By Benn Steil
“The dollar and gold are synonymous,” Harry Dexter White, the architect of the Bretton Woods international monetary system, told Congress in 1945. “There is no likelihood that . . . the United States will, at any time, be faced with the difficulty of buying and selling gold at a fixed price freely.”
Under the Bretton Woods system, currencies were tied to the U.S. dollar at a fixed rate, and the dollar was in turn tied to gold GCZ6, +0.45% at $35 an ounce. Today there is much nostalgia about Bretton Woods — a belief that the quarter-century from 1946 to Aug. 15, 1971 (when the system collapsed) was a golden era of monetary stability. But the reality was very different.
Although the International Monetary Fund was inaugurated in 1946, the first nine European countries to meet the requirements of its Article VIII — that their currencies be freely convertible into dollars at a fixed rate — didn’t do so until 1961. And by then, the system was already coming under enormous strain, as the U.S. — contrary to White’s assurances — was losing gold reserves.
The fundamental problem was that the United States couldn't simultaneously keep the world adequately supplied with dollars and sustain the large gold reserves required by its gold-convertibility commitment. The logic was laid bare by economist Robert Triffin in his now-famous 1960 congressional testimony. There were, he explained, “absurdities associated with the use of national currencies as international reserves.” It constituted a “‘built-in destabilizer’ in the world monetary system.” The European dollar-convertibility pledges, far from representing the final critical step into a new monetary era, “merely return[ed] the world to the unorganized and nationalistic gold exchange standard of the late 1920s.”