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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 deficit spending!
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:"
Triffin's
Dilemma
Testifying before the U.S. Congress in 1960, economist Robert Triffin exposed a fundamental problem in the
international monetary system.
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
instability.
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's Solution
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.
http://www.imf.org/external/np/exr/center/mm/eng/mm_sc_03.htm
Ah, yes. The "Balance of Payments"! I said
already that this is a red flag:
October 14, 2012: Book Notes: The
Age of Inflation, by Jacques Rueff
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 size.
 
Oops.
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."
June 2, 2011: The Currency "Trilemma"
The "currency trilemma" basically states
that there are three options:
1) A fixed currency value, an automatic operating system much like a currency
board, no capital controls, and no domestic "monetary policy"
2) A floating fiat currency, a domestic "monetary policy" involving
interest rate targets, "quantitative easing" etc., and no capital
controls.
3) A fixed currency value, a domestic "monetary policy," and
capital controls.
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 controls.
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.
April 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.
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