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Triffin: Dilemma or Myth?

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Abstract

Triffin gained enormous influence by reviving the interwar story that gold scarcity threatened deflation. In particular, he held that central banks needed to accumulate claims on the United States to back money growth. But the claims could eventually surpass the US gold stock, and then, central banks would stage a run on it. He feared that the United States might reduce the supply of dollars and cause global deflation. However, not US prudence and global deflation, but US profligacy and global inflation ensued. Moreover, we show that the US gold position after WWII was no worse than the UK position in 1900. Yet it took WWI to break sterling’s gold link. Could, contrary to Triffin’s framework, better and feasible US policies have kept Bretton Woods going? This history serves as a backdrop to our critical review of two later extensions of Triffin. One holds that the dollar’s reserve role required US current account deficits. This current account Triffin is popular, but not demonstrated. Nevertheless, it pops up in debates over the euro’s and the renminbi’s reserve roles. A fiscal Triffin holds that global demand for safe assets will either remain dangerously unsatisfied or force excessive US fiscal debt. This story overstates demand for safe assets and the inflexibility of their supply. Thus, these stories do not convince in their own terms. Moreover, each lacks Triffin’s clear crossover point from stability to instability. Triffin’s seeming predictive success leads economists to wrap his brand around dissimilar stories. Yet Triffin’s dilemma in its most general form correctly points to the conflicts and difficulties that arise when a national currency serves as an international public good.

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Fig. 1

Source: Lindert (1969, Table 3 and p. 37); Bordo (1993), based on Tables SC-8, columns 1 and 2, and SC-10, column 3 in Gold Commission Report, Washington, DC: US Congress, March 1982; 1972 Supplement to International Financial Statistics. (Color figure online)

Fig. 2

Source: Federal Reserve Bank of St Louis (FRED); IMF, Annual Reports (1979–2004) and Currency Composition of Official Foreign Exchange Reserves (COFER); US Department of Commerce, Bureau of Economic Analysis (BEA); BIS calculations. (Color figure online)

Fig. 3

Source: Chinn et al. (2014); Gruber and Kamin (2007); IMF, Annual Reports (1979–2004) and Currency Composition of Official Foreign Exchange Reserves (COFER); national data; authors’ calculations. (Color figure online)

Fig. 4

Source: IMF, Currency Composition of Official Foreign Exchange Reserves and International Financial Statistics; US Department of the Treasury; authors’ calculations. (Color figure online)

Fig. 5

Source: IMF, Currency Composition of Official Foreign Exchange Reserves, International Financial Statistics; US Department of the Treasury; authors’ calculations. (Color figure online)

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Notes

  1. Eichengreen (1992, pp. 20, 203–204) suggests that it should be called the Młynarski Dilemma.

  2. See Salant and Henderson (1978) and Krugman (1979). Garber (1993) applied these directly to the collapse of Bretton Woods.

  3. “Notably Dr. Otmar Emminger. See, for instance, his (1973), p. 35) Per Jacobsson lecture” [Triffin footnote]. Triffin was surprised by “the reluctance to accept the appreciation of its exchange rate that would flow from a country's refusal to accumulate dollars” (p. 5), which he ascribed to a coordination problem arising from multiple European currencies.

  4. But not the IMF, or at least not Altman (1961), who contests Triffin’s diagnosis and especially his prescription.

  5. Strange (1976) quipped that the GAB should have been labelled the Selective Agreement to Lend.

  6. Gilbert (1968) of the BIS, Rueff (1972) in French official circles and others (Meltzer 1991) argued that the problem could have been solved by the United States, unilaterally or in concert with others, doubling the nominal price of gold from $35 to $70 per ounce. US officials opposed this move because pariah nations South Africa and the USSR would have gained. It would also have been a time inconsistent policy and would have induced moral hazard (Bordo 1993).

  7. Farhi and Maggiori introduce something like a self-fulfilling run on the liabilities of the reserve currency issuer. They offer their model as a bridge between Triffin and Despres et al. However, their reserve currency issuer uses its capacity to produce (possibly) safe liabilities to extract real resources from the rest of the world to consume or to invest at home. On this reading, these authors bridge the current account and safe assets versions of Triffin, discussed below.

  8. “As far as the ‘international banker’ is concerned, it is obvious that he cannot count on a one-sided, permanent, and ever-increasing flow of short-term funds from abroad. The flow of short-term capital can reverse itself suddenly for a number of reasons, making the deficit which the minority view considers entirely normal rather problematic. The world banker can suddenly be faced with a liquidity problem or even a liquidity crisis. Then he will have to be able to fall back on very large international reserves” (Halm 1968, p. 7).

  9. Kindleberger (1978) saw the outline of an international lender of last resort in the swap network that the Fed developed during the Bretton Woods period but that outlasted it. In the end, despite the swaps’ short-term success, Bretton Woods collapsed between 1971 and 1973 amid US inflation (Bordo et al 2015a, b, chapter 4).

  10. With the principal exception of the United States. Britain and France suspended de facto but not de jure. And notably bank panics were avoided.

  11. Still, the inadequacy of the Bank of England’s gold reserve received much public attention discussion for 30 years before 1914: “It was a commonplace of economists, financial journalists, politicians (notably just about every Chancellor of the Exchequer) Tory or Liberal, bankers themselves…Everybody wrote articles on the subject: the journals of the period are filled with papers on the inadequacy of our reserves” (Goodhart 1972, p. 101).

  12. However, before 1965 the Fed did pay attention to international considerations in setting its policy rates (Bordo and Eichengreen 2013).

  13. This shift is not altogether surprising given what Borio (2016) calls “the centrality of the current account in international economics”.

  14. The fact that dollar reserves could grow in the 1960s in the absence of US current account deficits underscores an important distinction between nets and grosses in international finance (Borio 2016). Countries like Brazil, India and Indonesia accumulate foreign exchange reserves, notwithstanding current account deficits.

  15. See also Caballero et al. (2017b, p. 38).

  16. Caballero et al. (2017a) recognize that the narrow spread between corporate bond yields and US Treasury yields seems inconsistent with their story. Recent observations of negative government bond yields may make the safety trap less likely.

  17. Obstfeld et al (2010) find M2/GDP a powerful determinant of foreign exchange reserves as a proportion of GDP and interpret the relationship as insurance against financial instability arising from a domestic run (“drain”) from M2 into foreign exchange.

  18. However, the Federal Reserve absorbed much Treasury debt in this period. Federal Reserve selling of its Treasuries leaves a larger supply of Treasury debt available to reserve managers.

  19. A significant share of China’s reserve drawdown reflects the reversal of various forms of carry trades after the renminbi peaked against the dollar in early 2014. McCauley and Shu (2016) highlighted both the repayment of foreign currency debt by the Chinese corporate sector and the liquidation of renminbi deposits held outside the mainland in Hong Kong SAR, Macao SAR, Chinese Taipei, Korea and Singapore.

  20. See Farhi and Maggiori (2018) for competition between different issuers offering safe assets denominated in different currencies. See He et al. (2019) for a game-theoretic treatment of the choice of reserve assets between two contenders.

  21. According to the BIS locational international banking statistics, cross-border liabilities denominated in the dollar to central banks peaked before the Great Financial Crisis at about $800 billion, then declined to about $400 billion and have since recovered to about $600 billion. See http://stats.bis.org/statx/srs/tseries/LBS_D_PUB/Q.S.L.A.USD.A.5J.A.5A.M.5J.N?t=a8&c=&m=F&p=20172&i=3.6.

  22. Jeanne (2012) notes that these have grown as rapidly as the rest of the world GDP.

  23. If dollar reserves grow at 3.5% of US GDP per year (the maximum in Table 1 based on the larger, IMF COFER-derived measure in column (3) for 2002–2010), this implies, neglecting equity investment, 2.4% of US GDP new demand for US Treasuries. Even if the US Treasury debt/GDP ratio were miraculously to stabilise at the current 78% of US GDP, US nominal growth of 3.5% implies growth of 2.7% of US GDP in the annual supply of Treasuries. On this combination of extreme assumptions, the foreign official share of US Treasuries would still approach just 88%.

  24. See also Mateos y Lago et al (2009), IMF (2010), Bini-Smaghi (2011).

  25. See the BIS global liquidity indicators: https://www.bis.org/statistics/gli.htm?m=6%7C333; and Borio et al. (2017). Foulis (2015) suggests that both technical and political factors constrain the Fed’s backstop of eurodollars. “Could the Fed save the day again? It would be a lot harder than last time. The offshore archipelago is almost twice as large as it was in 2007 and is growing fast, so any rescue would have to be on a much larger scale. The mix of countries involved is tilting away from America’s allies. The banks in question are less likely to have subsidiaries in New York that can borrow directly from the Fed or are viewed as palatable by the American legal system”.

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  1. Rutgers University, New Brunswick, USA

    Michael D. Bordo

  2. Monetary and Economic Department, Bank for International Settlements, Centralbahnplatz 2, 4002, Basel, Switzerland

    Robert N. McCauley

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The authors thank Robert Aliber, Claudio Borio, Piet Clement, Emmanuel Fahri, Joseph Gagnon, Pierre-Olivier Gourinchas, Dong He, Boris Hofmann, Krista Hughes, Hiroyuki Ito, Steven Kamin, Perry Mehrling, Eric Monnet, Maurice Obstfeld, Hyun Song Shin and Chris Sims for discussion, two anonymous reviewers for their close readings, Hiroyuki Ito and Joseph Gruber for their US residuals, and Bilyana Bogdanova, Julieta Contreras, Burcu Erik, Tania Romero and José Maria Vidal Pastor for research assistance. The views expressed are those of the authors and not necessarily those of the Bank for International Settlements.

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Bordo, M.D., McCauley, R.N. Triffin: Dilemma or Myth?. IMF Econ Rev 67, 824–851 (2019). https://doi.org/10.1057/s41308-019-00088-y

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