The promise behind the dollar
Under the Bretton Woods system, established after World War II, many currencies were tied to the U.S. dollar, while the United States promised to exchange dollars held by foreign governments and central banks for gold at a fixed price of $35 an ounce. That made the dollar the system’s anchor: countries could hold it as a reserve and rely on its stated link to gold.
The promise applied to official foreign holders, not to every person or business with dollars. And it depended on confidence that the United States had enough gold to honor claims presented for conversion.
Why the arrangement came under strain
As dollars flowed overseas through U.S. spending and international trade, foreign official institutions accumulated claims on American gold. The supply of dollars circulating around the world grew, but the U.S. gold stock did not grow in step. If governments tried to exchange large amounts at once, the fixed gold promise became difficult to sustain.
The system also faced a basic tension: the world needed a growing supply of dollars for trade and reserves, while confidence in those dollars rested on a limited U.S. gold reserve. By 1971, pressure on the arrangement had become acute.
What changed—and what did not
On August 15, 1971, President Richard Nixon suspended the dollar’s convertibility into gold for foreign official holders. The move shut the system’s central redemption window. It did not instantly settle every exchange-rate arrangement: efforts to preserve fixed rates continued, but the Bretton Woods system ultimately gave way to a world in which major currencies could float against one another.
The dollar became fiat money: its value was no longer defined by a promise to exchange it for a fixed quantity of gold. It remained valuable because people, businesses, and governments continued to accept it—and because the United States stood behind its use. The lasting change was that a foreign government could no longer turn its dollar reserves into U.S. gold on demand.
