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Why did the Bretton Woods system end in 1971?
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International Monetary Fund
A view of the International Monetary Fund headquarters, Washington, D.C.
The Bretton Woods system, which established the International Monetary Fund (IMF) and a system of fixed exchange rates, ended in 1971 primarily due to the United States' inability to maintain the fixed price of gold at $35 per ounce.12
Under this system, the U.S. dollar served as the world's primary reserve currency, and the U.S. pledged to convert dollars into gold for foreign central banks. However, by the late 1960s, several factors undermined this arrangement:13
- Fiscal Deficits: Increased U.S. spending on the Vietnam War and domestic social programs led to a large fiscal deficit and significant inflation.34
- Dollar Glut: The resulting flood of dollars into foreign markets forced other central banks to accumulate large dollar holdings to maintain their own currency pegs.4
- Gold Drain: As the stock of dollars held abroad rose and U.S. gold reserves dwindled, confidence in the dollar's convertibility collapsed.13
On August 15, 1971, President Richard M. Nixon suspended the U.S. commitment to convert dollars into gold, effectively ending the postwar system of pegged exchange rates.42