Fifty years of floating currencies

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. Already by 1959, the United States’ official foreign liabilities equalled its monetary gold stock, and exceeded it by 1964. Yale economist Robert Triffin realised the tension inherent in the US dollar’s role as the world’s only de facto reserve currency. Growing international demand for the greenback, he predicted, would force the US to run constant balance-of-payments deficits until investors inevitably lost confidence in the currency, causing the system to break down. This insight later came to be known as “Triffin’s dilemma”.