Triffin dilemma
Topic: Balance of Payments and Exchange Rates · NCERT: Beyond NCERT
Meaning
The Triffin dilemma is a conflict faced by the country whose currency serves as the world's reserve currency. To give the world enough of its currency for trade and reserves, that country must run balance of payments deficits and send its currency abroad. But the more deficits it runs, the more foreign-held currency piles up compared with its backing. Confidence in the currency weakens. So the system can have enough liquidity or strong confidence, but not both for long.
Example
Under Bretton Woods, the dollar was convertible into gold at $35 per ounce. US deficits spread dollars around the world until foreign dollar holdings far exceeded US gold stocks. Doubts grew, and on 15 August 1971 the US closed the gold window (the Nixon shock). By 1973 major currencies had moved to floating rates.
Don't confuse with
- Impossible trinity: a country cannot have a fixed exchange rate, free capital movement and independent monetary policy all at once. The Triffin dilemma is about liquidity versus confidence for a reserve currency.
Related concepts
- International monetary system
- Gold standard
- Bretton Woods system
- Reserve currency
- IMF quota
- Reserve tranche position
- Special Drawing Rights
- Washington Consensus
- Structural adjustment programme