20 THE BiG DROP
July 22, 1944, marked the official conclusion of the Bretton
Woods Conference in New Hampshire. There, 730 delegates
from 44 nations met at the Mount Washington Hotel in the
final days of the Second World War to devise a new interna-
tional monetary system.
The delegates there were acutely aware that the failures
of the international monetary system after the First World War
had contributed to the outbreak of the Second World War.
They were determined to create a more stable system that
would avoid beggar-thy-neighbor currency wars, trade wars
and other dysfunctions that could lead to shooting wars.
It was at Bretton Woods that the dollar was officially des-
ignated the world’s leading reserve currency — a position that
it still holds today. Under the Bretton Woods system, all major
currencies were pegged to the dollar at a fixed exchange rate.
The dollar itself was pegged to gold at the rate of $35.00 per
ounce. Indirectly, the other currencies had a fixed gold value
because of their peg to the dollar.
Other currencies could devalue against the dollar, and
therefore against gold, if they received permission from the
International Monetary Fund (IMF). However, the dollar could
not devalue, at least in theory. It was the keystone of the entire
system — intended to be permanently anchored to gold.
From 1950–1970 the Bretton Woods system worked fairly
well. Trading partners of the U.S. who earned dollars could
cash those dollars in to the U.S. Treasury and be paid in gold
at the fixed rate.
In 1950, the U.S. had about 20,000 tons of gold. By 1970,
that amount had been reduced to about 9,000 tons. The
11,000-ton decline went to U.S. trading partners, primarily
Germany, France and Italy, who earned dollars and cashed
them in for gold.
The U.K. pound sterling had previously held the dominant
reserve currency role starting in 1816, following the end of the