Robert Triffin (1911-1993)
In October 1959, a Yale professor sat in front of the Congress' Joint Economic Committee and calmly announced that the Bretton Woods system was doomed. Years of pumping dollars into the world economy through post-war programs such as the Marshall Plan, was making it increasingly difficult to maintain the gold standard. The Belgium-born economist, Robert Triffin, was right. The Bretton Woods system collapsed in 1971, and today the dollar's role as the world's reserve currency has the United States running the world's largest current account deficit.
This reserve currency paradox, known as Triffin dilemma, says that the dollar could not survive as the world's reserve currency without requiring the United States to run ever-growing deficits to provide the world with liquidity. However, the demands on a reserve currency means that excess supply would undermine its value. Moreover, cheap sources of capital and positive trade balances cannot really happen at the same time. The flip side of "interest-free" loan made possible by selling currency to foreign governments along with ability to raise capital quickly is to endure consistently large current account deficits. Fortunately, the countries that benefited from U.S. consumption reinvested the excess dollars that they earned as foreign reserves back into the U.S. asset markets, notably U.S. Treasuries, thus supporting the dollar, keeping interest rates low, and perpetuating the imbalances. The Triffin dilemma therefore highlights fundamental conflicts that arise between domestic and international economic objectives.
Hmmm... who fell off the basket?
Triffin proposed the creation of new reserve units. Similar to Keynes' originally proposed Bancor, 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 U.S. to reduce its balance of payment deficits, while still allowing for global economic expansion. First created in 1969, Special Drawing Rights (aka SDR) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF) that would serve in this role. Their value is based on a basket of key international currencies reviewed by the IMF every five years, and consists of the following four currencies: U.S. dollars, euro, pounds sterling, and the Japanese yen.
“Providing reserves and exchanges for the whole world is too much for one country and one currency to bear.”