Bretton Woods
Also: Bretton Woods system, Bretton Woods agreement, Gold exchange standard
Bretton Woods is the international monetary system established in 1944 that pegged the US dollar to gold, named after the New Hampshire town where it was agreed.
The Bretton Woods system was the most consequential international monetary order of the 20th century. It emerged in July 1944, when delegates from 44 allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire to build a stable footing for world trade after the Second World War. The outcome was a regime of fixed exchange rates whose pivot was the gold price.
The system's core principles
The agreement rested on three pillars:
- Gold anchoring of the US dollar: the dollar was defined at a fixed rate of USD 35 per troy ounce of gold (about 31.1 grams). The United States guaranteed that other central banks could exchange dollars for gold at that rate at any time.
- Fixed exchange rates: every member currency was anchored to the dollar at a fixed but adjustable ratio, with a fluctuation band of plus or minus 1 % around the agreed parity.
- New international institutions: the International Monetary Fund (IMF) supervised exchange rates and extended stabilisation credit; the World Bank (IBRD) financed reconstruction.
Some key parities under Bretton Woods
| Currency | Parity to USD | Gold content per unit | Set |
|---|---|---|---|
| Pound sterling | 4.03 USD/GBP | 3.58134 g | 1944 |
| German mark (DM) | 4.20 DM/USD | 0.211588 g | 1949 |
| French franc | 350 FF/USD | 0.00255 g | 1949 |
| Japanese yen | 360 JPY/USD | 0.00247 g | 1949 |
Rise and fall
The system did much to stabilise post-war trade. Europe and Japan rebuilt their economies, exported to the United States and piled up dollar reserves. Yet that very success carried the seed of failure: the so-called Triffin dilemma (named after economist Robert Triffin) described the contradiction that the US had to export dollars to supply the world economy with liquidity - which over time eroded confidence in the gold backing.
By the 1960s the volume of dollars held abroad far exceeded US gold reserves. The cost of the Vietnam War and domestic programmes drove up American public debt. Under President de Gaulle, France began actively converting dollars into gold, straining US reserves further.
On 15 August 1971, US President Richard Nixon unilaterally suspended the dollar's convertibility into gold - a move remembered as the "Nixon shock". In 1973 fixed exchange rates were abandoned for good; since then freely floating exchange rates have governed the international monetary system.
Effect on the gold market
With the end of Bretton Woods, gold was freed from a state-fixed price. The subsequent historical rise in the gold price - from USD 35 in 1971 to more than USD 800 an ounce by 1980 - shows vividly how far the artificial peg had held the market price down. Gold established itself thereafter as a free commodity and investment market, priced in real time on exchanges such as COMEX and responding to exchange rates and geopolitical tension.
Many economists and investors point back to Bretton Woods when debating a possible return to gold-backed currencies or gold's role as a safe haven. The gold standard that preceded Bretton Woods and the present fiat system mark the two historical poles of that discussion.
In a nutshell
Bretton Woods (1944-1973) was the last great gold-based world monetary system: the dollar served as the reserve currency with a fixed gold rate of USD 35 an ounce, until Nixon ended convertibility in 1971. Since then gold has been a free market, its price mirroring inflation, money-supply growth and geopolitical risk directly.