In the first and second part of the history of gold, five periods were presented: The Classical Era, the Mediaeval Times the Early Modern Times, the period of the Classical Gold Standard (1816 – 1914) and the Interwar Period (1918 until 1939). Now follows the Bretton Woods System which lasted from 1944 until 1977.
6. Bretton Woods System (1944 – 1971)
Introduction of the Bretton Woods System: This monetary order established the rules for global commercial and financial relations, being named after the conference of Bretton Woods, which took place in 1944 in a New Hampshire hotel of the same name. Bretton Woods promoted the US dollar to the reserve currency with a fixed exchange rate of US$ 35 for one ounce of gold. The currencies of participating countries were tied to the US dollar.
Aim: As foreign currencies were pegged to the dollar, the gold rate could be set for a long time in advance. The Bretton Woods System also bound the United States to redeem the participating countries’ foreign dollar reserves for gold. The aim of Bretton Woods was a barrier-free word trade based on fixed exchange rates. Two new institutions were to oversee the system. These were the International Monetary Fund and the International Bank for Reconstruction.
Triffin Dilemma: In 1959, the Belgic-American economist Robert Triffin pointed out a flaw in the Bretton Woods System. Foreign governments held more dollar reserves as the US central bank had gold reserves. Thus, to maintain the liquidity for international trade, more US dollars had to be printed. This however would result in a deficit of the United States’ balance of payments. Therefore, Triffin suggested creating an artificial currency. This was eventually considered with the special drawing rights.
London Gold Pool: In 1960 US foreign liabilities exceeded their national gold reserves. This proved a danger to Bretton Woods. To sustain the system, the USA and seven European nations agreed to use employ market interventions to keep the gold rate at a certain rate.
Crisis: In 1967 the French president Charles de Gaulle declared that the Vietnam War made it impossible for France to continue with the payments for the London Gold Pool. In the same year, the British government decided to devalue the British Pound. This resulted in a rush demand for gold.
Collapse: In 1969 several participants of Bretton Woods tried to redeem their dollar reserves for gold. However, the United States was not able to fulfill their contractual obligations. (Foreign US dollar reserves were at that time so large that the United States could not even have redeem the dollar reserves of merely one participating country). In 1971 Nixon cancelled unilaterally the direct convertibility of the dollar to gold (Nixon shock). This led to a collapse of Bretton Woods and the fixed gold price of US$ 35 per ounce ceased to exist.
The third part of the history of gold explored the rejuvenated gold standard and the rise of the US dollar to a global reserve currency. The collapse of Bretton Woods was already certain from the beginning on due to its flawed design. However, Bretton Woods encouraged world trade and bound countries closer together. From this perspective, this agreement was a success.
- History of Gold – Part 1: Ancient History, Mediaeval Times and Early Modern Times
- History of Gold – Part 2: Classical Gold Standard and Interwar Period
- History of Gold – Part 3: Bretton Woods System
- History of Gold – Part 4: Bull and Bear Markets