I Don’t Want Your Dollars: Reverse Speculative Attacks and the Collapse of BrettonWoods (1971-1973)

Abstract

We interpret the collapse of the BrettonWoods system as a sequence of speculative attacks on dollar parities between 1971 and 1973, driven by the fundamental incompatibility of asymmetric monetary policies and capital mobility with fixed exchange rates. A permanent increase in US domestic credit growth in the 1960s, combined with increasingly integrated international capital markets, rendered the dollar parities unsustainable in the sense of the classic monetary trilemma. In a two-country model of balance of payments crises in which the US rate of domestic credit growth exceeds that of its partner, we show that when the US does not defend its parities through foreign exchange intervention, the burden of sustaining the peg falls entirely on foreign central banks’ willingness to absorb dollar inflows as reserves. The existence of an upper bound on their dollar holdings is sufficient to trigger an endogenous collapse through a “reverse” speculative attack, in which reserves accumulate at partner countries’ central banks rather than run down at the center. The model accounts for the timing of crises, the dynamics of reserve accumulation and capital flows, stable trade balances, and the evolution of inflation under the peg. We support this interpretation with new evidence from central bank balance sheets and policy deliberations drawn from archival sources.