The Bretton Woods System
When leading economists met in the small New Hampshire town of Bretton Woods in July of 1944 to devise and sign an international treaty that would determine how a regulated system of fixed exchange rates based on a gold exchange standard could work in a global economy, the world was still in the midst of the most deadly and destructive armed conflict in the history of mankind.
In fact many economists of that era believed that the protectionism and the devaluation excesses of the 1920s and 1930s were in no small part responsible for the recession and subsequent politics that led to World War II.
In 1940 the United States had over 2/3 of the global gold reserves, totaling over 20.000 tons, at their disposal. Most of the gold was in the form of bullion.
The Bretton Woods conference laid the foundation for a monetary reform that aside from the fixed exchange rates included, amongst other things, making the Dollar the anchor currency and therefore the global lead currency. Dollars could be officially exchanged for gold and the United States had a lot of gold.
After two decades economic growth and prosperity as well as fiscally responsible behavior the United States chose to intervene in the Vietnam conflict, which at the time the USA became involved was basically a post-colonial civil war in which the French government was engaged.
Soon after the United States got involved, the situation in Vietnam ballooned to an outright war and the U.S. debt ballooned with it. The Dollar suffered a dramatic depreciation. A growing number of countries were worried about their gold reserves and exchanged their Dollars for the more stable gold.
Charles De Gaulle requested his trade partners to finance and finalize all business transactions in Dollars. He then would transfer money to the United States and trade it in for gold. This resulted in an enormous capital drain out of the U.S. to France.
The depletion of the reserves in the U.S. vaults induced President Nixon to take a drastic and unexpected measure. In August of 1971 he ended the direct convertibility of the Dollar to gold and therefore unilaterally canceled the Bretton Woods agreement, an action also known as the “Nixon Shock”.
The wording of the announcement said that the measure was temporary, but none of Nixon’s successors up until today have reversed this decision. One can only guess what the reasons for their reluctance have been. But it is safe to assume that subsequent administrations might have been somewhat happy with the decision and would have felt too constrained in their fiscal policies, had they rolled back Nixon’s decree.
This decision also had immediate consequences for the citizens. For the first time in the history of the United States of America Dollars couldn't be exchanged for gold.
But why did Nixon take this step? Did he want to protect America’s gold reserves? Was it a power move to keep the United States in control of the commodity? Was he alarmed by De Gaulle’s actions and his cancellation of the convertibility a show of panic? Did he want to free himself of fiscal restraints, in order to fund the Vietnam War beyond military and economic logic?
It probably was a bit of all of the above. What it definitely showed however was the power of gold and its ability to influence politics as well as economic and military strategy.
To this day gold determines power and wealth, and it certainly will continue to capture people’s imagination.