This article first appeared in Forum, The Edge Malaysia Weekly on October 19, 2026 - October 25, 2026

The protracted demise of dollar-gold convertibility and associated fixed exchange rates did not end dollar hegemony. With crucial and timely help from political allies, confidence in the dollar system has persisted, albeit much diminished.

On Aug 15, 1971, then US president Richard Nixon announced that America would no longer convert dollars into gold, as promised under the 1944 Bretton Woods (BW) agreement.

The BW payments arrangements and the US promise of dollar convertibility into gold were not sustainable. As economist Robert Triffin noted in 1960, the system was “failing by design” from the outset, a claim the US authorities denied and refused to address.

Vietnam War spending, rising inflation and a run on US gold reserves forced this decision after allied Western central banks quietly gave up defending the gold-dollar peg in 1968.

Decades later, then US under secretary for monetary affairs Paul Volcker revealed that he had initiated a Treasury working group in 1969.

As the US balance of payments was already proving unsustainable, suspending gold-dollar convertibility was no longer considered an option to be avoided at all costs.

Portraying the gold peg’s failure as due to arithmetic, not politics, Volcker argued that suspending it involved implementing contingency planning that the group had long considered.

Two days before the announcement, Nixon summoned 15 advisers to a secret retreat at Camp David to draft it. He also imposed a 90-day wage price “freeze” and a 10% tariff on imports.

As such, Nixon presented the suspension of dollar convertibility to gold as part of a larger economic policy reform package, rather than the long-overdue default on earlier US pledges. With his 1972 re-election campaign approaching, the president and then Treasury secretary John Connally claimed to be “freeing” US economic policy by ending dollar-gold convertibility and associated fixed exchange rate obligations.

Clearly, Nixon’s mid-August 1971 announcement was not an improvised response to an emergency or even the sudden break he implied, although the Volcker group preferred a more “controlled demolition”.

When allied finance ministers were negotiating a replacement arrangement in Rome in November 1971, Connally bluntly told them that the dollar was the US’ currency but their problem, belatedly confessing to BW’s true nature.

Nevertheless, their December 1971 Smithsonian Agreement still sought to patch things up rather than explicitly abandon the 1944 arrangement and the later efforts to defend it.

The dollar was devalued against gold for the first time since 1934, with its price rising from US$35 to US$38 an ounce. Trading bands around other currencies were widened to give central banks more flexibility.

Nixon pronounced the 1971 Smithsonian Agreement the most significant monetary arrangement in world history before the dollar was devalued again 14 months later, in February 1973.

National authorities politically aligned with the US had defended it, but eventually stopped paying to maintain the charade. Thus, 1½ years after August 1971, BW was finally buried.

Within weeks, the major currencies abandoned fixed exchange rates altogether, allowing them to float against one another. Although the transition to floating rates was not smooth, it has survived, with modifications, ever since.

But the “settlement gap” time lag under floating exchange rates is so problematic that international banking regulators have long sought to reform the way cross-border currency trades are cleared.

Although BW is now long gone, the dollar system has proved durable. The end of gold convertibility was not fatal to the dollar’s role at the centre of world finance.

Instead, the end of the BW dollar-gold convertibility obligation removed one constraint on it. After the final break with gold in 1973, the dollar was only backed by US government promises.

Gold’s formal demonetisation was confirmed with the 1976 Jamaica Accords when International Monetary Fund (IMF) member governments quietly amended its charter to strip the precious metal of any official role.

Freed from its earlier BW obligation to redeem dollars with gold, the US has financed its trade, current account and fiscal deficits, as well as foreign and domestic government spending, with ever more dollar debt.

The world has increasingly financed the growth of US debt as the dollar remains the main currency in which most international trade, especially in commodities, is priced and settled.

The IMF policed fixed exchange rates and gold-dollar convertibility for over two decades after the war. It has since changed roles to overseeing floating exchange rates, selectively serving as a “lender of last resort” and managing sovereign debt crises.

International oil transactions were mainly settled in “petrodollars”, due to an arrangement with Saudi Arabia and other Gulf producers to use oil sales revenue to buy US Treasury securities.

The status quo is now based on others’ willingness to hold dollars. But growing concerns about the US’ willingness to honour its commitments have caused governments to consider alternatives. Nevertheless, dollar hegemony has weathered such recent storms so far.

Jomo Kwame Sundaram is senior adviser at Khazanah Research Institute. A former economics professor, he was United Nations assistant secretary-general for economic development. He is a recipient of the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought.

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