The Rise and Fall of the Bretton Woods System

Unlike the classical gold standard, in which every currency was directly convertible into gold, the Bretton Woods system created what is often called a "gold-exchange standard": only the United States dollar was directly convertible into gold, fixed by the US Treasury at 35 dollars per troy ounce, while every other member currency was pegged to the dollar at a fixed but adjustable parity, expected to be maintained within a band of one percent. Member countries could, in principle, alter their parity in cases of "fundamental disequilibrium" after consultation with the IMF, a provision intended to allow adjustment without repeating the deflationary rigidity of the classical gold standard. In practice, because the dollar functioned as the world’s principal trading and reserve currency, and because the United States held the overwhelming share of the world’s official gold reserves at the war’s end, other central banks held their reserves largely in dollar-denominated assets rather than gold itself, and used dollars, not gold, for most day-to-day intervention in foreign exchange markets, cementing the dollar’s central role in the postwar international monetary order.