# Bretton Woods System The international monetary order established in 1944 at Bretton Woods, New Hampshire. 44 allied nations agreed to peg their currencies to the US dollar, which was itself convertible to gold at $35 per ounce. This made the dollar the world's reserve currency — backed by the largest gold reserves on earth. ## Key Features - **Gold-dollar peg**: $35/oz, convertible on demand by foreign governments - **Fixed exchange rates**: other currencies pegged to USD within narrow bands - **IMF and World Bank**: created as institutional pillars to manage balance of payments and development lending - **Capital controls**: cross-border capital flows were restricted to maintain stability ## Why It Worked (Initially) After WWII, the US held roughly two-thirds of the world's monetary gold. Europe and Japan were rebuilding. The dollar was genuinely scarce and genuinely backed. The system provided stability for post-war reconstruction and the expansion of global trade. ## Why It Broke Down By the 1960s, the US was running persistent deficits — funding the Vietnam War, the Great Society programs, and Cold War military commitments. Foreign governments (especially France under de Gaulle) began redeeming dollars for gold, draining US reserves. The fundamental problem: the US couldn't simultaneously be the world's reserve currency issuer AND maintain gold convertibility while running deficits. This tension is known as the **Triffin Dilemma**. By 1971, gold coverage of outstanding dollar liabilities had fallen below 25%. Nixon was forced to act. ## The Collapse On August 15, 1971, Nixon suspended gold convertibility — the [[Nixon Shock 1971]]. The Bretton Woods system was effectively dead. After a brief attempt at a patched system (the Smithsonian Agreement), the world moved to floating exchange rates by 1973. ## Legacy Bretton Woods proved that a rules-based monetary system could deliver decades of stability and growth. Its collapse created a vacuum — which the [[Kissinger-Saudi Petrodollar Agreement 1974]] would fill, replacing gold backing with oil backing as the anchor of dollar demand. ## Links - [[Petrodollar MOC]] - [[Nixon Shock 1971]] - [[Economic Machine]] - [[fractional-reserve banking]] --- Tags: #macro #economics #history #kp