International Monetary System—What would Triffin do today?

Conference—80 years after Bretton Woods: Relaunching Multilateralism through Regional Monetary Unions, Banco do Portugal, Robert Triffin International, Academia Das Ciências, Lisbon 7 May 2024

Panel discussion—80 years after Bretton Woods. Where do we go from here? What kind of initiative would Robert Triffin promote?

Prepared remarks

Dear Friends,

Thank you very much to the organizers for the kind invitation to participate in the panel discussion on the past and outlook for the international monetary system and the most interesting question of what Robert Triffin would do in light of the state of the system today. The system as it was envisaged at Bretton Woods 80 years ago, has a rather mixed record. The most problematic one, I believe, is that only very few currencies serve today in international payments producing a high dependency on the so-called key currencies. Herein lies I think the biggest shortcoming that will need to be addressed going forward. I guess it is also what Triffin would lament the most and focus on as the most pressing issue. A new willingness to adopt unconventional approaches often in relation to central bank digital currencies (CBDC) seems to be pointing in the right direction.

Bretton Woods was unique, as is well known, in establishing for the first time a formal international arrangement on exchange rates with an international treaty, the Articles of Agreement of the IMF. Member countries are subject to a series of obligations. Under Article VIII they must abstain from exchange restrictions, multiple exchange practices and discriminatory currency arrangements for current transactions comprising international trade and interest payments.

One of the IMF’s main purposes is to establish a multilateral payment system. This rests in essence in: “The Commission, in asking governments to assume the obligation to make their currencies freely convertible, so that "each country can count on using the proceeds of its exports to any part of the world to pay for imports from any part of the world." 1 The elimination of exchange restrictions was seen as a necessary condition therefor. Article VIII was accepted by the main European countries by 1961. But despite the fact that most IMF member countries having subsequently accepted Article VIII their currencies continue to play no or only a very limited role in international transactions. Article VIII has proven not to be a sufficient condition for international currency usage.

The IMF early on was concerned that if few currencies are being used in international exchange it could produce unwanted dependencies. At Bretton Woods, in a memorandum to Committee 2 [Operations of the Fund] of Commission 1 about the use of Fund resources of around 12 July 1944 it stated:2 "The Fund must be in a position to dispose of its franc balances in meeting payments due to France, its guilder balances in meeting payments due to the Netherlands, etc. There is no doubt that the provision can be made in the Fund proposal to facilitate the use of all of the currencies in the Fund in meeting balances of payments."

The currency concentration problem also manifested itself in the adoption of the scarce currency clause of Article VII outlining that insufficient access to and liquidity in a given currency poses a major challenge for meeting international payments obligations. Initial IMF drawings have been heavily tilted towards a small set of currencies. Of total drawings to December 1960, 87 percent were drawn in dollars.3 Today it is not very different.

The use of few national currencies in international payments was the foundation of Triffin's critique: "The most fundamental deficiency of the present system, and the main danger to future stability, lies in the fact that it leaves the satisfactory development of world monetary liquidity primarily dependent upon an admittingly insufficient supply of new gold and an admittingly dangerous and haphazard expansion in the short-term indebtedness of the key currency countries."4

Triffin proposed several ideas, the Triffin plan, as is well known, to address the shortcomings. The plan aimed for the substitution of "IMF balances for [key currencies] national currencies in all member countries' monetary reserves".5 Triffin wanted to reduce the use of national currencies as international reserves and allow the IMF to accommodate liquidity needs flexibly driven by countries making deposits at the IMF.6 While he was concerned with a lack of international reserves, he also wanted to attain greater diversification in the use of currencies.7 The Triffin plan argued that any loan extended by the IMF would be deposited to the member's deposit account and could be drawn in any currency to put an end to IMF credits being funded mostly by countries, notably the U.S. suffering significant reserves losses.8

The persistent use of a narrow set of currencies remains the big unfinished business of the IMF and echoes the original Triffin critique.9 The IMF today still considers only 5 currencies, the dollar, euro, renminbi, sterling and yen, as freely usable currencies out of about 145 currencies in circulation. It means countries need to conduct operations with the IMF on the basis of those currencies. It shall be considered here as a proxy for the persistent strong asymmetry in the use of currencies in international transactions today. The IMF by relying only on those currencies risks reinforcing this asymmetry.

The narrow set of currencies seems particularly problematic as large emerging markets remain significantly constrained in using their own currencies in international payments. While emerging markets today represent about half of the world's real economy, their currencies play nearly no role in international payments. Although the renminbi is declared a freely usable currency by the IMF, it has not gained meaningful traction in international payments. China has for some time declared that it would like to pursue internationalization of the renminbi. India recently announced that it wants the rupee to have a bigger role internationally.

To conclude, 80 years on, Triffin's critique remains as valid today as it was then. His plan to convert the IMF de facto into a central bank has not been pursued to this date and seems an unlikely way forward. Triffin would probably still propose to reduce dependence on a narrow set of national currencies to establish greater stability and symmetry in the system.10 The adoption of IMF Special Drawing Rights (SDRs) in large part in response to Triffin’s critique and subsequent amendment of the Articles by which the SDR is meant to become the principal reserve asset, have brought few if any meaningful changes to the system; SDRs will likely need to be subject to considerable changes to increase their relevance in international transactions.

The shifting geopolitics have brought forward greater urgency in pursuing diversification in the international monetary system. CBDC initiated a new fundamental debate about the use of money. New approaches are being tested on how new technologies can facilitate foreign exchange settlement, establish more direct monetary relations and reduce risk in particular in foreign transactions. The political pressure has increased, including and driven by China and large emerging markets but also to an important extent by the Euro Union with its increasing emphasis on open strategic autonomy and the enhanced role of the euro. Recent initiatives like the BIS Innovation Hub CBDC project mBridge aim at conducting international payments using local currencies to advance currency diversification.

Achieving greater diversification remains one of the most enduring challenges of the international monetary system. It may be a necessary condition for the integrity of the system itself. The Triffin plan provided critical ideas that do still seem highly relevant today. Going forward some of the those should be put in practice.

Thank you very much for your attention