Skip to main content
Lifecycle

Bretton Woods and Its End

Pomegra Learn

Bretton Woods and Its End

In July 1944, with World War II still raging in the Pacific, delegates from 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, to design the post-war international monetary order. What they built—a system of fixed exchange rates anchored to a gold-convertible dollar—governed global finance for nearly three decades. Its collapse in August 1971, when President Nixon suspended the dollar's convertibility to gold, was one of the most consequential economic decisions of the twentieth century.

The design and its logic​

The architects of Bretton Woods—principally John Maynard Keynes for Britain and Harry Dexter White for the United States—had lived through the monetary chaos of the 1930s: competitive devaluations, exchange controls, trade wars. They designed a system intended to provide stability without the rigidity of the pre-war gold standard. The dollar would be pegged to gold at $35 per ounce; all other currencies would be pegged to the dollar with narrow bands of permissible fluctuation. The International Monetary Fund would provide short-term balance-of-payments support to countries facing pressure on their pegs.

The Triffin dilemma and the seeds of collapse​

The system contained a structural flaw identified in 1960 by economist Robert Triffin. The world needed growing supplies of dollars for trade and reserves, but the United States could only supply those dollars by running persistent current account deficits. Yet those same deficits would eventually undermine confidence in the dollar's gold convertibility. As U.S. deficits widened—driven by Great Society spending, Vietnam War costs, and rising domestic consumption—other countries accumulated dollar reserves while the U.S. gold supply shrank.

The Nixon shock​

By 1971, U.S. gold reserves had fallen from $23 billion in 1957 to roughly $10 billion, while dollar liabilities to foreign governments had grown to $61 billion. The arithmetic was unsustainable. On August 15, 1971, Nixon announced in a Sunday evening television address that the United States would immediately suspend dollar-gold convertibility, impose a 10 percent import surcharge, and implement wage and price controls. The announcement, made without consultation with U.S. trading partners, was a unilateral rewriting of the post-war monetary agreement.

Stagflation and its origins​

The end of Bretton Woods unleashed the inflation of the 1970s. With the dollar no longer anchored to gold, the Federal Reserve lacked a hard constraint on money creation. Oil shocks in 1973 and 1979 added cost-push pressure. The result was stagflation—simultaneous high inflation and high unemployment—a combination that the prevailing Keynesian economics had declared impossible. The chapter traces the full arc from Bretton Woods' design to its collapse and the difficult decade that followed.

Articles in this chapter​