Wednesday, January 14, 2015

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.


  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!

    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.


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