The Collapse of the Bretton Woods Fixed Exchange Rate System - Chapter 9 - Economic history analysis

Oct 22, 2026

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The collapse of the Bretton Woods fixed exchange rate system is examined as an event widely anticipated, especially through early warnings about liquidity provision and capital controls. It traces the system’s golden period from 1959 to 1968, explains how growing foreign dollar claims and declining U.S. gold holdings undermined confidence, and describes attempts to patch the system via mechanisms such as the Gold Pool, the General Arrangements to Borrow, currency swaps, and SDRs. The chapter focuses on how these interventions interacted with gold markets and policy credibility, leading to breakdown in 1968 and subsequent pressures.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages35

Reading Time1 h 28 min

AccessFree to download

The Collapse of the Bretton Woods Fixed Exchange Rate System

Predicted breakdown and early warnings

The golden age vs. mounting pressures

Patch efforts: Gold Pool, GAB, swaps, and SDRs

Gold market dynamics and the 1968 run

This PDF is a selection from an out-of-print volume from the National Bureauof Economic Research Volume Title:A Retrospective on the Bretton Woods System:Lessons forInternational Monetary Reform Volume Author/Editor:Michael D.Bordo and Barry Eichengreen,editors Volume Publisher:University of Chicago Press Volume ISBN:0-226-06587-1 Volume URL:http://www.nber.org/books/bord93-1 Conference Date:October 3-6,1991 Publication Date:January 1993 Chapter Title:The Collapse of the Bretton Woods Fixed Exchange Rate System Chapter Author:Peter M.Garber Chapter URL:http://www.nber.org/chapters/c6876 Chapter pages in book:(p.461-494) 9 # The Collapse of the BrettonWoods Fixed ExchangeRate System Peter M.Garber The collapse of the Bretton Woods system of fixed exchange rates was one ofthe most accurately and generally predicted of major economic events.Hind-sight,of course,sharpens the perception of the inevitability of events andmakes great prophets of those members of the spectrum of analysts who hap-pened to get their predictions right.But the general outlines at least of the keyevents from 1967 through 1971 were foreseen,starting from the work of Trif-fin(1960),whose warnings provided the compass to policymakers imple-menting serious changes in the provision of liquidity and the administrationof capital controls in a vain attempt to preserve the system. The heyday of Bretton Woods,during which the system actually operatedas envisioned under full convertibility,lasted only from 1959 through 1968.Associated with steady growth in world production and trade,these nine yearsand the preceding decade of movement toward currency convertibility areconsidered something of a golden age in contrast to the six-year debacle of theinterwar gold standard.Yet,from the moment of full convertibility on currentaccount transactions in 1959,the steady growth of official and private liquiddollar claims in the hands of foreigners and the reduction in official gold hold-ings,and especially U.S.gold holdings,convinced policymakers that,barringsome alteration,the system was on a trajectory headed toward collapse.2 Peter M.Garber is professor of economics at Brown University and a research associate of theNational Bureau of Economic Research. The author is grateful to Willem Buiter,Dale Henderson,the editors of this volume,and otherconference participants for very helpful suggestions and to Robert Reville for research assistance. 1.For example,Triffin(1960)warned of the potential for the collapse of the system,and Rueffstated,"What I am sure of is that,if we remain in the same regime,we shall some day arrive atthe end of the means of external payments by the United States.This will mean that,whether theywant or not,whatever the agreement in the IMF and the GATT,they will have to establish anembargo on gold,establish quotas on import,impose restrictions such as the one they are nowstudying on foreign travel,and cut the links between nations”(Rueff and Hirsch 1965,14) 2.Why the cumulation of foreign liquid dollar claims was a problem is not clear.Of course,ifU.S.gold holdings far exceeded foreign liquid dollar claims,either in private or in official hands, Starting from 1960,efforts to patch perceived deficiencies in the operationof the system assumed the form of perfecting interventions in the private goldmarket through the organization of the Gold Pool and the establishment ofvarious formal liquidity-increasing techniques—the General Arrangements toBorrow(GAB),currency swaps among central banks,and special drawingrights(SDRs).Essentially,these were new forms of lines of credit jerry-builtatop the preexisting credit lines like intergovernmental and private bank loansand drawings under the IMF's original credit provisions.Analogous to inter-bank credit lines in a domestic banking system,such changes would havetended to reduce official demand for foreign reserves.If,as claimed by theUnited States,U.S.balance-of-payments deficit

FAQs

Why was the collapse of the Bretton Woods fixed exchange rate system considered predictable?

The chapter links predictability to widely discussed warnings that pointed to structural weaknesses in liquidity provision and the sustainability of the fixed exchange regime.

What conditions during 1959–1968 made the Bretton Woods system’s operation vulnerable?

It emphasizes the accumulation of foreign liquid dollar claims alongside reductions in official and especially U.S. gold holdings, persuading policymakers that the system was on a trajectory toward collapse.

How did policy efforts like the Gold Pool and liquidity tools affect the crisis?

Interventions targeted private gold market deficiencies and expanded credit-like mechanisms, but the chapter describes them as potentially reducing reserve demand in ways that could either alleviate deficits or accelerate crisis dynamics depending on the source of payments imbalances.

Oct 22, 2026

Uploaded by jay