Bretton Woods, New Hampshire, July 1944
While World War II still raged across Europe and the Pacific, hundreds of delegates from 44 nations gathered in the grand ballroom of the Mount Washington Hotel. They were there to design the financial architecture of the post-war world. After three weeks of negotiations, they finally settled on a plan that would promote growth, low inflation and prevent tit-for-tat currency wars. The Bretton Woods system would fix the US dollar to gold at a fixed rate of $35 per ounce, and tie every other currency to the dollar. For over a decade, the system delivered on its goals.
Then, in October 1959, Yale economist Robert Triffin stood before Congress to warn why the system was, by its own design, going to fail. Because global trade needed a growing supply of dollars, sooner or later the amount of dollars in circulation would exceed gold reserves. From that moment, the entire system would rely on a handshake that central banks wouldn’t ask for their gold to be returned all at once. If they did, the US would be forced into default.
There was a way to prevent all of this, Triffin reassured the chamber. The US could halt the outflow of dollars, raise rates and cut spending. However, the move would paralyze global trade and trigger a severe global recession. For this reason, the plan lacked support, so Triffin floated an alternative solution: create a new currency that was able to grow as trade expanded, issued by an international body. Congress and the Treasury listened, but instead of addressing the core problem, they applied temporary patches and kicked the can down the road.
Triffin was not alone in sounding the alarm. In Paris, de Gaulle’s economic advisor had reached much the same conclusion, leaving the French President increasingly wary of Bretton Woods’ structural flaws. He believed the gold sitting in New York and London could be turned into leverage against France if a crisis ever came. So in 1963 he ordered France’s gold brought home gradually, aboard commercial vessels. In parallel, he started systematically converting France’s dollar surpluses into gold. Though European and US monetary authorities watched these moves with growing anxiety, each conversion was honoured without hesitation, and the system held.
In February 1965, following an official announcement that France had just converted $300 million into gold, de Gaulle stood before a large crowd of journalists and publicly criticised the Bretton Woods system. He accused the US of abusing its position by printing dollars to buy foreign assets and fund its spending abroad. What the world needed, he said, was to settle its accounts in gold. The speech rattled the Europeans, but almost no country followed France in converting dollar surpluses into gold. Central banks knew that a mass conversion would guarantee the collapse of the international monetary order. The US went to great lengths to preserve the integrity of the system. Hundreds of thousands of US troops were stationed in West Germany to help the Federal Republic deter the Soviet Union. Under the implicit threat of withdrawing such troops, the US prevented Germany from converting large sums of dollars into gold.
If de Gaulle’s assault exposed the Bretton Woods’ architectural flaws, U.S. President Lyndon Johnson accelerated its collapse. He pursued a war in Vietnam and welfare programs at home, a “guns and butter” policy, without raising taxes to pay for either. Fiscal deficit crept up, and so did inflation and the money supply. In theory, that should’ve led to a depreciation of the dollar. But it didn’t, and the system continued to hold. Every year brought a fresh scare, a temporary solution and a renewed promise that the peg to gold would always hold. Faith in the system was eroding, what people once trusted was beginning to give way.
In the summer of 1970, Europeans argued that the dollar was overvalued and called for a 10% devaluation against gold. “It appears to me that it is necessary, without being aggressive, to show how unhealthy the role of the dollar is and how it is constantly losing its purchasing power”, said de Gaulle’s successor Georges Pompidou. Officials at the Federal Reserve started to worry that a crisis of confidence in the dollar could begin at any time and that investors would begin to sell dollars for foreign currency.
The Fed’s concerns turned into reality within less than a year. Pressure grew to buy Deutsche marks in exchange for dollars. It built, and built, and built, until finally the German government was forced to abandon the peg in May 1971. In the weeks that followed, the mark appreciated almost 8% against the dollar.
Then, on August 6, a US congressional subcommittee released a report saying that the dollar was overvalued and recommended an immediate devaluation. European trading floors erupted into panic as investors frantically dumped dollars, scrambling to buy Swiss francs and Deutsche marks.
A few days later, the British Embassy in Washington formally asked the US Treasury to convert $3 billion of its reserves into gold. Terror spread through the Treasury as the request would’ve wiped out 30% of its remaining gold reserves. If they honoured Britain’s demand, every other central bank would be the next in line to do the same.
US President Nixon flew to Camp David with a handful of advisers for an emergency meeting away from the press and his cabinet. After spending two days thinking about a way out of the crisis, he reappeared on live television to address the nation about the challenges of economic stagnation, rising unemployment and inflation. “I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets.”
For the next four months, the dollar was left floating while countries sat down to negotiate a new set of rules. Convertibility to gold was not restored, but leaders agreed to keep exchange rates fixed. The dollar was devalued by roughly 10% against the other major currencies, and the new regime held for about a year. In early 1973 it was devalued by another 10%, but within a month it became clear that a further devaluation was only a matter of time. Rather than wait for it, countries pulled the plug on the whole arrangement and let their currencies float.
While the dollar continued to depreciate throughout the 1970s, it retained its role as the world’s anchor currency. No rival offered the same combination of liquidity and institutional trust, which meant that global trade, official reserves, and private savings all continued to be denominated primarily in dollars. To this day, almost 60% of globally allocated foreign-exchange reserves is in dollars, more than double its closest rival, the euro.
As to gold, once it was freed from the fixed rate, it rose in value. Initially investors were buying it as a hedge against a depreciating dollar, pushing its price up 20% by the end of 1971. But what started as a hedge soon exploded into an all-out global mania. As the 1970s descended into stagflation, energy shocks, and geopolitical chaos, the rush for gold became frantic. Institutional investors, royal families and state funds were all buying, culminating in a market frenzy that drove the price as high as $850 in January 1980.
For all its flaws, the Bretton Woods system delivered an unprecedented era of postwar prosperity. It provided the participating nations with a stable currency order and an economic framework to build on. Its collapse proved that no sovereign currency tied to gold can indefinitely act as the world’s reserve asset, as domestic policies inevitably clash with global liquidity needs. Most important, Bretton Woods put the dollar at the centre of global trade, a role it still retains.
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