Economics

[PLEASE DO NOT COPY] May 2, 2013 Prof. Bradbury Econ 204

Robert Triffin argued that there was a problem at the core fundamentals of international monetary policy. This system; “was relying on deficits in the U.S. balance of payments to avert a world liquidity shortage.”1 The U.S. was aiding the rest of the world using their deficit as a vehicle and although they were able to aid other countries, they were digging themselves into a deeper hole simultaneously and the weight of the world is literally on their shoulders. The dilemma lies where if the U.S. no longer ran balance of payment deficits, the international world would lose its biggest source of reserves which would result in a shortage of liquidity putting the global economy in a dangerous contractionary spiral creating instability. If this U.S. deficit continued, dollars would steadily propel the rest of the world; however excessive U.S. deficits would glut the dollar and harm its confidence in it. If this happened, the world would no longer accept the dollar as the world’s reserve currency. This would eventually lead to the fixed exchange rate vehicle to collapse and become unstable. The Bretton Woods system was a monetary mandate that created the rules for the financial and commercial global relations. Woods promoted the idea that the USD would become the global reserve currency and fix an exchange rate where $35 USD would equal the worth of one ounce of gold and all participating global countries would tie their currencies to this USD as a means of reserves and the ability to liquefy their economies. The goal in mind was as foreign countries pegged the dollar, the rate of gold could be set some time in advance. “It also bound the U.S. to redeem its participating countries’ foreign dollar reserves for gold and there would not be a barrier for world trade based on these fixed rates.”2 The

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1Cohen, Benjamin J. "A Brief History of...