Bretton Woods' Fatal Flaw: Unsustainable Dollar-Gold Standard

The Bretton Woods agreement in 1944 marked the beginning of the end for the dollar-gold standard. The US, which held two-thirds of the world's monetary gold at the time, agreed to convert dollars to gold, making the dollar a reserve asset and the global standard. However, this arrangement was unsustainable by design.

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.

The US Congress ignored Triffin's warning that the system was vulnerable. In late 1961, the US organised seven European central banks into the London Gold Pool to maintain the gold price at $35 per ounce. However, this effort failed, and the two-tier system emerged in its place.