Bretton Woods and the end of convertibility

The gold standard

Under the classical gold standard, in force in the main economies between the late 19th century and 1914, each national currency was convertible into gold at a fixed parity. This did not mean that every banknote was covered by gold in storage: reserve rules varied from country to country, and in general gold covered only part of the notes in circulation [15].

Bretton Woods (1944)

With the Second World War still under way, 44 countries met at Bretton Woods, New Hampshire (USA), to redesign the international monetary system [12]. The agreement established:

• the US dollar as the center of the system;
• the dollar convertible into gold at US$35 per troy ounce (about 31.1 g) — a conversion carried out by foreign governments and central banks, not by ordinary citizens [12][13];
• other currencies pegged to the dollar at fixed but adjustable rates;
• the creation of the IMF and the World Bank [12].

The Nixon shock (August 15, 1971)

The system had a structural tension: over time, there came to be more dollars in foreign hands than gold in the United States, and the country became vulnerable to a run on gold [13]. Charles de Gaulle's France was the most outspoken critic: on February 4, 1965, De Gaulle called for a return to the gold standard and proposed that countries settle their external deficits in gold only [38]; later, France left the London Gold Pool, which broke up in March 1968 [13]. The often-repeated image of a French warship sent to New York in 1971 has no reliable confirmation; De Gaulle, moreover, had left office in 1969.

On the evening of Sunday, August 15, 1971, President Richard Nixon announced the closing of the "gold window": foreign governments could no longer exchange dollars for gold [13].

Consequences

• An attempt to maintain fixed exchange rates (the Smithsonian Agreement, December 1971) did not hold, and the Bretton Woods regime ended between 1971 and 1973 [13][14]
• The main currencies moved to floating exchange rates
• The dollar remained at the center of the system, now without convertibility into gold
• The era of fiat money was consolidated

Since then, the value of the main currencies has depended not on a quantity of metal, but on trust in those who issue them and in the economy behind them.