Bretton Woods
Also: Bretton Woods system, Bretton Woods Agreement, gold-exchange standard
Bretton Woods refers to the international monetary system established in 1944 that pegged the US dollar to gold and is named after the conference venue in New Hampshire.
The Bretton Woods system was the most significant international monetary order of the 20th century. It emerged in July 1944, when representatives of 44 allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire (USA) to create a stable foundation for world trade after the Second World War. The result was a system of fixed exchange rates whose pivotal point was the gold price.
Core Principles of the System
The agreement rested on three pillars:
- Gold peg of the US dollar: the dollar was defined at a fixed rate of USD 35 per troy ounce of gold (approx. 31.1 grams). The USA guaranteed that other central banks could exchange dollars for gold at this rate at any time.
- Fixed exchange rates: all member currencies were anchored in a fixed but adjustable ratio to the dollar. Fluctuation band: ±1 % around the set parity.
- New international institutions: the International Monetary Fund (IMF) monitored exchange rates and granted stability loans; the World Bank (IBRD) financed reconstruction.
Important Parities in the Bretton Woods System (Selection)
| Currency | Parity to the USD | Gold content per unit | Set |
|---|---|---|---|
| British pound | 4.03 USD/GBP | 3.58134 g | 1944 |
| Deutsche 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 considerably stabilised world trade in the post-war period. Europe and Japan rebuilt their economies, exported to the USA and accumulated dollar reserves. Yet therein lay the seed of failure: the so-called Triffin dilemma (named after the economist Robert Triffin) described the contradiction that the USA had to export dollars to supply the world economy with liquidity – which in the long run undermined confidence in the gold backing.
In the 1960s, the amount of dollars held abroad far exceeded US gold reserves. The costs of the Vietnam War and social programmes drove up American public debt. France under President de Gaulle began actively exchanging dollars for gold, further straining US reserves.
On 15 August 1971, US President Richard Nixon unilaterally declared the suspension of the dollar's gold convertibility – a step that went down in history as the "Nixon shock". In 1973, fixed exchange rates were finally abandoned; since then, freely floating exchange rates have dominated the international monetary system.
Effects on the Gold Market
With the end of Bretton Woods, gold was freed from its state-fixed price. The historical gold price rise of the following years – from USD 35 (1971) to over USD 800 per ounce (1980) – vividly shows how strongly the artificial fixed rate had suppressed the market price. Since then, gold has established itself as a free commodity and investment market, whose price is traded in real time on exchanges such as COMEX and responds to exchange rates and geopolitical tensions.
Many economists and investors point to Bretton Woods when discussing a possible return to gold-backed currencies or gold as a safe haven. The gold standard that preceded Bretton Woods and the current fiat currency system form the historical reference points of the debate.
In Brief
Bretton Woods (1944–1973) was the last great gold-based world monetary system: the dollar served as the lead currency with a fixed gold rate of USD 35/ounce, until Nixon lifted convertibility in 1971 – since then gold has been a free market, and its price directly reflects inflation, money-supply growth and geopolitical risks.