Question

Essay Question: Explain the Triffin Dilemma. How does the dilemma explain the collapse of Bretton Woods? Does it explain the fragility of the current system of dollar hegemony?

Note: In dealing with the above you may find it very helpful to include some of the following: Keynes' barbarous relic, asymmetric adjustment, International Clearing Union, Bancor.

Answer 1

Answer:

For understanding Triffin Paradox we first need to understand some features of the Bretton Woods System.

Bretton Woods System: (1944)

After the havoc that WW2 unleashed representatives of 45 major economies met at Bretton Woods(USA) to finalize a new Exchange rate system.

Deliberations led to the formation of :
|1) IMF
2) IBRD ( International Bank for Reconstruction and Development)

Features:

1) In addition to Gold, the US Dollar was to given the status of a Universal Reserve Asset.     1 ounce=USD 35

2) The US Fed provided an unconditional guarantee to buy and sell unlimited quantity of Gold at this price a.k.a Gold Convertibility Clause.

3) Member countries were required to fix a value of their domestic currency against the USD.

4) Every currency was thus redeemable in terms of USD and only USD was redeemable in terms of Gold. The USD therefore became the means of International settlements.

Triffin Paradox:

The success of the Bretton woods was based on the Voluntary trade deficit accepted by the US.

This step resulted in the Net outflow of US Dollars to the World Economy.

Professor Triffin predicted that the continuous deficit in Balance trade accepted by the US would

reduce its acceptability in the International markets since supply would keep increasing without

downward revision in the value of USD.

dilemma explain the collapse of Bretton Woods:

He thus predicted that the system would disintegrate because of this basic weakness that it did not provide for the periodic review of the value of USD.