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Fifty Years of Floating Currencies

The half-century since the official demise of the Bretton Woods system of fixed exchange rates has shown the benefits of what replaced it. While some may feel nostalgic for the postwar monetary system, its collapse was inevitable, and what looked like failure has given rise to a remarkably resilient regime.

CAMBRIDGE – Fifty years ago this month, in March 1973, the Bretton Woods arrangement of fixed exchange rates was abandoned, and the world’s major currencies – including the US dollar, pound, yen, and Deutsche Mark – were allowed to float. At the time, the system’s demise was generally considered a policy failure. But the shift from fixed to flexible exchange rates was probably inevitable.

The international monetary system that was designed at Bretton Woods, New Hampshire, in 1944, helped lay the economic foundation for the postwar international order. Over the next three decades, known in France as the “glorious 30” (les trente glorieuses), the system delivered rapid economic growth and unprecedented prosperity. And yet the Bretton Woods regime operated as planned only for roughly one year.

Though it was born in 1944, the Bretton Woods system did not become fully functional until 1958, after Western European countries had grown strong enough to make their currencies convertible into dollars. It was the very next year, 1959, that total dollar liabilities to foreigners reached the value of gold reserves held by US monetary authorities. Yale economist Robert Triffin realized the tension inherent in the US dollar’s role as the world’s only de facto reserve currency. Growing international demand for dollars, he predicted, would force the US to run constant balance-of-payments deficits until investors inevitably lost confidence in the greenback, causing the system to break down. This insight later came to be known as “Triffin’s dilemma.”

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