The Bretton Woods system was ultimately undermined by the decline in US power. In 1944, the US produced half of the world's manufactured goods and held more than half its reserves ($26 billion in gold reserves of an estimated total of $40 billion). Over time, the burden of the Cold War and being at the centre of the global financial system weighed heavily on the US.
In the 1960s, President Lyndon Johnson's administration refused to increase taxes to pay for the increasingly expensive Vietnam War and its Great Society programs. This increased dollar outflows to pay for the expenditures and created inflation. The dollar became overvalued relative to the German Deutsche Mark and the Japanese Yen, forcing the US to either devalue the dollar or impose protectionist measures, President Johnson recognised the problem: "The world supply of gold is insufficient to make the present system workable - particularly as the use of the dollar as a reserve currency is essential to create the required international liquidity to sustain world trade and growth."
By the early 1970s, the ratio of gold available to dollars had deteriorated from 55% to 22%. Holders of dollar lost faith in the ability of the US to back currency with gold. Increasingly deregulated, global money markets placed pressure on US reserves as traders sold dollars seeking profit from devaluation. Traders redeemed dollars for gold.
On August 15, 1971, President Richard Nixon (seen here), not known for major economic initiatives, unilaterally closed the gold window making the dollar inconvertible to gold directly. The 'Nixon Shock', as it came to be known, was announced in an address on national television on a Sunday evening. Nixon was hesitant about interrupting the popular TV program Bonanza. The need to make an announcement before markets opened on Monday, though, forced the President to risk antagonising fans of the cowboy drama.
Frantic efforts to develop a new system of international monetary management followed. The Smithsonian Agreement devalued the dollar to $38/ounce, with 2.25% trading bands. But the sale of dollars continued.
By 1972 gold was trading at $70.30/ounce. Other countries began abandoning the link between their currency and the dollar.
In February 1973, the Bretton Woods currency exchange markets closed. The world moved to the era of floating currencies with no link to dollars or gold. The age of gold was over.