The Cabinet Papers banner

Practice and demise

Bretton Woods in practice

As the US held much of the world's gold reserves and the dollar was the only convertible currency, it soon became 'banker to the world'. Large amounts of dollars were lent through a liberal loans policy in different parts of the world. The following period of dollar shortage was largely due to the fact that European economies (still suffering from results of war damage) were not well placed to meet post-war economic demands and required substantial imports. When the pound became convertible to dollars in July 1947 at the insistence of the US, there was an immediate drain on the dollar reserves, causing a monetary crisis. As a result the convertibility of sterling against the dollar was suspended in August 1947. The American funded European Recovery Programme and Marshall Plan eased dollar shortages across much of Europe in the late 1940s.

In September 1949, in spite of Marshall Aid, balance of payments deficits forced Britain to devalue. In 1950 Britain's failure to seek approval ended in a number of European countries following suit. In 1958 European currencies returned to mutual convertibility, which made dollar reserves less desirable. In the context of the dollar 'glut', dollars were exchanged for gold, which began to flow from the US to Europe. The system required that the US ran a large balance of payments deficit, requiring the depletion of US reserves and undermining confidence in the dollar. 

Demise of Bretton Woods

The demise of Bretton Woods was also due to an increasingly globalised system of trade and finance, the decline of the US vis-à-vis other countries (in the Bretton Woods system) and the US becoming increasingly enamoured with a regime based on free movement of capital.

During 1960s the US made determined efforts to defend gold reserves and maintain the system. By the end of the decade powerful destabilising forces were at work and the 'pegged' value of certain currencies diverged from market value. This encouraged currency speculation and a 'run' on the pound in 1967. Although sterling had been constantly under pressure for the last two decades, this finally forced the Wilson government to devalue. President Lyndon B. Johnson now had the choice of using protectionist measures or risk being forced to devalue the dollar in the event of a 'run' on gold. This occurred in 1968, making it difficult to maintain the dollar against gold at the established rate.

By 1971 the dollar was greatly overvalued against American gold reserves. In July 1971 President Richard Nixon suspended convertibility, enabling the dollar to float against other currencies. Subsequent attempts to peg currencies, about which there was a multitude of Cabinet discussions throughout the 1970s, were defeated by speculation. The Smithsonian Agreement of 1973 allowed currencies of industrial countries to be freed to float independently.