Essay on the Triffin Plan and Revaluation of Gold of International Monetary System

Prof. Robert Triffin of Yale University vehemently opposed the revaluation of gold for increasing international liquidity. He put forward in his book Gold and the Dollar Crisis, a plan known as ‘Triffin Plan’ for the radical transformation of the international monetary system through a reorganisation of the International Monetary Fund.

The gist of this plan is that it seeks to do away with the current practices of several member countries keeping their foreign exchange reserves in the form of sterling and dollar balances. Instead, member countries are required to hold their reserves in the form of deposits with the IMF. The salient features of his plan are as follows:

1. Creation of an international monetary institution which would have the ability to create international credits. These credits would be the reserves of national central banks, and this new international monetary institution would be a central bankers’ bank. That is to say, there should be an International Central Bank which will not merely centralise the currency reserves but also create liquidity for its member central banks.

2. The International Monetary Fund would act as an International Central Bank. National Central Banks would pool their gold reserves with the IMF, and the credits received in exchange would in turn be counted as part of an individual central bank’s reserves in place of gold certificates, as it is presently in the United States.

Such deposits with the Fund would be as fully usable as gold itself in the transactions between members, so that, the IMF would act as a central bank for the national central banks, effecting settlements between them by transfers between their accounts with it and extending overdraft facilities to members facing difficulties in balance of payments.

A member country, facing a deficit in its balance of payments, may draw on its deposits in favour of the other countries, in the same manner as a member commercial bank balances to meet its disbursements. Moreover, this international central bank would also be authorised to create “international reserve credit,” analogous to a central bank credit, by open market purchase of the domestic financial assets of deficit countries.

3. To begin with each member country is required to deposit 20 per cent of its gross international reserves with the Fund. This might be gradually raised by the authority of the Fund. These deposits would earn interest which, it is hoped, would induce the countries to transfer all their gold and foreign exchange holdings to the Fund.

4. The countries may, at any time, convert into gold the deposits in excess of the minimum requirements.

5. The Fund may rediscount a country’s eligible paper (such as international bills of exchange) or give advance against it.

6. The IMF becomes a super-central bank in the process of clearing of international debts. International indebtedness between member countries would be settled by transfers from the accounts of creditor countries, since member countries agree to accept deposits with the Fund in the same way as they accept gold. A surplus country will find its deposits with the Fund increasing, while a deficit country will find its deposits declining.

The Fund will also permit a country to draw more than it has deposited, because all that it has to do is to debit the account of the country concerned and credit the account of the country to which that country has to make disbursements. As such the IMF can create international currency to any extent and meet the growth needs of international liquidity.

Thus, the Triffin plan basically has two objectives: (i) to replace the present international reserves of gold and ‘key currencies’ with a new international currency, namely, deposits with the international central bank; (ii) to introduce elasticity into international liquidity. Triffin claims that his plan would avoid the present danger of loss of confidence in key currencies because of the persistent deficits in the balance of payments of the key currency supplying countries. At the same time, it would tend to conserve gold and thereby solve the problem of a future lack of liquidity.

It may be noted that, Triffin’s plan for an international central bank is based essentially on the original Keynesian proposal for an International Clearing Union, presented in 1943. Keynes suggested that the International Clearing Union need not have any initial capital at all. He suggested that the foreign exchange earnings of the credit countries would be converted into Bancor balances which could be lent to the debit countries.

A surplus country receives payments in the form of credit at the International Clearing Union, while a deficit country will receive debit in terms of Bancor. These Bancor balances were not convertible into gold though, gold was made convertible into Bancor balances. However, a surplus country can use its credit balance for purchasing goods from the other countries, whenever, it wishes to do so. Similarly, no limit was to be placed on the deficit a country may run into, because the ICU was endowed with unlimited powers to create Bancor, the international currency.

Keynes’ plan was, however, rejected at Bretton Woods Conference for two reasons: (1) It did not allow the right of conversion into gold of the holdings of Bancor by surplus countries; and (2) The plan, by giving the ICU unlimited powers of lending, introduced an ‘inflationary bias’ which was to be an extreme and violent reaction against the ‘deflationary basis’ of the gold standard. The plan was also criticised for showing excessive concern for the deficit countries, especially England.

Triffin’s plan tries to overcome these objections. For this he suggested that deposits above the specified limit accumulated at the Fund to the credit of a member should be convertible into gold at the member’s request. Secondly, the IMF’s lending should continue to be the same staid criteria as had been followed by the Fund since its inception. Moreover, to prevent possible inflationary impacts of the Fund’s operation, Triffin suggested that an overall annual limit of increase to the Fund lending be laid down so that, it just kept pace with the growth of the world’s requirements! liquidity.

Thus, Triffin’s plan offers the most comprehensive reform discussed in recent years. It hi however, been criticised for the following drawbacks:

1. It makes no distinction between threats to international stability that may arise due to balance of payment pressures which the Fund is expected to deal with and those which it is not intended to deal with.

2. It makes no sharp differentiation between currencies that are convertible and those that are not. If the Fund’s holdings of incovertible currencies are excessive, doubts may arise about the Fund’s liquidity.

3. The system may lead to international liquidity.

4. The plan appears to be objectionable since it would involve delegating part of the economic sovereignty of the nations to a supernational body. Consequently, it would be difficult to persuade the countries to accept it.

5. The governments of U.K. and U.S.A. did not favour the plan because it seeks to do away with the key currencies, namely, £-sterling and dollar, which may be a threat to the financial status of the London and New York money markets.

It may be concluded that though, on account of certain drawbacks, the Triffin plan may not be acceptable in toto, there stands a fair scope for compromises if it is to be implemented anyhow. And the very least that can be said about it is that it has evoked examination of the international monetary system and steps for its reform which were sorely needed, however unlikely the prospects for the implementation of the specific plan itself.’