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How the U.S. Became Banker to the Post-War World (Part 3)

March 28 (Bloomberg) -- Both the international monetary system and American fiscal policy began to change in the 1960s. The system developed at the United Nations Monetary and Financial Conference, held in Bretton Woods, New Hampshire, in July 1944, fixed exchange rates to a dollar backed by gold. It worked successfully for years. But it couldn’t last forever.

By 1960, foreign dollar holdings exceeded U.S. gold reserves. The country was like a 19th-century bank that had issued more notes than it had gold coins in the vault. In that year’s presidential election, both Vice President Richard M. Nixon and Senator John F. Kennedy took pains to emphasize the importance of maintaining gold reserves, which were seen as a crucial element of national strength. As President Kennedy later said: “Britain has nuclear weapons, but the pound is weak, so everyone pushes it around. Why are people so nice to Spain today? Not because Spain has nuclear weapons but because of all those lovely gold reserves.”