By Jomo Kwame Sundaram
KUALA LUMPUR, Malaysia, Sep 28 2026 (IPS)
The 1944 Bretton Woods (BW) conference accepted the US demand to use the dollar to settle international financial transactions. This arrangement would require a US balance-of-payments deficit to issue enough dollars.
Jomo Kwame Sundaram
But every dollar abroad was, in principle, a claim on US monetary gold. With dollar liabilities exceeding US gold reserves by the 1960s, the arrangement became more vulnerable.
Bretton Woods
At BW in July 1944, 44 allied nations met to design the post-war world monetary system. John Maynard Keynes represented the UK, no longer financially dominant due to its heavy public debt fighting two world wars.
Harry Dexter White represented the US, which then held two-thirds of the world’s monetary gold, while other countries needed dollar loans for trade and reconstruction. The US promised foreign governments and central banks to convert dollars to gold.
With the US BW promise to redeem an ounce of gold for $35, the dollar became the world’s reserve asset. Every other currency’s exchange rate was fixed against the dollar, in principle, adjustable with IMF approval.
Instead, Keynes proposed a reserve currency, Bancor, managed by an international clearing union to avoid any national currency becoming dominant; a payments system using a national currency could eventually force others to accept its national policies and priorities.
Unsustainable by design
The BW agreement also created the International Monetary Fund and the World Bank. Each member nation was assigned a quota, partly paid in gold and its own currency.
A member nation’s quota determined both its voting weight and how much it could borrow if it needed to borrow when its own currency came under pressure.
The dollar-gold peg was vulnerable by design. For the arrangement to function, the world needed a growing supply of dollars for reserves and international transactions.
In principle, the US had to have enough gold to honour all claims against it. This requirement was met in 1944, when its gold reserves were vast, while other economies were ruined. However, these conditions were not met for long.
As currency devaluations were stigmatised, currency pegs were rarely adjusted. Governments defended unrealistic exchange rates, unjustified by their reserves.
Instead of adjusting gradually, fixed exchange rates would adjust abruptly, typically after crises, as with sterling in 1967 and the dollar in 1971.
Keynes had insisted on allowing governments to manage cross-border capital movements, expecting free-flowing speculative capital to undermine fixed exchange rates.
For a decade and a half, most European governments used the IMF’s sixth Article of Agreement to restrict how freely money could leave their countries and thus defend their currency pegs.
As strong post-war recoveries turned Europe’s dollar shortages into surpluses, capital controls were gradually loosened from the 1960s.
London Gold Pool
The US Congress ignored Triffin’s warning. Instead, in late 1961, the US organised seven European central banks into the London Gold Pool, coordinated by the Bank of England rather than by treaty.
It worked for a while. Whenever private demand pushed the gold price over $35/ounce, participating banks sold their bullion to bring the price down, to buy gold!
From 1962, currency swap lines involving the same central banks withdrew dollars from circulation abroad to reduce demand for gold. Both efforts used a formula based on each country’s original contributions.
Rising US government spending made things worse. The Johnson administration financed both the Vietnam War and Great Society programmes without raising taxes. More dollars flowed out of the US, expanding the supply of Eurodollars.
In March 1967, without any parliamentary mandate or transparent treaty, West Germany’s Bundesbank President privately promised the Fed it would not convert its large dollar reserves from its fast-growing trade surplus into gold.
But France’s president had never accepted Washington’s abuse of the post-war arrangement. In February 1965, De Gaulle complained of the dollar’s exorbitant privilege.
This referred to the US ability to settle its liabilities abroad by issuing more dollars, instead of earning foreign exchange like others. In June 1967, France refused to continue subsidising the dollar peg by withdrawing from the Gold Pool.
Britain devalued the pound in November 1967. As speculative pressure on gold rose, other Pool central banks had to sell even more gold until they gave up on 17 March.
Two tiers
In the subsequent two-tier system, the $35 gold price was only used for transactions between central banks and governments. Another floating free-market price traded well above it.
US gold reserves, almost $20 billion shortly after WW2, were halved by 1971 as foreign governments’ and central banks’ dollar claims rose over $50 billion!
When member governments safely created official liquidity by introducing a new reserve asset, the Special Drawing Right (SDR), in 1969, the problem was highlighted again.
SDRs were allocated directly to member countries rather than tied to either gold or the US trade or current account deficit. The SDR was supposed to supplement, not replace, gold and the dollar as reserve assets.
By mid-1971, when President Nixon unilaterally ended the dollar’s gold convertibility obligation, the debate was no longer about whether the gold window could hold, but over how to close it without triggering a currency-market panic after years of speculation.
IPS UN Bureau
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Aggregated summary from an independent source. Read the original at IPSnews.