The Keynes-Triffin Plan: A Critical Appraisal

Abstract

In his recent publication, Gold and the Dollar Crisis, Professor Triffin revisits the old Keynes plan, designed during the Second World War for solving postwar international currency and payments problems. In Professor Triffin's view such a plan would solve our present difficulties in international payments. The book itself stems from two articles by the author, published by the Banca Nazionale del Lavoro in Rome in I959. An introductory section and a postscript composed of six comments on Professor Triffin's work (the sixth being by Mr. Khrushchev), have been added in the book form. In essence, the Keynes-Triffin scheme advocates the establishment of an international or supranational central bank of which all countries of the free world would be members. Such an institution would serve as a substitute for the present International Monetary Fund. It is clear that its merits and defects would have to be discussed on two different planes. On the one hand, Professor Triffin's New International Monetary Fund would create problems of a purely political nature, because much would depend upon on what basis, or by what type of voting system, the decisions of such an institution would be reached, given politically sovereign member states. On the other hand, a number of purely economic problems are raised by the existence and by the mode of operation of such an institution. It is beyond the scope of this note to discuss the problem of the decision-making process in detail. The difficulties that might arise are, however, quite clear. If all of the rules of the game were not laid down from the outset, whenever a decision were to be made, and no three-fourths, four-fifths, or unanimous agreement as envisaged by Professor Triffin were reached, it might impede the functioning of the institution. But let us assume that in one way or another decisions are made, and let us consider the impact of the new fund on international liquidity, and on the stability and policies of the member countries. Professor Triffin starts from the premise that the world supply of gold and annual gold production are insufficient to satisfy the international demand for liquidity generated by the growing volume of world trade. Moreover, he observes a striking, and in his view highly dangerous, concentration of reserves and of international short-term credit creation. To remedy this situation and to facilitate international payments, he envisages an international central bank which would absorb part of national gold and foreign exchange reserves and through which international payments simply would be effected as a bookkeeping operation. Under the Keynes plan, presented in the later years of the war, net surpluses or deficits in the balance resulting from autonomous transactions could accumulate in substantial amounts (not indefinitely, as Professor Triffin asserts-see page go). Professor Triffin realizes the damaging inflationary effects that such an unrestrained credit creation might entail. Consequently, he advocates a three, four, or five per cent ceiling on the annual expansion of world liquidity. Each member country would be required to hold a given proportion of its monetary reserves, say, twenty per cent, as deposit with the fund; it might, however, keep a greater proportion. With the twenty per cent reserve ratio, Professor Triffin estimates the initial capital of the fund at about $i I billion, initially held in the form of gold to the extent of about forty per cent, while the rest of the assets would be in the form of claims on member countries, primarily the United States and the United Kingdom. Thus in the initial stage not all official foreign exchange reserves of member countries (at present about $I9 billion) would be absorbed; there would be about $I3 billion outstanding, left in the hands of official short-term creditors within the member countries. Such balances would, according to Professor Triffin's plan, be absorbed over the early years of operation of the new fund. This, of course, would require some countries holding reserves with the fund well in excess of the 20 per cent. The expansion of world reserves would be effected in two different ways, comparable to those currently employed by national central banks. On the one hand, the fund could extend short-term credit on demand of the member countries; on the other, it could invest directly in members' security markets, both on short and on long term. It may be interesting to note that such credit creation would involve an annual increase of about i8 per cent of the fund's initial assets if the growth of reserves were to equal five per cent.