The Triffin dilemma
Economist Robert Triffin told the US Congress that a currency used as global reserve forces its issuer to run persistent deficits, which eventually undermines its backing. Throughout the 1960s, foreign central banks accumulated dollars faster than the US accumulated gold. By 1971, US gold reserves could not remotely cover the dollars owed.
Triffin's warning was ignored for a decade. When Nixon closed the gold window in 1971, it was less a decision than an acknowledgment that the math had long since stopped working. Triffin's paper is still taught in graduate macroeconomics for precisely this reason: almost no prediction about monetary policy has held up so exactly.
05 · Bretton Woods & the Dollar
At a New Hampshire resort in July 1944, 44 Allied nations designed the postwar monetary order. The dollar was pegged to gold at $35/oz; every other currency pegged to the dollar. The Federal Reserve became the global monetary authority. The IMF and World Bank were created. It was the first deliberately-negotiated global monetary system in history — and the last one before the current era of free-floating currencies.
Read the full era →