Which of the following events contributed most to the disruption in the Bretton Woods system?

Correct option is C

The suspension of the convertibility of the US dollar into gold in 1971 by President Richard Nixon—often referred to as the “Nixon Shock”—was the most critical event leading to the collapse of the Bretton Woods system. Under this system, currencies were pegged to the US dollar, which in turn was convertible to gold at $35 per ounce. However, due to growing fiscal deficits, rising inflation in the US, and increasing demands from foreign governments (especially France and Germany) to exchange dollars for gold, the US gold reserves were depleting rapidly.

To protect the US economy and halt the drain on gold reserves, Nixon unilaterally suspended dollar convertibility into gold in August 1971. This decision shattered the core mechanism of the Bretton Woods fixed exchange rate system, as it relied on trust in the dollar's gold backing. With this suspension, the system lost its anchor and moved toward floating exchange rates, leading to the ultimate dissolution of Bretton Woods by 1973.

Information Booster:

• The Bretton Woods Agreement (1944) aimed to ensure monetary stability via fixed exchange rates.

• The US dollar became the central reserve currency, pegged to gold.

• As the US printed more dollars in the 1960s to finance Vietnam War and social programs, confidence in the dollar weakened.

• Several countries began demanding gold in exchange for their dollar reserves, draining US gold stock.

• Nixon’s action on August 15, 1971, was meant to be temporary but became permanent.

• This marked the beginning of the end for the fixed exchange rate system.

• The system officially ended with the Smithsonian Agreement (1971) and was replaced by the Jamaica Agreement (1976), formalizing floating rates.

Additional Knowledge:

(a) Introduction of Special Drawing Rights (SDRs):
SDRs were introduced by the IMF in 1969 to supplement member countries’ official reserves. However, their limited quantity and usage at the time meant that they did not cause major disruption to the system. Instead, they were an attempt to stabilize it.

(b) Western dominance over the system:
While the Bretton Woods system did reflect the economic dominance of the West, especially the US, this structural feature alone did not directly disrupt the system. It was an underlying characteristic rather than a disruptive event.

(d) Oil price shock of 1973:
The oil crisis occurred after the suspension of gold convertibility. While it affected global inflation and exchange rates, the Bretton Woods system had already broken down by then. Hence, it was a consequence rather than a cause of the system’s collapse.