the gold standard policy were
This was no surprise – nobody else understood it either, including Robert Triffin. It was a time of incredible ignorance.
The main reason that we don’t have a gold standard today is not because it
didn’t work, or because the floating fiat currency system is better. There
was no rational decision-making involved. Mostly, I think it is the natural
outcome of mind-bending idiocy.
(This item originally appeared in Forbes.com on January 18, 2013.)