Economic life, like nature, has its laws but it does not believe in miracles. The reconstruction of the country through printing paper money was an artificial and nervous process. Paper money is like morphine, which excites giving rise to immediate and great but temporary effects, the reaction comes later. Our current crisis is just such a reaction
Feliks Młynarski (1925)
The Triffin dilemma, despite the collapse of the Bretton Woods system, is still an important theoretical construct that addresses the risks of using a national currency as a reserve currency by the rest of the world. Admittedly, the US dollar is still the main reserve currency.
The literature presents opinions that Triffin’s dilemma should be called Młynarski’s dilemma due to Robert Triffin’s borrowing from the Polish economist his view on the defectiveness of the gold exchange standard (GES). The aim of this article is to answer the question whether the content of Triffin’s dilemma coincides with the content of Młynarski’s dilemma. The analysis is devoted to the book referred to by researchers with regard to the origin of the dilemma, i.e. Gold and Central Banks as well as The Functioning of the Gold Standard published by Feliks Młynarski in 1929 and 1931, respectively. Robert Triffin refers to them in his book entitled Gold and the Dollar Crisis published in 1960.
It seems that Triffin’s dilemma cannot be called Młynarski’s dilemma, because the latter turned out to be a paradox, which means that these concepts are not identical. Triffin’s dilemma is to some extent an extension of this paradox, because it refers to the problems of threatening the convertibility of the dollar into gold and the limitation on liquidity of GES countries. Młynarski’s paradox, on the other hand, showed that the seemingly inflationary monetary system caused deflation. Both economists postulated a reform of the gold exchange standard. Perhaps Młynarski’s special transactions were an inspiration for the creation of special drawing rights (SDRs), being a way of converting foreign exchange reserves into gold rights and generating credit for a country with a negative balance of payments.
Triffin’s dilemma, despite the collapse of the Bretton Woods system, still represents an important theoretical construct that addresses the dangers of using a national currency as a reserve currency by the rest of the world. This concept is also an argument in the discussion regarding the need to create a “real” international currency that makes the global economy independent of the monetary policy of one country, which was discussed, for example by former head of the Chinese Central Bank Zhou Xiaochuan (Maes 2021, p. XIX). He stressed that in the sphere of economic policy, the country issuing a reserve currency is always faced with a choice between achieving domestic goals and satisfying the international demand for the reserve currency1. However, the US dollar is still the main reserve currency, which should be associated primarily with the confidence in the political base of the United States and its stable economy (Balicki 2013, p. 107).
The literature presents opinions that Triffin’s dilemma should be called Młynarski’s dilemma due to Triffin’s borrowing from the Polish economist his view on the defectiveness of the gold exchange standard system2 (Eichengreen and Flandreau 2016, p. 298). Therefore, the purpose of this article is to answer the question whether the content of the Triffin dilemma coincides with the content of the Młynarski dilemma. Content is understood in this case as what constitutes the idea, the meaning of the theory under consideration3. It will be verified by genetic explanation in order to highlight the genesis of the Triffin dilemma by showing the evolution of the implications of the concept. On the other hand, causal explanation will take into account the impact of economic determinants on the views of the authors, which will explain possible differences4.
The analysis will be devoted to the book referred to by researchers with regard to the origin of the dilemma, i.e. Gold and Central Banks as well as The Functioning of the Gold Standard published by Młynarski in 1929 and 1931, respectively. Triffin refers to them in his book entitled Gold and the Dollar Crisis published in 1960.
The meaning of the Triffin dilemma
The source of Triffin’s (1911-1993) views can be found in his life experiences5. As a young man, he observed the crisis of the 1930s, the development of fascism in Europe and then WWII, which made him a pacifist who, as a citizen of the world and an idealist, dreamed of uniting all humanity (Maes 2021, pp. 1 and 114). He treated economics as a theoretical as well as practical tool meant to improve the global monetary system6 in such a way that it would favour the development of all nations. Undoubtedly, this was the goal of Triffin’s research and political activity7.
The search for recommendations for economic policy, especially for monetary policy, was a sign of the times in which he lived and worked. Triffin’s youth as an economist coincided with the time of questioning the foundations of neoclassical economics with the model of perfect competition at the forefront. It was reflected in Triffin’s doctoral dissertation entitled General Equilibrium Theory and Monopolistic Competition in 1938. He wrote it under the supervision of J. Schumpeter, W. Leontief and E. Chamberlin in the United States (Maes 2021, p. 18). The monopolistic competition model challenged economists’ belief in the automatism of market mechanism. Triffin believed that the market economy was essentially unstable and required state interventions (Maes 2021, p. 1). This view is in line with the Keynesian way of perceiving the economy, but does not exhaust the specificity of its understanding by Triffin. He also proved to be close to the monetarist approach as he emphasised the significance of changes in money supply for the real economy (Maes 2021, p. 47). Hence, his critical attitude towards the gold standard in the form before WWI, which he considered to be a deflationary factor in the event of a negative balance of payments of a country. The Great Depression and the deflationary policy in Belgium aimed at maintaining the gold standard at the expense of high unemployment in 1934 were traumatic experiences for Triffin (Maes 2021, pp. 14-16). It had affected his perception of deflation as the main threat associated with the GES system. The unemployment rate in Belgium was 18.9% at that time (Eichengreen and Hatton 1988, p. 6).
Financial systems8 have evolved over centuries, so have the theories explaining the principles of their functioning. It was no different with the GES system adopted in 1944, called the Bretton Woods system.
Not going into detail about the political determinants that accompanied the construction of the post-war monetary system, it should be emphasised that its task was primarily to create stable conditions for international exchange, so as not to lead to a crisis comparable to that of 1929. The new system had to be free from the mistakes made by politicians in the interwar period, i.e. it was to be multilateral, to guarantee stable exchange rates while allowing for a policy of full employment (Bordo and Eichengreen 1993, p. 28). This means that the system had the advantages of the classical gold standard in terms of exchange rate stability and the advantages of a floating exchange rate, which allows the government to be independent in relation to the policy of full employment (Bordo 1999, p. 397). The re-introduced GES (the first one operated in some countries in the years 1922-1931) was based on fixed exchange rates against the dollar with the possibility of adjustment (Bąk 2014, p. 40). The value of the dollar was set at $35 per ounce of gold, and in practice the exchange rates of other currencies were pegged to the dollar with a fluctuation range of ±1% (Balicki 2013, p. 108).
The Bretton Woods system was made up of countries, only one of which had a central bank converting the issued currency into gold, and the banks of the other members of the system accumulated dollar reserves to cover the issuance of their own currencies. The gold reserves of the United States were at the same time the reserves of the rest of the world, which was really worrying for Triffin. In view of the data cited by him, concerning the deterioration of the US balance of payments and the decrease in gold reserves in this country between 1957 and 1959 by 20% (with a rise in foreign dollar reserves by 33% in the same period), he formulated his famous dilemma (Triffin 1960, p. 5). He claimed that the Bretton Woods system had a “built-in” threat of either suspending the convertibility of the dollar into gold if the US increased the balance of payments deficit indefinitely or9 the risk of liquidity limitation for the rest of the world if the United States fought the deficit, e.g. by using protectionist practices (Triffin 1960, pp. 9 and 87). The second option became a real threat in 1965, when the US committed itself to fighting the deficit by introducing, for example, quota restrictions on imports (Rueff 2012, pp. 181 and 203). It can be said that the main flaw of the Bretton Woods system was the way in which each country could create official foreign exchange reserves, i.e. the fact that increasing international liquidity was associated with deepening the US balance of payments deficit (Bąk 2014, p. 40).
The US economic policy was therefore associated with a difficult choice between two unfavorable solutions10: the acceptance of risk of excessive growth in dollar liabilities against gold reserves as a result of increasing balance of payments deficits or limitation on liquidity in the GES countries by reducing the balance of payments deficit. The choice of the first option entailed not only a decrease in the level of gold reserves, but also in foreign confidence in the key currency, which increased the likelihood of suspending the dollar convertibility into gold11. The risk of losing the bullion nature of the reserve currency would have to affect the money supply in the GES countries. Triffin assumed that it would be reduced (the US would have to raise the interest rate for fear of the outflow of reserves), leading to global deflation. The second option was also to lead to global deflation by immediately reducing the supply of the dollar in the event of a positive US balance of payments, which reminded of protectionist practices in the interwar period. Regardless of the option chosen, according to Triffin, the Bretton Woods system condemned the world to deflation, although intuitively it should have favoured inflation, since the role of gold as a cover for currency issuance was limited to the dollar only.
According to Triffin, the solution to the problem of the threat of inability of the dollar to convert into gold should definitely not consist in limiting imports or foreign investments by the USA, but should be limited to increasing the competitiveness of exports of American goods on the world markets (Triffin 1960, p. 7). Such a strategy would support the US economic growth, but also maintain the US international position as a credible country. To accomplish this, he said, it was necessary to limit inflation in the US and increase the productivity of the US economy by investing in research and technological development (Triffin 1960, pp. 7-8). Triffin therefore took into account not only the need to reform the international monetary system as a tool that would help to avoid a crisis comparable to the Great Depression of the 1930s, but also stressed the importance of the condition of the real economy in building the foundations for long-term economic growth.
As for the reform, he considered it necessary to create a common fund of world monetary reserves to guarantee international liquidity, so that the world could face temporary inevitable fluctuations in the payments of each country, which he saw as a threat to the stability of the international monetary system leading to widespread deflation, devaluation and trade restrictions (Triffin 1960, p. 8). As already mentioned, the experience of the crisis of the 1930s determined Triffin’s approach to the analysis of defects of the Bretton Woods system.
Thus, Triffin’s main concern was to create a mechanism that could guarantee the world liquidity regardless of the policy of the United States, which constantly had to be subordinated to the choice between the pursuit of internal and external goals. In his opinion, only the internationalisation of the currency component of the central banks’ world reserves would bring the desired effects (Triffin 1960, p. 10). In practice, this would mean that countries would hold gold-linked deposits in the International Monetary Fund instead of a currency component to supplement their gold reserves, with the IMF to guarantee the exchange rate of the deposit, which would provide more security than using any national currency as a reserve currency that was exposed to devaluation and inconvertibility (Triffin 1960, pp. 10-11). The IMF would lend the international currency to countries with balance of payments deficits to settle current liabilities. Thus, the concept of special drawing rights (SDRs) was born. It was to reform the Bretton Woods system, and SDRs have been in operation since 1969 until today12.
Triffin was convinced of the necessity of eliminating national currencies from international reserves beyond the amounts necessary for current settlements, but he did not accept the possibility of adopting another solution allowing the Bretton Woods system to survive. It is about raising the price of gold in the face of its decreasing reserves, which Triffin rejected, pointing, for example, to the fear of a wave of inflation (Rueff 2012, p. 15313). In reality, however, Triffin opposed the revaluation of gold for political reasons. He indicated potential beneficiaries of such a solution, i.e. countries with significant gold reserves, such as the USSR, South Africa and the United States, which would further increase their advantage over the rest of the world (Triffin 1960, p. 81).
He also believed that, in addition to its disadvantages, GES had an advantage of helping to overcome the problem of insufficient gold reserves in the world, but he did so until the issuing country of the key currency allowed its gold reserves to decrease against the growing receivables of the rest of the world (Triffin 1960, p. 6714). As mentioned before, the continuation of liquidity at the expense of reserves reduction must, according to the author, lead to a loss of foreign confidence in the key currency. When giving arguments, Triffin referred to Młynarski’s The Functioning of the Gold Standard published in 1931, and not to Gold and Central Banks from 1929 (this book is referred to by contemporary researchers, like B. Eichengreen, analysing the sources of the Triffin dilemma), arguing that the Gold Delegation of the League of Nations Finance Committee debated for three years about the defects of the GES system (Triffin 1960, p. 19).
The approach of economists to the GES system in the interwar period was determined by their attitudes to the classical gold standard from before WWI, in which the role of central bank reserves was different from that in the GES system. Triffin mentioned it, arguing that the disappearance of gold coins from circulation imposed a special obligation on central banks in the form of regulating the country’s balance of payments deficit (Triffin 1960, p. 3215). Primarily, it changed the situation of the country issuing the reserve currency, because, in real terms, it did not have to pay its deficit. The United States paid for imports of goods in dollars, and these dollars returned to New York on the same day, bringing interest, so the deficit did not reduce funds in the US (Rueff 2012, p. 146). As Triffin noted in an interview with J. Rueff, “It is extremely unhealthy to guarantee to a country the automatic financing of its deficit ” (Rueff 2012, p. 146). It can be said that Triffin was outraged by the fact that the richest country in the world was financed by poorer countries (Maes, Pasotti 2022, p. 1).
Xiaochuan Z. (2009): Reform the international monetary system, https://www.bis.org/review/r090402c.pdf [accessed: 1.03.2022].
 The gold standard system will be referred to in the text with the abbreviation GES (Gold Exchange Standard).
In historical sciences, including the history of economic thought, genetic explanation makes it possible to show both the sources and development of theory, as well as its significance in the history of a given discipline (Kotarbiński 1986, pp. 439 – 440). On the other hand, causal explanation allows to explain the way the author of the examined text approaches the issue through, for example, his life experiences. However, the issue of causality in history is very complex and it should be assumed that in the history of social changes phenomena are explained “causally” by the characteristics of the situation in which people found themselves (Kotarbiński 1986, p. 340).
 Contextual analysis used in the history of economic thought allows important events in the authors’ lives to be taken into account as possible factors shaping their theories.
 The global monetary system is understood here as a set of official international arrangements on how to regulate the balance of payments through arrangements on how exchange rates, international payments, capital movements and central bank reserves are formed (Mohan R., Patra M., Kapur M (2013), p. 4).
 See: I. Maes, “Robert Triffin. A Life”, Oxford University Press, 2021, pp. 45, 60, 93.
 The financial system as the core of the financial sphere plays an important role from the point of view of economic growth, because it enables the flow and co-creation of purchasing power between the entities of the real and financial spheres of the economy (Polański 2008, p. 19).
 The use of the phrase “either…or” is not accidental here. “Or” indicates that at least one of the two possibilities exists, but does not exclude the occurrence of both, while “either…or” indicates that at least one of the two possibilities exists, one excluding the other (Kotarbiński 1986, p. 138). You cannot increase the balance of payments deficit and reduce it at the same time, hence the “or”.
 The essence of the dilemma is the existence of an alternative, an embarrassing situation that requires a difficult choice between two unpleasant possibilities (Kopaliński 2000, p. 135)
 Nowadays, there are different interpretations of the Triffin dilemma in the context of its topicality. See: (Bordo M.D., McCauley R. N. 2017).
 Triffin considered his idea analogous to the concept of the International Clearing Union of J. M. Keynes (Triffin 1960, p. 11).
 This view was expressed by Triffin during a discussion with J. Rueff in 1966, which was published, for example, in the Sunday Times (Rueff 2012, p. 145).
 See: also: [Maes, Pasotti 2022, p. 8).
See: (Triffin 1960, p. 34): The main function of monetary reserves is no longer to preserve the overall liquidity of individual central bank, but to permit the financing of short-run deficits in the country’s external transactions. See also: (Maes, Pasotti 2022, p. 7).