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May 2, 2013

Prof. Bradbury
Econ 204

Robert Triffin argued that there was a problem at the core fundamentals of international
monetary policy. This system; was relying on deficits in the U.S. balance of payments to avert a
world liquidity shortage.1 The U.S. was aiding the rest of the world using their deficit as a
vehicle and although they were able to aid other countries, they were digging themselves into a
deeper hole simultaneously and the weight of the world is literally on their shoulders. The
dilemma lies where if the U.S. no longer ran balance of payment deficits, the international world
would lose its biggest source of reserves which would result in a shortage of liquidity putting the
global economy in a dangerous contractionary spiral creating instability. If this U.S. deficit
continued, dollars would steadily propel the rest of the world; however excessive U.S. deficits
would glut the dollar and harm its confidence in it. If this happened, the world would no longer
accept the dollar as the worlds reserve currency. This would eventually lead to the fixed
exchange rate vehicle to collapse and become unstable. The Bretton Woods system was a
monetary mandate that created the rules for the financial and commercial global relations.
Woods promoted the idea that the USD would become the global reserve currency and fix an
exchange rate where $35 USD would equal the worth of one ounce of gold and all participating
global countries would tie their currencies to this USD as a means of reserves and the ability to
liquefy their economies. The goal in mind was as foreign countries pegged the dollar, the rate of
gold could be set some time in advance. It also bound the U.S. to redeem its participating
countries foreign dollar reserves for gold and there would not be a barrier for world trade based
on these fixed rates.2 The
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1

Cohen, Benjamin J. "A Brief History of International Monetary Relations." (n.d.): n. pag. Print.

"History of Gold - The Bretton Woods System." Gold Rate for Today. N.p., n.d. Web. 01 May 2013.
<http://goldratefortoday.org/history-gold-part-3-bretton-woods-system/>.

institutions that were formed to regulate this system were the International Bank for
Reconstruction and the International Monetary Fund (IMF). Robert Triffin foresaw a serious flaw
in the Bretton Woods system. The problem at hand was that foreign governments were
beginning to hold more reserve dollars then the U.S. Central Bank had in reserves. As a result,
to sustain the liquidity in global trade, more USD had to be printed. Alas, this would cause a
deficit of the balance of payments the U.S. was carrying. Though, Triffin had a solution and
suggested that the U.S. create new reserve units that would not depend on gold or any other
currencies, but would still add to the worlds liquidity and doing so would allow the U.S. to
reduce its balance of payments deficit while still allowing for global expansion and hence the
collapse of the Bretton Woods system. There were a few solutions to possibly patch up the
Bretton Woods system to keep it going. First, since the U.S. foreign liabilities exceeded their
national gold reserves, the London Gold Pool was created to employ market interventions to
retain the rate of gold at a particular rate until the pound sterling was devalued in 1967 and the
demand for gold increased. So acknowledging the failures of the Bretton Woods system,
Former President Richard Nixon removed the direct convertibility of the dollar to gold and this
was known as the Nixon Shock. 3 The current dollar standard is fragile because it is no longer
backed by the gold standard and is now a fiat system that is only backed by the promise of
future payments. In turn, the dollar has been devalued significantly because a lot of dollars has
been pumped into the economy because of monetary policy.4 If confidence in foreign investors
is lost in the currency, it will no longer be the reserve currency. It must sustain itself.
Keynes had a plan to replace the asymmetric adjustment through the ICU, also known
as the International Clearing Union. The Bretton Woods system promoted and kept the
traditional ways of
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"Money Matters, an IMF Exhibit -- The Importance of Global Cooperation, System in Crisis (1959-1971)." Money Matters, an IMF
Exhibit -- The Importance of Global Cooperation, System in Crisis (1959-1971). N.p., n.d. Web. 01 May 2013.
<http://www.imf.org/external/np/exr/center/mm/eng/mm_sc_03.htm>.
4
Is the Dollar Too Fragile? Dir. Francesco Guerrera. Video. Wall Street Journal, 05 Nov. 2012. Web. 01 May 2013.
<http://live.wsj.com/video/is-the-dollar-too-fragile/68B20386-CF48-4C4C-B985-9BF10CB41CA7.html>.

debtor adjustment by the use of the IMF as this did not solve the Keynes problem. Keynes plan
of deflationary pressure was not implemented the way he intended and instead the U.S.
voluntary dishoarded its surpluses. The question arose of the United States credibility to be able
to convert dollars to gold. Today, there is no pressure to make adjustments by foreign countries
or by the U.S., as long as the U.S. keeps satisfying their dollar reserves and they are content
holding onto them. This is what is called a symmetric non-adjustment.5 However, the main issue
we are dealing with today is the balancing act of the economies surpluses and deficits and not
necessarily the deficit itself. Financial boom and busts are allowed without any pressure to both
creditor and U.S. (debtor). Not only is this method not cheap but it seems almost completely
senseless if steps are not taken to rebalance the international accounts as the next crisis is
looming. The purpose of the Keynesian plan was to secure these surpluses and deficits in
attempt to rebalance the worlds money. Global effects and employment in turn will be affected
as it allows foreign nations that are running a surplus to absorb the wealth, while others like the
U.S. are forced to correct deficits with systems like monetary policy which inevitability alters the
landscape of employment causing much lower levels as inflation rises because of constant
money injection into the supply of money.5
The U.S. benefits from the large appetite for the USD reverses because since it has to
continuously keep the dollar low (but not too low) and must continue to create more reserves,
which makes American goods and services much cheaper to foreign investors which means our
manufacturing sector booms.6 The U.S. plays the role of both privilege maker and privilege
taker. In a sense where foreign countries greatly benefit from us because they need those U.S.
reserves to sustain their economies, but at the same time since it is cheaper to have labor done
overseas in countries were the

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5

Bordo, Michael D., and Barry J. Eichengreen. A Retrospective on the Bretton Woods System: Lessons for International Monetary
Reform. Chicago: University of Chicago, 1993. Print.
6
Arnall, Dan. "The Benefits of a Weak Dollar." ABC News. N.p., 11 May 2005. Web. 01 May 2013.
<http://abcnews.go.com/Business/story?id=747385>.

currency is far lower than that of the United States, they opt to get it done there for cheap and in
turn hurting the employment levels domestically as inflation is the cause because the U.S. has
to continuously feed the bellies of foreign countries.7 The Purchasing power of our currency is
worth far less, so it wouldnt make sense to keep hiring U.S. workers unless that changes. A
businesses only objection is to make a profit. If the U.S. wants to raise employment levels they
would have to deflate the currency and regulate capital markets more tightly than it is or make
incentives or subsides for businesses for jobs to return to the U.S. In a sense the U.S. is still
under the Bretton Woods system, only that we are not tied to a gold standard. This exorbitant
privilege existing for the U.S. remains the same in a sense. We are still continuously trying to
balance surpluses and deficits and as long as both sides remain satisfied it can sustain itself a
bit longer. The U.S. still rules the reserve currency for that is their exorbitant privilege in itself;
for the time being anyway.

____________________________
7

Bordo, Michael D., and Barry J. Eichengreen. A Retrospective on the Bretton Woods System: Lessons for International Monetary
Reform. Chicago: University of Chicago, 1993. Print.

Works Cited
Arnall, Dan. "The Benefits of a Weak Dollar." ABC News. N.p., 11 May 2005. Web.
<http://abcnews.go.com/Business/story?id=747385>.
Bordo, Michael D., and Barry J. Eichengreen. A Retrospective on the Bretton Woods System:
Lessons for International Monetary Reform. Chicago: University of Chicago, 1993. Print.
Cohen, Benjamin J. "A Brief History of International Monetary Relations." (n.d.): n. pag. Print.
"History of Gold - The Bretton Woods System." Gold Rate for Today. N.p., n.d. Web.
<http://goldratefortoday.org/history-gold-part-3-bretton-woods-system/>.
Is the Dollar Too Fragile? Dir. Francesco Guerrera. Video. Wall Street Journal, 05 Nov. 2012.
Web. <http://live.wsj.com/video/is-the-dollar-too-fragile/68B20386-CF48-4C4C-B9859BF10CB41CA7.html>.
"Money Matters, an IMF Exhibit -- The Importance of Global Cooperation, System in Crisis
(1959-1971)." Money Matters, an IMF Exhibit -- The Importance of Global Cooperation,
System in Crisis (1959-1971). N.p., n.d. Web.
<http://www.imf.org/external/np/exr/center/mm/eng/mm_sc_03.htm>.