Triffin: dilemma or myth?

BIS Working Papers No 684
December 2017

Summary

Focus

Economist Robert Triffin held that there is an inherent conflict in a national currency also serving as a global reserve currency, because domestic and international policy goals do not generally match. The paper seeks to set the record straight about Triffin's argument and its application to current policy debates.

Contribution

Triffin's work is regularly cited as an argument against the US dollar's de facto role as pre-eminent global reserve currency. The paper adds context to the discussion by pointing out gaps in Triffin's reasoning, as well as limitations and flaws in modern extensions of his dilemma.

Findings

Triffin gained enormous influence by arguing that the gold shortage and the increasing use of the dollar as official reserves would inevitably lead to a run on US gold holdings, and threaten deflation. Although the dollar gold standard did eventually collapse, we argue that better and feasible US policies could have kept it 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 anachronistic, and flawed in logic and fact. 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. Less flawed, this story posits implausibly inflexible demand for and supply of safe assets. 

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 plays a role as an international public good.

 

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 would eventually surpass the US gold stock and then central banks would inevitably stage a run on it. He feared that the resulting high US interest rates would cause global deflation. However, 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. And better and feasible US policies could 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 anachronistic, and flawed in logic and fact. 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. Less flawed, this story posits implausibly inflexible demand for and supply of safe assets. Thus, these stories do not convince in their own terms. Moreover, each lacks Triffin's clear cross-over point from a stable system to an unstable one. 

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 plays a role as an international public good. 

JEL classification: F32, F33, F34, F41, H63

Keywords: Triffin dilemma, foreign exchange reserves, gold, US current account, safe assets, world's banker