How it worked: Currencies were directly convertible to gold at fixed rates. If you had $20.67, you could exchange it for one ounce of gold, anywhere in the world. This created a self-regulating system.
World War I (1914-1918): Countries suspended gold convertibility to finance war spending. After the war, attempts to return to gold failed. The system couldn't handle the economic disruptions, debt levels, and political pressures of the interwar period. The Great Depression (1929-1939) delivered the final blow as countries abandoned gold to fight deflation.
The gold standard was rigid. During recessions, it prevented countries from expanding money supply to stimulate growth. During booms, it prevented cooling overheated economies. It forced painful deflations instead of allowing currency adjustments. This rigidity made the Great Depression worse—countries that left gold earlier recovered faster.
The Setup: In July 1944, representatives from 44 countries met in Bretton Woods, New Hampshire, to design a new international monetary system. The goal: prevent the chaos of the 1930s while avoiding the rigidity of the gold standard.
The system worked because the US had 75% of the world's monetary gold and ran large trade surpluses. The world needed dollars for reconstruction and trade. The US was willing and able to supply them. This created stable exchange rates and facilitated rapid post-war growth—the "Golden Age" of capitalism (1950s-1960s).
In 1960, economist Robert Triffin identified a fatal flaw: For the world economy to grow, countries needed more dollars for reserves and trade. But if the US supplied those dollars (by running deficits), it would eventually have more dollar liabilities than gold to back them. Confidence would collapse.
By the late 1960s, this was happening. The US was running deficits to finance the Vietnam War and domestic programs. Foreign central banks held more dollars than the US had gold. France, led by Charles de Gaulle, started demanding gold for dollars. A run on US gold was beginning.
President Nixon unilaterally suspended dollar-gold convertibility. This was supposed to be temporary. It became permanent. Bretton Woods was dead.
Immediate effects: Currencies floated against each other. Exchange rate volatility spiked. A new system had to be negotiated.
What replaced Bretton Woods: Nothing formal. Instead, an ad-hoc system emerged where currencies floated against each other, determined by supply and demand. But the dollar remained the global reserve currency—not because it was backed by gold, but because of US economic power, deep financial markets, and network effects.
French Finance Minister Valéry Giscard d'Estaing coined this term in the 1960s. Because the world demands dollars, the US can run persistent trade deficits, borrow cheaply, and impose financial sanctions. The US prints the money everyone else needs. This is enormously powerful—but also creates global imbalances.
Freed from gold constraints, governments expanded money supply aggressively. Combined with oil shocks (1973, 1979), this created "stagflation"—high inflation and high unemployment simultaneously, something Keynesian economics said was impossible.
Fed Chairman Paul Volcker raised interest rates to 20% to crush inflation. This caused a brutal recession but restored central bank credibility. It also established the modern approach: central banks control inflation through interest rates, independent from political pressure.
The ideology: After the Cold War, a set of policy prescriptions became dominant, named the "Washington Consensus" because they were endorsed by the IMF, World Bank, and US Treasury—all based in Washington.
Countries that borrowed from the IMF had to implement "structural adjustment programs"—austerity, privatization, deregulation. This created:
Pattern: Capital account liberalization + fixed exchange rates + sudden stops = crisis. The IMF's austerity conditions often made crises worse.
In developed countries, this era saw low inflation, steady growth, and reduced volatility. Central bankers declared they had solved the business cycle. This hubris blinded them to building risks in the financial system.
What happened: The US housing bubble burst, but the crisis spread globally because of financial interconnection. Banks worldwide held toxic mortgage-backed securities. Lehman Brothers collapsed. Credit froze. The global financial system nearly failed.
The crisis revealed that the Washington Consensus had failed. Deregulated finance created systemic risk. Central banks became more powerful than ever—"whatever it takes" became the motto. The crisis also accelerated China's rise, as Western economies stagnated while China maintained growth.
When pandemic hit, central banks and governments responded with unprecedented coordination:
Combination of massive stimulus, supply chain disruptions, and Russia-Ukraine war caused inflation to spike to 9% (US) and higher elsewhere. Central banks raised rates aggressively—fastest tightening in decades. This broke several banks (Silicon Valley Bank, Credit Suisse) and triggered stress.
Central banks face impossible choices: Fight inflation (raise rates) but risk recession and financial instability. Support economy (low rates) but risk inflation and asset bubbles. There are no good options—only trade-offs.
Current challenges to dollar dominance:
Despite challenges, no viable alternative exists. The yuan isn't freely convertible. The euro lacks unified fiscal backing. No other financial market has the depth, liquidity, and rule of law of US markets. Network effects are powerful—everyone uses dollars because everyone else uses dollars.
But: The system is becoming more fragmented. A truly multipolar financial system may be emerging, but slowly.
Bretton Woods Conference - Dollar-gold standard established, IMF and World Bank created
Nixon Shock - Dollar-gold convertibility ended, floating exchange rates begin
Volcker Shock - Interest rates to 20% to crush inflation, central bank independence established
Washington Consensus - Neoliberal policy package becomes dominant development model
Asian Financial Crisis - Reveals dangers of capital account liberalization
Global Financial Crisis - System nearly collapses, massive bailouts and QE begin
Basel III - Stricter banking regulations adopted globally
COVID-19 Response - Unprecedented monetary and fiscal coordination
Inflation Surge - Fastest rate hikes in decades, financial stress returns
Multipolar Era? - BRICS expansion, digital currencies, gradual fragmentation
The gold standard broke. Bretton Woods broke. The Washington Consensus broke. The current system is showing cracks. Financial systems are not natural or inevitable—they're designed by people and contain inherent contradictions that eventually cause crises.
Major reforms happen only after disasters. The Great Depression led to Bretton Woods. The Nixon Shock led to floating rates. The 2008 crisis led to Basel III. Incremental change is impossible—systems limp along until catastrophe forces redesign.
Bretton Woods reflected US post-war dominance. The Washington Consensus reflected US ideological victory after the Cold War. China's rise is creating alternative institutions (AIIB, NDB, BRICS). Financial systems reflect geopolitical power—as power shifts, so do systems.
You can have at most two of three: fixed exchange rates, free capital flows, independent monetary policy. This "impossible trinity" has driven every crisis. Bretton Woods chose fixed rates and capital controls. Today we have floating rates and free capital (mostly) but frequent crises.
The US can run deficits others can't. It can impose sanctions others can't. But this creates global imbalances and resentment. Countries are slowly building alternatives. Whether they succeed depends on geopolitics, not just economics.
The current system is unsustainable but resilient. Likely future scenarios:
What's certain: The system will continue evolving, driven by crises, power shifts, and technological change. Understanding the history helps us recognize the patterns and prepare for what's coming.