It is August 15, 1971. Richard Nixon provokes a worldwide shock by announcing the temporary end of the convertibility of the American dollar into gold. The temporary has finally become permanent. Nixon thus put an end to the Bretton Woods system that the Americans loved.

This world monetary system had been imposed in 1944 at Bretton Woods by another U.S. president, Franklin D. Roosevelt.

To understand the fatal spiral that put an end to the only international monetary order ever decided by men, we must go back at least to the First World War.

The “gold exchange standard” did not survive the financial crisis of the late 1930s

This first conflict of the industrial era cost the main belligerents a lot of money, leading to the breaking of the fixed link between gold and currency, the famous gold standard that had been in place since the 19th century. Even more problematic was the British domination, at the heart of this system, which was then erased.

In an attempt to save the situation, the Genoa Conference of 1922 resulted in a “gold exchange standard” that could not hold for long. In this system, each country could decide to make its currency convertible into gold, or into a currency that was itself convertible into gold, namely the pound sterling and the US dollar.

The problem is that after the financial crisis of 1929, the United Kingdom and the United States were the first countries to devalue their currencies.

A new monetary order was defined putting the US dollar at the center of the game

A global monetary disorder ensued. For many, it is considered to be one of the causes of the Second World War. As early as 1941, Washington and London were thinking about what to do next. The British John Maynard Keynes wanted to create an international currency, the bancor.

The Americans held three-quarters of the world's gold reserves. They intended to put the dollar at the heart of the system that would be established after the Second World War.

The Bretton Woods conference took place from July 1 to 22, 1944 to define the broad outlines of this new international monetary system. As expected, the Americans won. The American dollar was pegged to gold. An ounce of the yellow metal was worth $35.

The other currencies were linked to the dollar by a fixed but adjustable link.

The Bretton Woods system had one flaw...

This new monetary order had a flaw, however. All countries were required to adjust their accounts in case of imbalance... except America. Robert Triffin, a Belgian economist who emigrated to the United States, explained the problem in 1960: for the world to have enough dollars, the United States had to manufacture them en masse.

Unfortunately, this unlimited issuance of American dollars ended up undermining confidence in the American currency.

This happened throughout the decade of the 1960s. President Lyndon Johnson's generous welfare program and, above all, the Vietnam War increased America's public deficits. In 1969, the current account surplus disappeared. On the open gold market, prices exceeded $40.

There was growing concern in Europe.

... that some European countries ended up exploiting in the mid-60s

In 1964, the French Minister of Finance denounced this problem with a phrase that would become famous. He spoke of the “exorbitant privilege of the dollar”. At the beginning of 1965, General de Gaulle advocated the return of gold. The French president brought into play a Bretton Woods principle that was not to become a practice: he exchanged the dollars held by France for gold held by the United States.

Germany, which already had large surpluses at the time, in turn, requested the conversion of its dollar holdings into gold. The American gold reserves melted like snow in the sun. They were now only a quarter of the world total.

For all economic observers, it became clear that the fixed link between gold and the U.S. dollar was fiction. On August 15, 1971, Richard Nixon made an admission that was more than a historical break.

The Bretton Woods system had stabilized the world banking system:

Number of countries having a banking crisis in each year since 1800 - Source: Wikipedia

The number of banking crises in the world is the lowest it has been in centuries.

Final Thoughts

The world is now remembering that the end of the Bretton Woods system was America's fault. And more specifically, the fault of the president at the time, Richard Nixon. Nevertheless, this fault was inevitable. This fault did not harm the American dollar, which remains at the heart of world finance half a century later.

All this has favored the unprecedented development of world finance and speculation. States have had to face up to the fact that they are largely powerless in the face of currency fluctuations. The end of the gold standard marked the beginning of the era of currency crises and speculation.

For the majority of the world's inhabitants, it was also the beginning of trouble with a decorrelation between productivity and compensation for work done. The gap has never stopped growing since 1971. Some would say that the system that was established de facto in 1971 and then legalized by Jamaica Accords in January 1976, is a failed experiment that we must try to get out of as soon as possible.

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