The Dollar–Gold System and Its Strains

The Bretton Woods system worked best in the 1950s and 1960s, an era of rapid growth in Western Europe and Japan. Exchange rates were fixed but adjustable, and capital controls limited speculative flows. Yet the design contained a contradiction identified by economist Robert Triffin in 1960. The world needed more dollars to finance growing trade, and it obtained them through US deficits; but the more dollars piled up abroad, the less credible the promise to convert them into gold at $35 an ounce became.

As Europe and Japan recovered, American gold reserves fell and foreign dollar holdings rose. Spending on the Vietnam War and domestic programs added to deficits and inflation. Measures such as the London Gold Pool, which tried to hold the market price of gold at $35, and the IMF's creation of Special Drawing Rights in 1969 bought time but did not resolve the underlying tension.