What is Triffins Paradox?


The success of the Bretton Woods System was essentially based on the voluntary trade
deficit accepted by the US. This step resulted in a net outflow of US Dollars to the world
economy. Professor Triffin, an economist, predicted that the continuous deficit in balance
of trade incurred by the US would reduce its acceptability in the international markets since
supply would keep increasing without a downward revision in the value of USD. He
predicted that the system would disintegrate due to this basic weakness in the system that
it did not provide for a periodic review of the value of the USD.
The American involvement in Vietnam resulted in uncontrolled deficit. In 1968, the Gold
Convertibility Clause was invoked but the US Federal Reserve Bank could not honour its
commitment. The formal withdrawal from the system was announced by the US on 15th
August, 1971, thus resulting in the collapse of the system as predicted by Professor Triffin.

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