Adopt a gold-backed dollar? This is what happened the last time we tried
By GCRU Gold News on Thursday, August 11 2016, 03:40 - Permalink
The fundamental problem was that the United States couldn't simultaneously keep the world adequately supplied with dollars and sustain the large gold reserves required by its gold-convertibility commitment. The logic was laid bare by economist Robert Triffin in his now-famous 1960 congressional testimony. There were, he explained, “absurdities associated with the use of national currencies as international reserves.” It constituted a “‘built-in destabilizer’ in the world monetary system.” The European dollar-convertibility pledges, far from representing the final critical step into a new monetary era, “merely returned the world to the unorganized and nationalistic gold exchange standard of the late 1920s.”
When the world accumulated dollars as reserves, rather than gold, it put the United States in an impossible position. Foreigners lent the excess dollars back to the U.S. This increased U.S. short-term liabilities, which implied the U.S. should boost its gold reserves to maintain its convertibility pledge. But here’s the rub: if it did so, the global dollar “shortage” persisted; if it didn’t, the U.S. ultimately wound up hopelessly trying to guarantee more and more dollars with less and less gold. This became known as “the Triffin dilemma.”
If concerted international action wasn’t taken to change the system, Triffin explained, a deadly dynamic would set in. The United States would need to deflate, devalue, or impose trade and exchange restrictions to prevent the loss of all its gold reserves. This could cause a global financial panic and trigger protectionist measures around the world.
Adopt a gold-backed dollar? This is what happened the last time we tried