Skip to main content

Triffin Dilemma and the collapse of Bretton Woods

Harry Dexter White and Keynes at Bretton Woods

I had promised to post on this a while ago. According to Triffin Dilemma view the US economy could not guarantee the convertibility of dollars into gold at the fixed parity, since the supply of gold did not keep pace with the increase in the level of income in the world economy. The U.S., on the other hand, provided liquidity to the world economy, increasing the supply of dollars, to avoid creating a liquidity problem. So the ratio of dollars to gold was not fixed, and the parity was unsustainable. The excess supply of dollars caused, in this view, a confidence crisis. The Bretton Woods system failed because the fixed parity commitment was not credible, in the context of an expanding economy.

For heterodox Keynesians (I prefer the term classical-Keynesian), the abandonment of the fixed parities is not connected to the loss of credibility in the face of an expanding economy. This view emphasizes the role of financial liberalization in the collapse of the Bretton Woods regime. The use of capital controls during Bretton Woods implied that the rate of interest was in general low, to promote high employment, and the cost of reducing the remuneration of financial capital. The abandonment of the fixed parity system and the increasing mobility of capital allowed for interest rates to be kept at higher levels favoring financial interests.

In that sense, the end of Bretton Woods was, to some extent, a policy decision. Contrary to the collapse of the Gold Standard and the pound, the role of the dollar as the key currency (reserve and vehicle currency) did not end with end with the collapse of Bretton Woods. In other words, if lack of confidence in the dollar would have been the cause one would expect a run on the dollar and a new hegemonic currency to replace it.

My Bretton Woods entry for the Elgar Companion to Post Keynesian Economics can be read here, and downloaded here. There is a slightly modified entry for the 2nd edition, but I don't have a link to that one yet.

Comments

  1. Hi Matias,
    I mostly agree with you. However, don't you think that the "confidence crisis" could have had a catalytic role in the collapse of Bretton Woods? What I mean is that countries that started the attack on the US and the dollar believed in the theory and went on with their attack expecting a change in the international financial system. Here I have in mind countries like France.
    If that's correct, even though it is wrong to explain the collapse in that way, the theory could have been significant in affecting political position and serving as a starting point.
    I agree with you that this interpretation is not valid, but it did play a role in the collapse in my opinion. Even if this role was a mere ideological one.
    I hope I've made my self clear enough!

    ReplyDelete
    Replies
    1. Se a taxa de juros tivesse subido nos EEUU naquele momento a tal crise de confiança desaparecia Pedro. Confiança, como dizia o Eccles, é resultado, não causa.

      Delete

Post a Comment

Popular posts from this blog

What is the 'Classical Dichotomy'?

A few brief comments on Brexit and the postmortem of the European Union

Another end of the world is possible
There will be a lot of postmortems for the European Union (EU) after Brexit. Many will suggest that this was a victory against the neoliberal policies of the European Union. See, for example, the first three paragraphs of Paul Mason's column here. And it is true, large contingents of working class people, that have suffered with 'free-market' economics, voted for leaving the union. The union, rightly or wrongly, has been seen as undemocratic and responsible for the economics woes of Europe.

The problem is that while it is true that the EU leaders have been part of the problem and have pursued the neoliberal policies within the framework of the union, sometimes with treaties like the Fiscal Compact, it is far from clear that Brexit and the possible demise of the union, if the fever spreads to France, Germany and other countries with their populations demanding their own referenda, will lead to the abandonment of neoliberal policies. Aust…

A brief note on Venezuela and the turn to the right in Latin America

So besides the coup in Brazil (which was all but confirmed by the last revelations, if you had any doubts), and the electoral victory of Macri in Argentina, the crisis in Venezuela is reaching a critical level, and it would not be surprising if the Maduro administration is recalled, even though right now the referendum is not scheduled yet.

The economy in Venezuela has collapsed (GDP has fallen by about 14% or so in the last two years), inflation has accelerated (to three digit levels; 450% or so according to the IMF), there are shortages of essential goods, recurrent energy blackouts, and all of these aggravated by persistent violence. Contrary to what the press suggests, these events are not new or specific to left of center governments. Similar events occurred in the late 1980s, in the infamous Caracazo, when the fall in oil prices caused an external crisis, inflation, and food shortages, which eventually, after the announcement of a neoliberal economic package that included the i…