Bretton Woods and the 1971 Regime Shift
The Bretton Woods System (1944-1971)
Post-WWII monetary settlement: a-00152
- USD pegged to gold at $35/oz
- Other currencies pegged to USD
- US = banker to the world
- IMF/World Bank as multilateral institutions
This was MP0 (hard money linked) at the global level. It maintained discipline for 25 years — the US had to keep fiscal accounts compatible with the gold peg.
“The dollar became the world’s leading reserve currency when the United States became the world’s strongest economic and military power at the end of World War II.” — a-00135 (context)
The Breakdown Sequence
- US ran large deficits (Great Society + Vietnam War) in 1960s
- Dollar supply grew faster than gold backing
- Foreign CBs held more dollars than the US had gold to redeem
- “Run on the bank” dynamic: foreign CBs could demand gold, US would default
- August 1971: Nixon suspended gold convertibility → end of Bretton Woods
The 1971 Transition: MP0 → MP1
“The August 1971 breakdown of the monetary system changed the value of money and how the system worked — i.e., the gold-linked system was replaced by a fiat monetary system in which central banks stimulated and restrained debt/credit/money growth by changing interest rates.” — a-00108
What changed:
- Before: money supply constrained by gold reserves
- After: money supply controlled only by CB interest rate policy
- Implication: no hard constraint on money creation — only the inflation/currency consequence as the check
Immediate Consequences (1971-1980)
“After the 1971 delinking of the dollar and other currencies from gold, the world moved to an unanchored fiat (Type 3) monetary system and the dollar fell in value against gold, other currencies, stocks, and eventually just about everything.” — a-00153
USD fell against virtually all assets 1971-1980:
- vs gold: -85%
- vs other currencies: -20-30%
- vs stocks: -30% real
- vs commodities: -50%+ real
This is the template for what happens when a reserve currency removes its hard money anchor. The inflation of the 1970s was not primarily about oil shocks — it was about the loss of monetary discipline from removing gold.
The 2008 Parallel: MP1 → MP2
“In 2008 the debt crisis led to interest rates being lowered until they hit 0%, which led the three main reserve currency countries’ central banks to move from an interest-rate-driven monetary policy (MP1) to a printing-of-money-and-buying-financial-assets-driven monetary policy (MP2).” — a-00154
1971 analog for 2008: Just as removing gold forced a new policy regime in 1971, hitting the zero lower bound forced a new policy regime in 2008. MP2 is to MP1 what MP1 was to MP0: a further loosening of constraints on money creation.
Each regime shift has been inflationary in the medium term.