Pauls' Revere
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WE ARE STUCK IN WHATS CALLED TRIFFIN'S DILEMMA!
Some history:
The late Bretton Woods System
[edit] The U.S. balance of payments crisis (1958–68)
After the end of World War II, the U.S. held $26 billion in gold reserves, of an estimated total of $40 billion (approx 65%). As world trade increased rapidly through the 1950s, the size of the gold base increased by only a few percent. In 1950, the U.S. balance of payments swung negative. The first U.S. response to the crisis was in the late 1950s when the Eisenhower administration placed import quotas on oil and other restrictions on trade outflows. More drastic measures were proposed, but not acted on. However, with a mounting recession that began in 1959, this response alone was not sustainable. In 1960, with Kennedy's election, a decade-long effort to maintain the Bretton Woods System at the $35/ounce price was begun.
The design of the Bretton Woods System was that nations could only enforce gold convertibility on the anchor currency—the United States’ dollar. Gold convertibility enforcement was not required, but instead, allowed. Nations could forgo converting dollars to gold, and instead hold dollars. Rather than full convertibility, it provided a fixed price for sales between central banks. However, there was still an open gold market, 80% of which was traded through London, which issued a morning "gold fix," which was the price of gold on the open market. For the Bretton Woods system to remain workable, it would either have to alter the peg of the dollar to gold, or it would have to maintain the free market price for gold near the $35 per ounce official price. The greater the gap between free market gold prices and central bank gold prices, the greater the temptation to deal with internal economic issues by buying gold at the Bretton Woods price and selling it on the open market.
However, keeping the dollar was still more desirable than holding gold because of the dollar's ability to earn interest. In 1960 Robert Triffin noticed that holding dollars was more valuable than gold was because constant U.S. balance of payments deficits helped to keep the system liquid and fuel economic growth. What would later come to be known as Triffin's Dilemma was predicted when Triffin noted that if the U.S. failed to keep running deficits the system would lose its liquidity, not be able to keep up with the world's economic growth, and, thus, bring the system to a halt. But incurring such payment deficits also meant that, over time, the deficits would erode confidence in the dollar as the reserve currency created instability. [8]
SOUNDS FAMILAR!
The first effort was the creation of the "London Gold Pool." The theory behind the pool was that spikes in the free market price of gold, set by the "morning gold fix" in London, could be controlled by having a pool of gold to sell on the open market, that would then be recovered when the price of gold dropped. Gold's price spiked in response to events such as the Cuban Missile Crisis, and other smaller events, to as high as $40/ounce. The Kennedy administration drafted a radical change of the tax system in order to spur more productive capacity, and thus encourage exports. This culminated with his tax cut program of 1963, designed to maintain the $35 peg.
In 1967, there was an attack on the pound and a run on gold in the "sterling area," and on November 17, 1967, the British government was forced to devalue the pound. U.S. President Lyndon Baines Johnson was faced with a brutal choice, either institute protectionist measures, including travel taxes, export subsidies and slashing the budget—or accept the risk of a "run on gold" and the dollar. From Johnson's perspective: "The world supply of gold is insufficient to make the present system workable—particularly as the use of the dollar as a reserve currency is essential to create the required international liquidity to sustain world trade and growth."[citation needed] He believed that the priorities of the United States were correct, and, although there were internal tensions in the Western alliance, that turning away from open trade would be more costly, economically and politically, than it was worth: "Our role of world leadership in a political and military sense is the only reason for our current embarrassment in an economic sense on the one hand and on the other the correction of the economic embarrassment under present monetary systems will result in an untenable position economically for our allies."[citation needed]
While West Germany agreed not to purchase gold from the U.S., and agreed to hold dollars instead, the pressure on both the Dollar and the Pound Sterling continued. In January 1968 Johnson imposed a series of measures designed to end gold outflow, and to increase U.S. exports. However, to no avail: on March 17, 1968, there was a run on gold, the London Gold Pool was dissolved, and a series of meetings began to rescue or reform the existing system.[citation needed] But, as long as the U.S. commitments to foreign deployment continued, particularly to Western Europe, there was little that could be done to maintain the gold peg.
The attempt to maintain the peg collapsed in November 1968, and a new policy program was attempted: to convert Bretton Woods to a system where the enforcement mechanism floated by some means, which would be set by either fiat, or by a restriction to honor foreign accounts.[citation needed]
NIXON DID THE REST:
The Triffin dilemma, less commonly called Triffin's dilemma, is the problem of fundamental imbalances in the Bretton Woods system. The dilemma is named after Belgian-American economist Robert Triffin, who first identified the problem in 1960.
Thanks to money flowing out of the country through the Marshall Plan, US defence spending and Americans buying foreign goods, the number of U.S. dollars in circulation soon exceeded the amount of gold backing them up. By the early 1960s, an ounce of gold could be exchanged for $40 in London, even though the price in the U.S. was $35. This difference showed that investors knew the dollar was overvalued and that time was running out.
There was a solution to the Triffin dilemma for the U.S. - reduce the number of dollars in circulation by cutting the deficit and raising interest rates to attract dollars back into the country. Both these tactics, however, would drag the U.S. economy into recession, a prospect new President John F. Kennedy found intolerable. *Although, he did sign an executive order allowing the US Treasury "to issue silver certificates against any silver bullion, silver, or standard silver dollars in the Treasury." This would create competition to the Federal Reserve Notes (dollars) that were over-valued.
In August 1971, President Richard Nixon acknowledged that the Bretton Woods system was finished. He announced that the dollar could no longer be exchanged for gold, which soon became known as the Nixon shock. The "gold window" was closed.
In order to maintain the Bretton Woods system the US had to:
a) run a balance of payments current account deficit to provide liquidity for the conversion of gold into US dollars. With more US dollars in the system the citizens began to speculate, thinking that the $US was overvalued. This meant that the US had less gold as people starting converting the US dollars to Gold and taking it offshore. With less gold in the country there was even more speculation that the $US was overvalued.
b) run a balance of payments current account surplus to maintain confidence in the $US.
Obviously, the US was faced with a dilemma because it is not possible to run a balance of payments current account deficit and surplus at the same time
Some history:
The late Bretton Woods System
[edit] The U.S. balance of payments crisis (1958–68)
After the end of World War II, the U.S. held $26 billion in gold reserves, of an estimated total of $40 billion (approx 65%). As world trade increased rapidly through the 1950s, the size of the gold base increased by only a few percent. In 1950, the U.S. balance of payments swung negative. The first U.S. response to the crisis was in the late 1950s when the Eisenhower administration placed import quotas on oil and other restrictions on trade outflows. More drastic measures were proposed, but not acted on. However, with a mounting recession that began in 1959, this response alone was not sustainable. In 1960, with Kennedy's election, a decade-long effort to maintain the Bretton Woods System at the $35/ounce price was begun.
The design of the Bretton Woods System was that nations could only enforce gold convertibility on the anchor currency—the United States’ dollar. Gold convertibility enforcement was not required, but instead, allowed. Nations could forgo converting dollars to gold, and instead hold dollars. Rather than full convertibility, it provided a fixed price for sales between central banks. However, there was still an open gold market, 80% of which was traded through London, which issued a morning "gold fix," which was the price of gold on the open market. For the Bretton Woods system to remain workable, it would either have to alter the peg of the dollar to gold, or it would have to maintain the free market price for gold near the $35 per ounce official price. The greater the gap between free market gold prices and central bank gold prices, the greater the temptation to deal with internal economic issues by buying gold at the Bretton Woods price and selling it on the open market.
However, keeping the dollar was still more desirable than holding gold because of the dollar's ability to earn interest. In 1960 Robert Triffin noticed that holding dollars was more valuable than gold was because constant U.S. balance of payments deficits helped to keep the system liquid and fuel economic growth. What would later come to be known as Triffin's Dilemma was predicted when Triffin noted that if the U.S. failed to keep running deficits the system would lose its liquidity, not be able to keep up with the world's economic growth, and, thus, bring the system to a halt. But incurring such payment deficits also meant that, over time, the deficits would erode confidence in the dollar as the reserve currency created instability. [8]
SOUNDS FAMILAR!
The first effort was the creation of the "London Gold Pool." The theory behind the pool was that spikes in the free market price of gold, set by the "morning gold fix" in London, could be controlled by having a pool of gold to sell on the open market, that would then be recovered when the price of gold dropped. Gold's price spiked in response to events such as the Cuban Missile Crisis, and other smaller events, to as high as $40/ounce. The Kennedy administration drafted a radical change of the tax system in order to spur more productive capacity, and thus encourage exports. This culminated with his tax cut program of 1963, designed to maintain the $35 peg.
In 1967, there was an attack on the pound and a run on gold in the "sterling area," and on November 17, 1967, the British government was forced to devalue the pound. U.S. President Lyndon Baines Johnson was faced with a brutal choice, either institute protectionist measures, including travel taxes, export subsidies and slashing the budget—or accept the risk of a "run on gold" and the dollar. From Johnson's perspective: "The world supply of gold is insufficient to make the present system workable—particularly as the use of the dollar as a reserve currency is essential to create the required international liquidity to sustain world trade and growth."[citation needed] He believed that the priorities of the United States were correct, and, although there were internal tensions in the Western alliance, that turning away from open trade would be more costly, economically and politically, than it was worth: "Our role of world leadership in a political and military sense is the only reason for our current embarrassment in an economic sense on the one hand and on the other the correction of the economic embarrassment under present monetary systems will result in an untenable position economically for our allies."[citation needed]
While West Germany agreed not to purchase gold from the U.S., and agreed to hold dollars instead, the pressure on both the Dollar and the Pound Sterling continued. In January 1968 Johnson imposed a series of measures designed to end gold outflow, and to increase U.S. exports. However, to no avail: on March 17, 1968, there was a run on gold, the London Gold Pool was dissolved, and a series of meetings began to rescue or reform the existing system.[citation needed] But, as long as the U.S. commitments to foreign deployment continued, particularly to Western Europe, there was little that could be done to maintain the gold peg.
The attempt to maintain the peg collapsed in November 1968, and a new policy program was attempted: to convert Bretton Woods to a system where the enforcement mechanism floated by some means, which would be set by either fiat, or by a restriction to honor foreign accounts.[citation needed]
NIXON DID THE REST:
The Triffin dilemma, less commonly called Triffin's dilemma, is the problem of fundamental imbalances in the Bretton Woods system. The dilemma is named after Belgian-American economist Robert Triffin, who first identified the problem in 1960.
Thanks to money flowing out of the country through the Marshall Plan, US defence spending and Americans buying foreign goods, the number of U.S. dollars in circulation soon exceeded the amount of gold backing them up. By the early 1960s, an ounce of gold could be exchanged for $40 in London, even though the price in the U.S. was $35. This difference showed that investors knew the dollar was overvalued and that time was running out.
There was a solution to the Triffin dilemma for the U.S. - reduce the number of dollars in circulation by cutting the deficit and raising interest rates to attract dollars back into the country. Both these tactics, however, would drag the U.S. economy into recession, a prospect new President John F. Kennedy found intolerable. *Although, he did sign an executive order allowing the US Treasury "to issue silver certificates against any silver bullion, silver, or standard silver dollars in the Treasury." This would create competition to the Federal Reserve Notes (dollars) that were over-valued.
In August 1971, President Richard Nixon acknowledged that the Bretton Woods system was finished. He announced that the dollar could no longer be exchanged for gold, which soon became known as the Nixon shock. The "gold window" was closed.
In order to maintain the Bretton Woods system the US had to:
a) run a balance of payments current account deficit to provide liquidity for the conversion of gold into US dollars. With more US dollars in the system the citizens began to speculate, thinking that the $US was overvalued. This meant that the US had less gold as people starting converting the US dollars to Gold and taking it offshore. With less gold in the country there was even more speculation that the $US was overvalued.
b) run a balance of payments current account surplus to maintain confidence in the $US.
Obviously, the US was faced with a dilemma because it is not possible to run a balance of payments current account deficit and surplus at the same time
