Wednesday, January 26, 2005

Has Triffin's time come?

Robert Triffin was a famous Yale economist who became famous for, among other things, his assertion that the dollar's role as a reserve currency was headed for doom.

His logic was roughly as follows: as an international currency, demand for dollars will grow roughly at the rate of world trade. This additional demand for dollars would allow the US to run current account deficits beyond its capacity to export. Eventually, however, there would be a day of reckoning. If the US were to avoid its day of reckoning and remain an international currency, it would have to engage in deflationary policies (restricting demand through austere economic policy). Otherwise, there would eventually be an overhang of dollar balances accumulated in the rest of the world. Foreigners (and residents) would lose their faith in the dollar's value, and its role as a reserve currency would come to an end.

Sounds familiar... The problem with Triffin, though, is that he was well ahead of his time. He was right to say that the Bretton Woods system didn't have much of a chance, but he called for the end of the dollar standard way too soon.

Here is (the beginning of) an article he published in Foreign Affairs back in 1979. To quote Triffin,

All Americans are alarmed at the shrinking value of the dollar in their neighborhood supermarkets - by close to one-half in the last ten years. With the President's announcement in early November ordering a series of dramatic actions to shore up the value of the dollar abroad, more and more Americans have also become conscious of the dollar's declining value in terms of major foreign currencies over the same period - by more than one-half against the West German mark and the Japanese yen, and by nearly two-thirds vis-à-vis the Swiss franc. But I suspect that no more than one American out of 10,000 realizes that these - and other - developments are rapidly undermining what President de Gaulle used to call our "exorbitant privilege" of being able to settle with our own dollar IOUs the growing excess of our expenditures abroad over our receipts from abroad (on capital as well as on current account).


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