On the Trilemma of Finance, The Triffin Dilemma, Bitcoin, and Nations and Games

6 min readSep 9, 2018


Reading GC Pieters’ “ The Potential Impact of Decentralized Virtual Currency on Monetary Policy” today inspired me to re-consider the problem of the Triffin Dilemma as well as the observation we refer to as Gresham’s Law.

On a relevant note, Pieters gives us an explanation of the Trilemma of Finance:

The relative value of any two currencies — the exchange rate — is determined through their sale and purchase on the global foreign exchange market. If government policy interferes with this market by changing the relative supply or demand of currencies, the exchange rate is managed.

The trilemma of international finance, illustrated in Chart 5, is a restriction on government policy that follows immediately from the interaction of exchange rates, monetary policy and international capital flows. The trilemma states that any country can have only two of the following: (1) unrestricted international capital markets, (2) a managed exchange rate or (3) an independent monetary policy

Gresham’s Law is an observation of the outflow of commodity money from the Queen’s realm when she was caught in a state of debasement. George Selgin, as quoted from, wiki explains:

According to the economist George Selgin in his paper “Gresham’s Law”:

As for Gresham himself, he observed “that good and bad coin cannot circulate together” in a letter written to Queen Elizabeth on the occasion of her accession in 1558. The statement was part of Gresham’s explanation for the “unexampled state of badness” that England’s coinage had been left in following the “Great Debasements” of Henry VIII and Edward VI, which reduced the metallic value of English silver coins to a small fraction of what it had been at the time of Henry VII. It was owing to these debasements, Gresham observed to the Queen, that “all your fine gold was convayed out of this your realm.”[11]

Considerations on the Trilemma in Relation to Bitcoin

I think in some sense we can think of Bitcoin as a new country as if it came from a shift in geopolitics (or a metaphorical shift in borders etc). Then we can think of it as having an independent monetary policy (although quite rigid in some way), it does not manage its exchange rate, and it cannot restrict its own supply in capital markets (nor will attempt to control its own demand).

The Triffin Dilemma

The Triffin Dilemma was a specific example related to the generalized Trilemma (wiki):

The Triffin dilemma or Triffin paradox is the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies. This dilemma was first identified in the 1960s by Belgian-American economist Robert Triffin, who pointed out that the country whose currency, being the global reserve currency, foreign nations wish to hold, must be willing to supply the world with an extra supply of its currency to fulfill world demand for these foreign exchange reserves, thus leading to a trade deficit.

It is that the short-term domestic and long-term international objectives have different Trilemmas. Each combination of the Trilemma competes or conflicts with itself.

The Bancor As a Solution to the Triffin Dilemma

Keynes is often ill cited. I noticed he is mentioned on the Triffin Dilemma wiki for proposing the Bancor as a solution to the Triffin Dilemma anticipated for the US:

Specifically, the Triffin dilemma is usually cited to articulate the problems with the role of the U.S. dollar as the reserve currency under the Bretton Woods system. John Maynard Keynes had anticipated this difficulty and had advocated the use of a global reserve currency called ‘Bancor’. Currently the IMF’s SDRs are the closest thing to the proposed Bancor but they have not been adopted widely enough to replace the dollar as the global reserve currency.

Trilemma Strategies

We can think of nations having different strategies in regard to the Trilemma and how a competing strategies could cause local (ie 2-d) political strife especially if the strategy of a nation or nations somehow HAD to change very rapidly. Sometimes borders do change and we can think of a simple interaction between two countries that function coherently side by side and what might happen if the Trilemma arrangements were forced to change in one or both countries.

Sometimes such arrangements are favorable or have other political or culture implications.

On The Executive Order

In USD terms, the price of gold had not changed in 27 years, this did not allow true price discovery by the free market. This price was fixed following the enactment of E.O. 6102, where the US government purchased gold from US citizens under threat of fines and/or jail time at a rate of $20.67/oz then revalued the gold overnight to $35/oz.

This order is often cited by Bitcoin enthusiasts as an example that a government can one day be tryannistic and that even your gold is never safe. We can imagine a scenario a BENEVOLENT government acting for the greater good of its people might have to make the same decision if say two superpowers decided it must be so be so (perhaps amicably or not).

Then it would be as if the people were ultimately saved but not saved from the trauma of the culture shock or the confusion stemming from not understanding the cause of the order. From a non-conpsirital light one could note such decisions ARE the job of government and it exists to ensure our own freedoms at times when the general populace could not make such decisions fast and collectively enough.

On Bitcoin’s Implications

In some ways Bitcoin is a form of a well protected super-power. Ask any credible computer scientist and they will tell you the conjecture seems to be widely held as having a secure basis. The other conjecture implied but not spoken by the creator Satoshi is that it will store value. Satoshi did say this:

If it somehow acquired any value at all for whatever reason, then anyone wanting to transfer wealth over a long distance could buy some, transmit it, and have the recipient sell it.

Maybe it could get an initial value circularly as you’ve suggested, by people foreseeing its potential usefulness for exchange. (I would definitely want some) Maybe collectors, any random reason could spark it.

And of course Bitcoin does have a non zero exchange price now in every nation in the world there is no doubt.

At least anywhere that has the internet or mobile service which is another Trilemma consideration-Bitcoin doesn’t restrict its capital flow. From a war perspective this means it cannot bow to pressure on this front.

And because it’s built on the most decentralized technology we have, a global communications network that every person in the world relies on, any countries that sport Trilemmas that rely on capital controls are going to find themselves NEEDING to respond to the change.

On Geopolitical Conflict

…my personal view is that a practical global money might most favorably evolve through the development first of a few regional currencies of truly good quality. And then the “integration” or “coordination” of those into a global currency would become just a technical problem. (Here I am thinking of a politically neutral form of a technological utility rather than of a money which might, for example, be used to exert pressures in a conflict situation comparable to “the cold war”.)~Ideal Money

We can think of certain agreements, types of economic embargo, and currency wars and how one country that is otherwise forced to peg to another country (thus giving up their financial sovereignty or right to their own policies) might now be forced to break such agreements or might be alleviated from them.

Solving For the Bitcoin Trilemma “Attack”

In a game where each player is a nation and has their own Trilemma strategy and their own agreements and obligations each nation can think of their own strategy for the adjustment that might be inevitable.

It might be a very complex simulation to come to the solution whatever it might be for each individual country.

I would suggest that Nash Equilibrium response is to peg the exchange rate to Bitcoin.

Solving For the New Age Triffin Dilemma

The US still functions as a de facto reserve currency provider. Helen Rey talks about the Trilemma and alludes to the Triffin Dilemma as she describes the US acts like a world bank has growing asymmetries and that this might be a growing crisis in the making.

And then I think would be interesting to consider the optimal response to the inevitable “invasion” of Bitcoin’s monetary implications as a possible solution (in a different sense than an ‘equilibrium’ solution) similar to how Keynes previously proposed the Bancor.

On The Ideal Money Wiki Page

I did do most of the editing and I don’t feel its very well done at the moment. I didn’t put this line in however in regard to Nash’s Ideal Money it was said:

It is a solution to the Triffin dilemma-the conflict of economic interests between the short-term domestic and long-term international objectives when a currency used in a country is also serving as world reserve currency.

Someone else wrote it and I’ll always wonder how they came up with that observation.