The collapse of Bretton Woods System

Let see a video first.:

In August 1971,  President Nixon announced that US government suspend the responsibility for other government using dollar to exchange for gold. This is called Nixon Shock. Actually, it was a great challenge to the Bretton Woods System, because dollar is not relate to the gold any more, it also means that dollar's dominate status lost. Besides, a series of negotiation among the  group  of ten countries took place, seeking to redesign the exchange rate in December 1971 at the Smithsonian institution in Washington D.C, which is call Smithsonian Agreement,agree adjust the fixed exchange rate. After this agreement, many countries decided to let their currency float. Until then, the Bretton Woods System, as the two incidents indicate, had completely collapsed.

So, what cause the collapse of Bretton Woods System? there are many reasons that can be found. Firstly, the weakness of mechanism, dollar as a unique global currency was used for international payment and international reserve in Bretton Woods System. Thus, on one part, it require the US kept favorable of balanced trade and sufficient gold reserve to ensure the value of dollar maintain. On the other part, other countries also need sufficient reserve, so they wanted US keep unfavorable of balanced trade. Thus, there was a contradiction on both sides. Moreover, the gold reserve of US government has reduced sharply during that period. From 1944 to 1971, there were seven times dollar crisis, most of they were caused by the war cost, such as Vietnam War. The government printed paper bill in great amount, but the gold reserve has decreased sharply. As we can see from the graph；

The gold reserve decrease almost 100 billion in 20 years. As a result, the USA could not meet their commitment . Finally, the inflation rate increased dramatically due to the low gold reserve.

As we can see the above graph, the inflation rate keep at a low level before 1965. at that period,which is so-called dollar shortage period. However, increasing sharply until 1971, which is what we called dollar glut period. The main reason why inflation rate change in such a dramatic way was because the government unlimited print dollar to pay for the war cost and dollar crisis. in 1971, the inflation rate even reached 11%, and that was the main reason why Nixon shock happened.