- Bretton Woods was a semi-fixed exchange rates set up in the post-war period. The Bretton Woods exchange rate system had a system of pegged exchange rates with currencies pegged to the dollar.
- The dollar was fixed to the price of gold ($35 an ounce) – giving the US Dollar a fixed value.
- The currencies in Bretton Woods were only to be revalued in the event of fundamental disequilibrium. The system ended in 1971.
The idea of the Bretton Woods was
- Provide stable exchange rates to encourage investment and economic growth
- Encourage countries to maintain low inflation/competitiveness – in order to maintain value of exchange rate.
- Try to prevent competitive devaluation – where countries seek to gain a short-term advantage by reducing value of the currency.
- Limit the free movement of foreign exchange on the capital account of balance of payments
Policy Trilemma and Bretton Woods
The Policy trilemma states that a government can only choose two monetary objectives out of three possible choices.
- Fixed exchange rates
- Capital mobility
- Independent monetary policy
Under Bretton Woods, the government was effectively choosing to prioritise, semi-fixed exchange rates and independent monetary policy. This meant the necessity of capital controls.
- (Breton Woods) C = Fixed Exchange rate + monetary autonomy
Capital controls under Bretton Woods
- Limits on the amount of foreign currency that could be exchanged. In the 1960s, UK citizens were limited to taking £50 of foreign currency on a foreign holiday.
- Limits on the sale and purchase of financial assets, such as government bonds.
- Taxes on dealings with financial assets.
Collapse of the Bretton Woods System
In the late 1960s, there was a run on the Pound Sterling and later the dollar. It was partly caused by a booming US trade deficit. With the US unwilling to use protectionism as a measure to reduce imports – the link between the dollar and gold was broken in 1968. There was a short period of a floating Bretton woods exchange rate, but it was effectively ended by 1971. Some of the structural changes which undermined the Bretton Woods system included:
- Rise of global trade – US running current account deficits
- Growth of international currency markets with hedging and speculation, causing fluctuations in the exchange rate
- Decline of US economic and monetary hegemony. After the Second World War, the US economy was dominant but it declined in relative importance bythe 1970s.
- Long-term Decline of the Dollar
- Increase in free market ideology and belief that capital controls are either harmful or difficult to implement.
- Oil price shocks of the 1970s saw cost-push inflation and greater economic instability.
- 1973-74 US, Canada and Germany removed capital controls.
The real price of gold fell during Bretton Woods, but soared when it ended.
Why Did Nixon Leave Bretton Woods?
In August 1971, US President Richard Nixon ended the Bretton Woods system by suspending the dollar’s convertibility into gold. The decision was driven by economic pressures that made the system unsustainable.
1. The US was running large deficits
Under Bretton Woods, the dollar was fixed to gold at $35 per ounce, and other currencies were fixed to the dollar.
But by the late 1960s: The US ran large budget deficits due to things such as cost of Vietnam War + expansion of welfare state, e.g. health insurance, welfare payments.
2. US running persistent current account deficits
US imports of goods and services greater than exports This meant too many dollars were circulating globally relative to US gold reserves.
2. Gold reserves were draining
Under Bretton Woods Foreign governments could exchange dollars for gold. As confidence in the dollar fell:
- Countries like France demanded gold for their dollars
- US gold reserves fell sharply
- The US risked running out of gold, making the promise of convertibility impossible to keep.
3. The “Triffin dilemma”
The Bretton Woods system contained a built-in contradiction: The world needed more dollars for trade and reserves. But issuing more dollars undermined confidence in the dollar’s gold backing This is known as the Triffin dilemma — a key reason Bretton Woods could not last.
4. Inflation was rising in the US
By 1970, US inflation was 6%
Loose fiscal policy and monetary expansion led to rising inflation. Keeping gold convertibility would have required tight monetary policy, Nixon chose domestic priorities (growth and jobs) over defending gold
5. Fixed exchange rates became unworkable
By the late 1960s:
- Capital flows had grown rapidly
- Fixed rates were repeatedly attacked by speculators
- Countries faced pressure to revalue or devalue
- Floating exchange rates offered greater policy flexibility.
6. Political and strategic considerations
- The US no longer wanted to act as the world’s gold anchor
- Ending convertibility reduced constraints on US policy
- Nixon also imposed a temporary wage–price freeze to control inflation
Impact of Ending Bretton Woods
- Dollar fell as a share of the global foreign currency reserves.
- Floating exchange rates: Currencies began to move freely, increasing volatility but allowing faster adjustment to shocks.
- More monetary freedom: Central banks gained independence to target inflation and growth.
- Higher inflation (1970s): Removing the gold anchor made inflation harder to control in the short run.
- More capital flows: Global financial markets expanded, raising both investment and crisis risk.
- End of gold standard: Fiat money became the global norm.
US Dollar to Pound Sterling index
The Bretton Woods system saw long-period of exchange rate stability, but fixed exchange rates rarely last due to differences in competitiveness. The UK Pound has seen a long-term decline against the dollar.
The dollar after the end of Bretton Woods. The rapid appreciation in the early 1980s due to high interest rates caused real problems for many developing economies who had borrowed in US dollar.
Bretton Woods Conference 1944
Bretton Woods is a ski resort chosen as a location for a conference in 1944 to decide on the new international monetary arrangements for after the end of the Second World War. It was attended by over 700 delegates from 44 allied countries. The conference led to the creation of
- International Monetary Fund IMF
- International Bank for Reconstruction and Development IBRD – this was later to be known as the World Bank
Related
Published: 17th November 2019. Last updated 22 Dec 2025. Tejvan Pettinger, www.economicshelp.org, Oxford, UK
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