Bretton Woods & The Rise and Fall of the Gold Standard

Gold is the stabiliser of value and has historically played a central role in global finance. It is a hedge against inflation and currency devaluation. Yet since the 20th century, the global monetary system has moved away from metal-backed currencies. The question of whether major currencies might one day return to a gold standard is raised when we see this current level of uncertainty in the world.

The Gold Standard Act

The United States formally adopted the gold standard in 1900 with the passage of the Gold Standard Act, signed into law by President McKinley on 14th March 1900. Leading up to the Act, the US had operated under a de facto gold standard since 1879, when it resumed gold convertibility after the Civil War when it had been suspended. The ’Free Silver’ movement which advocated for unlimited silver coinage to inflate the money supply, created significant political conflict during the 1896 presidential election, and with the election of McKinley who supported gold-backed currency, it paved the way for formal legislation.

The Act declared that: ‘The dollar consisting of twenty-five and eight-tenths grains of gold nine-tenths fine... shall be the standard unit of value.’ This defined the dollar in terms of a specific quantity of gold and committed the US Treasury to redeem legal tender notes in gold on demand - requiring the establishment of a gold reserve of at least US$150 million to support currency convertibility. The Act marked the end of using both gold and silver and aligned the US with other major economies already on the gold standard. This system remained until it was abandoned in 1933 due to the financial stresses of the Great Depression, and its full collapse internationally with the introduction of the Bretton Woods system in 1971.

The Bretton Woods System

The Bretton Woods system was an innovative monetary framework that emerged from the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire. Its purpose was to rebuild and stabilize the global economy after the impact of World War II and the Great Depression. Delegates from 44 Allied nations, including economists John Maynard Keynes from the UK and Harry Dexter White from the US, convened to design a system that would prevent competitive devaluations, encourage global trade, and provide financial stability.

The result was a new international order with the US dollar at its centre and made the US dollar the world’s reserve currency. Under this system, countries agreed to peg their currencies to the US dollar, which in turn was pegged to gold at a fixed rate of US$35 per ounce. While countries no longer exchanged gold directly, foreign central banks were allowed to convert their dollar reserves into gold from the US Treasury. This effectively made the dollar ‘as good as gold’ - thus coining the term - and the US dollar became the world’s primary reserve currency. The system also created two critical institutions: the International Monetary Fund and the World Bank, which were designed to monitor exchange rates, provide short-term financial assistance, and support global reconstruction and development.

The strength of the Bretton Woods system rested on US post-war economic dominance. At the time, the United States held about two-thirds of the world’s gold reserves and had a powerful industrial economy largely untouched by the destruction of the war – so making the US dollar a natural anchor for the new system. However, maintaining the dollar’s fixed convertibility to gold became increasingly difficult as Europe and Japan recovered and global trade expanded.

By the late 1960s and early 1970s, massive fiscal deficits and inflation - largely due to military spending and social programs – as well as growing international claims on US gold reserves made the system unsustainable.  Faith in the dollar’s stability was in question and ultimately in 1971, President Nixon suspended gold convertibility for foreign governments, effectively ending Bretton Woods in what became known as the ‘Nixon Shock.’ By 1973, gold was no longer tied to the dollar and the world had fully transitioned to fiat currencies. This uncoupling from the gold standard became the genesis of the modern financial system, where monetary supply is controlled by central banks, with nothing being backed by commodities.

Could the Gold Standard Make a Comeback?

Calls for a return to the gold standard surface in times of high inflation and concerns about global fiat currency debasement. Advocates argue that re-pegging the dollar to gold could curb inflation, enforce fiscal discipline, and restore long-term confidence in monetary policy. Today’s global economy is so much larger than in the 20th century and tying trillions of dollars to a limited gold supply would require either a massive revaluation of gold to a potential US$10,000+ per ounce - or a dramatic contraction in money supply, both of which would trigger massive financial disorder.

For investors in bullion, the prospect of a gold standard return is more about positioning than probability. Even if a full gold standard remains unlikely in the near term, ongoing interest in gold-backed digital currencies and central bank gold accumulation suggest that gold is silently regaining strategic monetary significance. Investors holding physical gold or bullion-backed assets will find themselves well positioned in an environment where trust in fiat currencies is at an all-time low, even without a formal return to gold-pegged money. As central banks and markets confront massive debt, inflation, and currency volatility – the role of gold as a store of value remains as relevant as ever.