Bretton Woods System

How the system worked

From July 1 to July 22, 1944, with the war still on, 730 delegates from 44 Allied nations met at the Mount Washington Hotel in Bretton Woods, New Hampshire to design the monetary architecture for the peace. The result, hammered out under John Maynard Keynes (UK Treasury) and Harry Dexter White (U.S. Treasury), had three moving parts.

1. The dollar pegged to gold. The U.S. Treasury committed to buy or sell gold at $35 per troy ounce to foreign central banks on demand.
2. Other currencies pegged to the dollar. Each member declared a par value in dollars and intervened in foreign-exchange markets to keep its currency within ±1% of par.
3. Capital controls allowed. Cross-border capital flows could be restricted; only current-account (trade) transactions had to be free. This was deliberate — Keynes called free capital movement "the bane of the inter-war period."

If a country's peg became untenable, it could request a "fundamental disequilibrium" devaluation through the IMF — a pre-announced, negotiated reset rather than a free-market float. Britain devalued sterling from $4.03 to $2.80 in 1949; France devalued repeatedly through the 1950s. The system was rule-bound but not rigid.

What got designed at the conference

Two institutions opened their doors as soon as the treaty was ratified.

• International Monetary Fund (IMF). A pool of currencies that members paid in (a "quota"). A country with a balance-of-payments deficit could draw on the pool to defend its peg, conditional on policy reforms — the origin of "IMF conditionality."
• International Bank for Reconstruction and Development (IBRD). The lending arm for post-war reconstruction, later joined by the IDA, IFC, and other affiliates to form the modern World Bank Group.

A planned third institution — the International Trade Organization — was killed by the U.S. Senate in 1948. Trade liberalization fell instead to the GATT, which morphed into the WTO in 1995.

Keynes vs. White: the bancor that wasn't

Keynes proposed an International Clearing Union that would issue a synthetic reserve unit called the bancor. Countries running surpluses would face penalties symmetric to those imposed on deficit countries — a deliberate move to share adjustment pain so creditor nations couldn't simply hoard. White, representing a U.S. that held two-thirds of the world's monetary gold and wanted the dollar as the anchor, blocked it.

What emerged was White's design: a dollar-centric system in which the U.S. enjoyed the "exorbitant privilege" (Valéry Giscard d'Estaing's 1965 phrase) of issuing the world's reserve currency. The asymmetry would matter when the strain came.

The Triffin dilemma

Belgian economist Robert Triffin pointed out the contradiction in 1960 testimony to the U.S. Congress. The world needed dollars to settle trade and hold reserves; supplying them required the U.S. to run balance-of-payments deficits indefinitely. But every dollar held abroad was a claim on the fixed U.S. gold stock. Sooner or later, foreign dollar claims would exceed U.S. gold and the peg would become unsustainable. Liquidity and credibility were on a collision course.

Triffin's arithmetic looked like this. In 1948 U.S. gold reserves were ~$24 billion and foreign dollar holdings ~$7 billion — comfortable cover. By 1971 reserves had dropped to ~$10 billion (at the official $35) while foreign dollar liabilities had climbed past $60 billion. The cover ratio went from ~3.4× to ~0.17×.

Bretton Woods vs. classical gold standard vs. floating

	Classical gold standard (1870-1914)	Bretton Woods (1944-1971)	Post-1973 floating
Anchor	Gold directly	Gold via the dollar	None (fiat)
Currency convertibility	Citizens could convert notes to gold	Only foreign central banks could	No gold convertibility at all
Capital controls	Minimal	Permitted and widely used	Largely removed
Realignment	Rare; viewed as failure	Negotiated through IMF on "fundamental disequilibrium"	Continuous market float
Adjustment burden	Symmetric (Hume's specie-flow mechanism)	Asymmetric — falls on deficit countries	Distributed via market
Inflation control	Tight (gold supply binds)	Tight while peg holds	Loose — depends on central-bank credibility
Crises	Banking panics; gold drains	Currency crises; speculative attacks on the peg	Sudden stops, capital-flow reversals

The Nixon shock, 15 August 1971

By summer 1971 the run was on. France's Pompidou had ostentatiously sent a battleship to New York to collect French gold from the Federal Reserve. Britain requested $3 billion in gold cover. On Friday August 13, Nixon convened 15 advisors at Camp David — including Treasury Secretary John Connally, Fed chair Arthur Burns, and OMB director George Shultz. After a weekend of debate, on Sunday evening Nixon went on television and announced:

• Gold convertibility suspended — "temporarily" (it never returned).
• A 90-day wage and price freeze to contain the inflation everyone expected to follow.
• A 10% import surcharge to pressure trading partners into revaluing their currencies upward.

The Smithsonian Agreement of December 1971 tried to reset pegs (dollar devalued to $38/oz of gold, then $42) but failed. By March 1973 the major currencies had all floated, formalized in the IMF's Second Amendment of 1978.

Why it still matters

• The IMF and World Bank are still here. They lent $213 billion combined in 2023 and shape conditionality across emerging markets.
• The dollar is still the anchor. ~58% of global reserves and ~88% of forex turnover (2022 BIS triennial) are dollar-denominated, even though the gold link is gone.
• The "exorbitant privilege" persists. The U.S. funds deficits in its own currency at lower yields than peers — Eichengreen estimates this saves ~30-60 bps per year on Treasury issuance.
• Pegged-to-the-dollar arrangements proliferated. Hong Kong (since 1983), Saudi Arabia, the GCC, and most Caribbean dollarized economies operate variants of the Bretton Woods playbook against a fiat dollar.

Bretton Woods II

Dooley, Folkerts-Landau, and Garber (NBER, 2003) argued the world had drifted into a new informal regime: East Asian economies, especially China, ran current-account surpluses, accumulated dollar reserves (China's reserves peaked near $4 trillion in 2014), and pegged or heavily managed against the dollar to protect export competitiveness. The U.S. ran deficits and absorbed Asian savings as Treasury demand. Critics (Roubini, Setser) called it an unstable savings glut; the authors called it a stable equilibrium for at least a decade. Both turned out partly right — the arrangement loosened after 2014 as China rebalanced.

Counterarguments and qualifications

• "Bretton Woods caused the post-war boom." Probably partly. Growth was high (1948-1971 averaged ~4.8% real GDP for advanced economies), but so were the Marshall Plan, technology catch-up, demographic tailwinds, and trade liberalization. Disentangling the contribution of fixed exchange rates is hard.
• "Floating rates are inherently superior." Friedman (1953) argued so. Yet the post-1973 record includes the EMS, the euro, and dozens of peg revivals — countries keep choosing fixity for trade-credibility reasons.
• "The system collapsed because of Vietnam." The Vietnam War's deficits accelerated the run, but Triffin had already diagnosed the structural problem in 1960. The fiscal shock pulled the trigger; the gun was loaded by design.

Common misconceptions

• "Bretton Woods was a gold standard." Only indirectly. Citizens couldn't redeem dollars for gold (FDR had ended that domestically in 1933). Only foreign central banks had convertibility, and only at the official rate.
• "All 44 currencies were equally tied to gold." No — only the dollar was. Other currencies were tied to the dollar, which made the U.S. the system's central bank in everything but name.
• "The Nixon shock was sudden." The fundamentals had been deteriorating for a decade; the speculative attack of summer 1971 made the timing acute.
• "After 1971 we had pure floats." Many countries (China, Saudi Arabia, the eurozone members internally) re-pegged within years. Pure floats are the exception, not the norm.