Bretton Woods 1944: The Gold-Dollar Peg That Built the Postwar Order

For three weeks in July 1944, with World War II still raging, 730 delegates from 44 nations met at the Mount Washington Hotel in Bretton Woods, New Hampshire. They drafted a monetary system designed to prevent the disasters of the 1930s: competitive devaluation, capital flight, deflationary spirals. The system worked, more or less, for 27 years.

The architecture

The dollar was pegged to gold at $35 per ounce. All other major currencies were pegged to the dollar within narrow bands. The dollar was therefore the only currency directly convertible into gold, and only by foreign governments and central banks not by private citizens. The IMF was created to backstop temporary balance-of-payments imbalances. The World Bank (formally the IBRD) was created to fund postwar reconstruction.

• Conference dates: 1-22 July 1944
• Fixed dollar-gold ratio: $35/oz
• IMF founding capital: $8.8 billion
• Lead negotiators: Harry Dexter White (US), John Maynard Keynes (UK)
• System operational: 1946-1971 effectively

White vs Keynes

The conference was dominated by two men with opposing visions. Keynes wanted a supranational reserve currency, the "bancor", administered by an international clearing union, to prevent both surplus and deficit countries from imposing adjustment costs on others. White wanted the dollar at the centre, with the US's vast wartime gold reserves anchoring the system.

"I went up like a rocket and came down like the stick." Keynes on his negotiating performance at Bretton Woods

Why it worked, then didn't

For two decades the system delivered an unprecedented combination of growth, stable exchange rates, and capital controls that allowed national policy autonomy. By the late 1960s, US dollar liabilities to foreign central banks far exceeded the US gold stock. The Triffin Dilemma articulated by economist Robert Triffin pointed out that the reserve-currency country must run deficits to supply global liquidity but those deficits eventually undermine confidence in the peg.

The end

On 15 August 1971, President Nixon "closed the gold window", suspending dollar convertibility into gold. The peg never reopened. The Bretton Woods system as designed died that day, although the IMF and World Bank survive.

Takeaway: Bretton Woods is the most successful international monetary architecture ever attempted. It still failed within a generation. Anyone designing the next one should study it carefully.