Triffin discovers his dilemma

In the 1960s, economist Robert Triffin warnsof the contradictions in the Bretton Woods system. According to Triffin, the use of a national currency as the main international reserve currency will eventually lead to conflict between said country’s national needs and those of the world economy. Triffin predicts that the gold peg of the USdollar will fail.

• This contradiction was one of the reasons why Keynes had advocated the introduction of a neutral reserve asset at Bretton Woods.
• In response to Triffin, the IMF introduces special drawing rights (SDRs) in 1969. SDRs are a synthetic reserve currency, representing a basket of other currencies.
• Following their introduction, there are many attempts to introduce SDRs as the major international reserve asset and thus replace the USdollar. All attempts fail due to US resistance.

As early as the 1960s, several measures are taken to stabilize the BW system. The main concern is to maintain the fixed gold price ratio of USD 35 per ounce. Anything else would amount to a devaluation of the US dollar.

• To this end, theLondon Gold Pool is created in November 1961 and charged with manipulating the free gold market in order to depress the price.
• Under the BW system, it is not possible for individuals to exchange USdollars for gold. Private ownership of gold has even been forbidden to US citizens, since 1933. Only foreign governments and central banks have the possibility to exchange their US dollars for gold.

In Europe, resentment against the Bretton Woods system grows from the 1960s onward. People feel trapped in an unfair system in which Europe’s citizens have to subsidize the high standard of living in the United States.

• The French, under former General Charles De Gaulle, are particularly critical of the BW system. France is the nation that most actively exchanges USdollars for gold.
• French Finance Minister Valéry Giscard d’Estaing coins the termexorbitant privilege to describe the ability of the US to print money almost at will and receive real goods in return.
• In 1965, De Gaulle warns of a USdollar crisis in a televised speech and makes the case for a return to the gold standard. His words are strongly reminiscent of the criticisms of Keynes and Triffin. De Gaulle maintainsthat the US dollarcannot be a “neutral and international medium of trade” and is in fact “a credit instrument reserved for only one state”.

In March 1967, the then president of the Deutsche Bundesbank, Karl Blessing, sends a letter to the board of the Federal Reserve. Blessing promises that Germany will not imitate the French and that Bonn will refrain from exchanging its USdollar reserves for gold in the interest of international cooperation. The so-called “Blessing letter”of March 30, 1967, goes down in history.

• A few years later, in May 1971, Karl Blessing describes the concession as a mistake: “I declare to you today that I myself feel personally guilty in this area. I should have been more rigorous with America at the time. The dollars that accrued to us should simply have been rigorously exchanged for gold.”
• In this interview, Blessing also outlines what the euro should eventually be: a European central bank, independent of the nation states, with clear rules and a hard currency:“There is no doubt that, if we really had the political will in the EEC, we could form a hard currency bloc whose rates could then fluctuate against the dollar. That would have taken us away from the USdollar standard, which we have today. After all, we practically have the dollar standard.”
• At the end of 1970, the “Werner Report”, named after Pierre Werner, Prime Minister of Luxembourg, is published. It is the first real plan on the part of Europe to create an economic union within a decade and is regarded as the starting signal for efforts to create a common currency.

In early August 1971, France under De Gaulle sends a warship to New York to pick up physical gold that France was to receive in return for its USdollars.