Bretton Woods Agreement
The Bretton Woods Agreement was the 1944 international financial conference that established the post-WWII monetary order. It made the US dollar the world's reserve currency, backed by gold at $35 per ounce, and created the IMF and World Bank. Every other currency was pegged to the dollar, giving America extraordinary financial privileges and responsibilities, until Nixon ended it in 1971.
In July 1944, representatives from 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, to design the post-war financial system. Everyone knew the Nazis and Japan would be defeated; the question was who would lead the peace. John Maynard Keynes represented Britain and proposed a neutral international currency called the 'bancor.' Harry Dexter White represented the US and proposed the dollar. America's overwhelming economic dominance, it held two-thirds of the world's gold in 1944, meant the dollar won.
The result was a tiered system: the dollar was convertible to gold at a fixed price ($35 per ounce), and all other currencies were pegged to the dollar at fixed rates. This gave America the 'exorbitant privilege', French Finance Minister Valéry Giscard d'Estaing's famous phrase, of essentially printing the world's money. But it also imposed discipline: America had to maintain gold reserves to back its currency.
The system generated extraordinary prosperity through the 1950s and 1960s. But Vietnam, the space race, and the Great Society programs combined to push America into deficit spending. By 1971, foreign governments held more dollars than America had gold to redeem. Nixon's decision to 'close the gold window', ending dollar-gold convertibility, effectively ended Bretton Woods. The petrodollar system that replaced it gave America even more privilege with even less discipline, laying the foundation for the debt crisis of today.
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What was the Bretton Woods Agreement? ＋
Bretton Woods was a 1944 conference where 44 Allied nations agreed to make the US dollar the world's reserve currency, backed by gold at $35 per ounce. Every other currency pegged to the dollar. This gave America the 'exorbitant privilege' of effectively printing the world's money and shaped the entire post-WWII financial system.
Why did Bretton Woods end? ＋
Because America spent too much. Vietnam, the space race, and domestic programs pushed the US into deficit spending, and by 1971, other countries held far more dollars than America had gold to back them. In August 1971, Nixon 'closed the gold window', ending dollar-gold convertibility, effectively killing Bretton Woods and replacing it with the petrodollar system.