Bretton Woods System
The Bretton Woods System was the international monetary framework established in 1944 in which member countries pegged their currencies to the US dollar, which was in turn convertible to gold at $35 per ounce, creating a fixed exchange rate system that governed global finance until 1971.
In July 1944, with World War II drawing toward its conclusion, delegates from 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire to design a new international monetary system. The overriding goal was to avoid the competitive devaluations, trade protectionism, and financial instability that had characterized the interwar period and contributed to the Great Depression. The negotiations were dominated by two towering figures: John Maynard Keynes, representing Britain, and Harry Dexter White, representing the United States.
The system that emerged established the US dollar as the world's reserve currency, pegged to gold at $35 per ounce. All other participating currencies were pegged to the dollar at fixed exchange rates, with a narrow band of permissible fluctuation. Countries experiencing fundamental imbalances in their balance of payments could adjust their pegs, but only with the approval of a newly created institution — the International Monetary Fund (IMF). The World Bank, also created at Bretton Woods, was designed to finance postwar reconstruction.
For the roughly two decades following World War II, the Bretton Woods system provided remarkable monetary stability and underpinned the economic expansion of the postwar era. The reconstruction of Western Europe and Japan under Marshall Plan assistance, combined with stable exchange rates and growing international trade, produced unprecedented prosperity.
By the late 1960s, strains had become apparent. The US was running persistent balance of payments deficits, partly due to spending on the Vietnam War and domestic Great Society programs. The volume of dollars held by foreign central banks grew far beyond the US gold stock that was supposed to back them. Foreign governments, particularly France, began demanding gold in exchange for their dollar holdings, accelerating the drain on US gold reserves.
President Nixon ended the dollar's convertibility to gold in August 1971 — the Nixon Shock — effectively ending the Bretton Woods system. By 1973, major currencies had moved to floating exchange rates. The transition marked a fundamental shift in the nature of money itself, with the world moving to a system of fiat currencies whose values float against one another, determined by market forces rather than a fixed metallic standard.