From Bretton Woods to floating exchange rates: 1944, 1971 and 1973

The foreign exchange market as traders know it, with major currencies moving freely every second, is only about half a century old. For most of the period after the Second World War, exchange rates were fixed by international agreement.

Bretton Woods, 1944

In July 1944, 730 delegates from 44 nations met at the Mount Washington Hotel in Bretton Woods, New Hampshire, to design a post-war monetary system. Its main features:

• Currencies were fixed to the US dollar, adjustable only within a band of 1%.
• The dollar was fixed to gold at $35 an ounce.
• Two institutions were created: the International Monetary Fund, to monitor exchange rates and lend to countries in difficulty, and the International Bank for Reconstruction and Development, now part of the World Bank Group.

The principal architects were John Maynard Keynes, for Britain, and Harry Dexter White of the US Treasury, whose more limited plan largely prevailed.

Strains in the 1960s

The system depended on confidence that dollars could be converted into gold. As dollars held abroad grew and came to exceed US gold reserves, that confidence weakened, and pressure built on the fixed rate.

The Nixon shock, 1971

After a weekend of meetings with advisers at Camp David, President Richard Nixon addressed the nation on the evening of 15 August 1971. His new economic policy had three parts:

• The gold window closed: foreign governments could no longer exchange dollars for gold.
• A 90-day freeze on wages and prices, the first time the US government had imposed wage and price controls outside wartime.
• A 10% surcharge on imports.

Federal Reserve History notes that, in effect, the international monetary system became a fiat one.

Smithsonian Agreement and the move to floating

In December 1971, the Smithsonian Agreement tried to rescue fixed rates with a devalued dollar and wider bands. It didn't last. By March 1973, the major trading nations had allowed their currencies to float freely against each other. That month is still the base period for the ICE US Dollar Index, set at 100 (DXY explained).

What it means today

• Most major currencies float, with prices set by supply and demand, but some remain pegged (the Hong Kong dollar peg).
• Central banks still intervene at times (intervention explained).
• Floating rates created today's market, where turnover averaged $9.6 trillion a day in April 2025 (how big is the forex market).
• Gold, no longer the anchor of the system, trades freely, and its price responds to interest rates, the dollar and demand for safety (what moves gold).