The Bretton Woods agreement was supposed to be the architecture of forever. Established in 1944, it promised a global economy defined by predictable exchange rates and anchored by gold. Yet, its implosion in the early 1970s was a revelation: without a tangible anchor, even the most sophisticated paper currency systems are defenseless against political expediency.
The Architecture
The U.S. dollar was pegged to gold at $35 per ounce. Other currencies were pegged to the dollar. This made the dollar the world's reserve currency, theoretically convertible to gold by foreign central banks.
The Flaw
It relied on a single assumption: that the U.S. would maintain fiscal discipline. By the 1960s, Vietnam War costs and domestic spending blew out the balance of payments. The U.S. printed more dollars than it had gold to back.
The Collapse: A Timeline
- 1961London Gold Pool Formed: Central banks tried to artificially suppress gold prices at $35/oz.
- 1968The Pool Breaks: Market forces overwhelmed the central banks. The pool dissolved, forcing a two-tiered market.
- 1971The Nixon Shock: President Nixon suspended the dollar's convertibility to gold. This severed the final tether to reality, birthing the pure fiat era.
The Legacy: The Great Debasement
Removing the gold constraint eliminated external discipline on money creation. In the half-century since 1971, the dollar has lost over 87% of its purchasing power.
The collapse of Bretton Woods serves as a stark warning: monetary systems managed by politicians are inherently fragile. When the pressure becomes too great, the rules change overnight.
Own Assets Outside the System
Gold remains the ultimate hedge against the systemic risks of the fiat era.