Bretton Woods

The Bretton Woods system was the most significant international monetary order of the 20th century. It arose in July 1944, when representatives of 44 allied nations met at the Mount Washington Hotel in Bretton Woods, New Hampshire (USA) to create a stable basis for world trade after the Second World War. The result was a system of fixed exchange rates whose pivot was the gold price.

Core principles of the system

The agreement rested on three pillars:

1. Gold peg of the US dollar: The dollar was defined at a fixed rate of 35 USD 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.
2. Fixed exchange rates: All member currencies were anchored in a fixed but adjustable ratio to the dollar. Fluctuation band: ±1% around the set parity.
3. 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)

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. Precisely 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 in order 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 the US gold reserves. The costs of the Vietnam War and social programmes drove up American national debt. France under President de Gaulle began to actively convert dollars into gold, which further strained the 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 the state-fixed price. The historical gold price rise of the following years – from 35 USD (1971) to over 800 USD per ounce (1980) – shows impressively how strongly the artificial fixed rate had suppressed the market price. Gold thereafter established itself as a free commodity and investment market, whose price is traded in real time on exchanges such as COMEX and reacts to exchange rates and geopolitical tensions.

Many economists and investors refer to Bretton Woods when they discuss a possible return to gold-backed currencies or gold as a safe haven. The gold standard, which preceded Bretton Woods, and the current fiat currency system form the historical anchor points of the debate.

In brief

Bretton Woods (1944–1973) was the last major gold-based world monetary system: the dollar served as the leading currency with a fixed gold rate of 35 USD/ounce, until Nixon abolished convertibility in 1971 – since then gold has been a free market, and its price directly reflects inflation, money supply growth and geopolitical risks.