A postwar agreement
In July 1944, delegates from forty-four countries met at Bretton Woods, New Hampshire. They sought a more stable postwar monetary order and hoped to avoid some interwar failures. They agreed to create the International Monetary Fund and the institution that became the World Bank Group.
Countries set exchange rates against the US dollar and used intervention to keep them within an allowed range; parities could be adjusted in specified circumstances. Dollars held by foreign monetary authorities were convertible into gold at $35 per troy ounce. An ordinary US holder no longer had the same domestic right to gold.
Why the system needed dollars and confidence in gold
Recovering trade required international liquidity, supplied by dollar reserves and US spending. Yet the more dollars the world held, the larger the potential claim of foreign authorities on limited US gold. The system needed both enough dollars and confidence that those dollars would remain convertible.
Full convertibility of major European currencies returned only in 1958. During the 1960s, US deficits, inflation and concern about gold cover grew. Measures to defend the parity delayed the problem but did not remove the tension between domestic US policy and the dollar's international role.
- national currencies had stated parities against the dollar
- the dollar had an official link to gold
- the IMF assisted countries with temporary balance-of-payments problems
- parities were not absolutely unchangeable
1971 and the move to floating rates
In August 1971, President Richard Nixon suspended the exchange of dollars for gold by foreign monetary authorities. This changed a fundamental rule; it did not make the dollar disappear. An attempt to agree new fixed rates failed to last, and by 1973 major currencies had largely moved to floating rates.
Today's fiat currency is therefore not a general receipt for a fixed amount of gold. A central bank issues notes and reserves, commercial banks create deposits through lending, and monetary policy uses interest rates and financial conditions. Markets set many exchange rates, although fixed and managed regimes still exist.
What supports fiat money, and what alternative does Bitcoin offer?
Fiat does not mean that a currency has value only because a law says so. Taxes and legal obligations in the currency, incomes and prices, the user network, payment infrastructure, institutional quality and confidence in monetary stability all matter. Those supports can be strong or can fail.
Bitcoin offers a unit with a pre-limited issuance schedule and global settlement without a promise to redeem it for gold. In return for that independence, it has no authority that stabilises purchasing power, supplies emergency liquidity or guarantees a refund. A fair comparison names rules and trade-offs rather than claiming that either system solves every problem of the other.