Where a Golden Era Began

For 20 days during July 1944, the West's financial leaders worked on a plan for a postwar world economic order at the rambling Mount Washington Hotel in Bretton Woods, N.H. The international money system they developed in that spectacular White Mountain setting was so successful that ten years after its collapse, some economists and politicians still long for a return to Bretton Woods.

The dominant figure at the 1944 conference was John Maynard Keynes, then 61, the leader of the British delegation. Treasury Secretary Henry Morgenthau led the U.S. contingent, but the real American architect of the Bretton Woods accord was Harry Dexter White, Morgenthau's plain-spoken chief adviser.

Working in the cool mountain air, Keynes and White agreed to create a system of fixed exchange rates. The established currency values could be adjusted, but in practice that rarely happened. The value of the dollar was set in terms of gold at $35 per oz. Moreover, the U.S. promised to redeem all dollars held by foreign governments with gold at the $35-per-oz. price. The value of all other currencies was set in terms of the dollar, and countries were obliged to maintain the value of their currencies. If the French franc suddenly dropped below its assigned price in dollars, for example, the French government had to push the price back up by buying francs on the foreign exchange market.

The Bretton Woods arrangement worked smoothly for some 20 years, but by the late 1960s it was coming apart. The problem was that large American balance of payments deficits, caused by factors that ranged from rising U.S. imports to hefty outlays for foreign aid and the Viet Nam War, were creating a huge dollar glut abroad. By the end of 1970, foreign countries held some $36.4 billion in dollars, far more than could be redeemed out of U.S. gold reserves, which had slipped to just $11 billion.

President Nixon dealt a death blow to Bretton Woods in August 1971 by cutting the link between the dollar and gold and allowing world money markets to set temporarily the dollar's value. Four months later, the U.S. and its major trading partners agreed to an 8.57% dollar devaluation, an action Nixon called "the most significant monetary achievement in the history of the world." But in February 1973 the U.S. devalued again by 10%, and its allies responded by letting their currencies float freely against the dollar. The Bretton Woods era of fixed exchange rates was over. This file is automatically generated by a robot program, so viewer discretion is required.