Delegates at the Bretton Woods conference agreed on a postwar monetary order centered on fixed (but adjustable) exchange rates. The U.S. dollar served as the main anchor currency, and countries committed to maintain declared “par values” with official support and limited day-to-day movement.
The IMF’s founding treaty entered into force, providing the legal framework for the Bretton Woods par value system. This framework was meant to support exchange-rate stability while allowing changes when countries faced serious balance-of-payments problems.
IMF members agreed to create Special Drawing Rights (SDRs) to supplement global reserves, because reliance on gold and U.S. dollars was becoming strained. SDRs were designed as an official reserve asset used among central banks and the IMF, not as cash used by the public.
The IMF began the first round of SDR allocations, distributing new reserve assets to member countries over 1970–1972. These allocations reflected growing concern that the system’s reserve base was not keeping pace with world trade and capital flows.
Facing heavy inflows and pressure to buy unwanted U.S. dollars to defend its exchange rate, West Germany allowed the Deutsche Mark to float temporarily. The move signaled that key countries were struggling to maintain fixed exchange rates under mounting market pressure.
President Richard Nixon announced measures that included suspending the dollar’s convertibility into gold for foreign official holders—often described as closing the “gold window.” The same announcement included a 90-day wage and price freeze and a 10% import surcharge, aiming to address inflation, trade pressures, and a currency crisis.
Major industrial countries reached the Smithsonian Agreement to restore an organized system after the Nixon Shock. It devalued the U.S. dollar (raising the official gold price) and widened permitted exchange-rate bands, but it did not remove underlying tensions such as inflation differences and large capital flows.
Several European Economic Community members agreed to limit exchange-rate swings among their currencies more tightly than the global rules allowed. This “snake in the tunnel” approach aimed to preserve European monetary stability even as the dollar-centered system became less reliable.
After renewed market pressure and rising uncertainty, the United States carried out a second dollar devaluation by raising the official dollar price of gold again. Instead of restoring stability, the move was followed by intensified speculation and further strain on fixed-rate commitments.
With exchange markets repeatedly disrupted and official support proving costly, major currencies moved to “generalized floating,” meaning rates were largely set by market supply and demand rather than fixed par values. This shift effectively ended Bretton Woods-style fixed exchange rates for the main trading currencies.
As floating exchange rates spread, the IMF adopted guidelines for how countries should manage floats and interventions. The goal was to reduce harmful instability while accepting that currencies would no longer be kept at fixed parities in the earlier Bretton Woods style.
IMF members meeting in Jamaica agreed on a reform package that accepted the practical reality of floating exchange rates and reduced the formal role of gold in the system. These decisions set the direction for rewriting key IMF rules to fit the post-1973 world.
The IMF’s Second Amendment to the Articles of Agreement took effect, updating the legal framework to reflect the post–Bretton Woods order. It recognized members’ ability to choose different exchange-rate arrangements (including floating) and supported a system based more on surveillance and cooperation than fixed par values.
Nixon Shock and the Breakdown of Bretton Woods (1971-1973)