The Smithsonian Agreement, announced in December 1971, created a new dollar standard, whereby the currencies of a number of industrialized states were pegged to the

US dollar The United States dollar (symbol: $; currency code: USD) is the official currency of the United States and several other countries. The Coinage Act of 1792 introduced the U.S. dollar at par with the Spanish silver dollar, divided it int ...

. These currencies were allowed to fluctuate by 2.25% against the dollar. The Smithsonian Agreement was created when the Group of Ten (G-10) states (

Belgium Belgium, officially the Kingdom of Belgium, is a country in Northwestern Europe. Situated in a coastal lowland region known as the Low Countries, it is bordered by the Netherlands to the north, Germany to the east, Luxembourg to the southeas ...

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France France, officially the French Republic, is a country located primarily in Western Europe. Overseas France, Its overseas regions and territories include French Guiana in South America, Saint Pierre and Miquelon in the Atlantic Ocean#North Atlan ...

Germany Germany, officially the Federal Republic of Germany, is a country in Central Europe. It lies between the Baltic Sea and the North Sea to the north and the Alps to the south. Its sixteen States of Germany, constituent states have a total popu ...

Italy Italy, officially the Italian Republic, is a country in Southern Europe, Southern and Western Europe, Western Europe. It consists of Italian Peninsula, a peninsula that extends into the Mediterranean Sea, with the Alps on its northern land b ...

Japan Japan is an island country in East Asia. Located in the Pacific Ocean off the northeast coast of the Asia, Asian mainland, it is bordered on the west by the Sea of Japan and extends from the Sea of Okhotsk in the north to the East China Sea ...

the Netherlands , Terminology of the Low Countries, informally Holland, is a country in Northwestern Europe, with Caribbean Netherlands, overseas territories in the Caribbean. It is the largest of the four constituent countries of the Kingdom of the Nether ...

Sweden Sweden, formally the Kingdom of Sweden, is a Nordic countries, Nordic country located on the Scandinavian Peninsula in Northern Europe. It borders Norway to the west and north, and Finland to the east. At , Sweden is the largest Nordic count ...

, the

United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Northwestern Europe, off the coast of European mainland, the continental mainland. It comprises England, Scotlan ...

, and the

United States The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...

) raised the price of

gold Gold is a chemical element; it has chemical symbol Au (from Latin ) and atomic number 79. In its pure form, it is a brightness, bright, slightly orange-yellow, dense, soft, malleable, and ductile metal. Chemically, gold is a transition metal ...

to 38 dollars, an 8.5% increase over the previous price at which the US government had promised to redeem dollars for gold. In effect, the changing gold price devalued the dollar by 7.9%.

Background

The Bretton Woods Conference of 1944 established an international fixed exchange rate system based on the

gold standard A gold standard is a backed currency, monetary system in which the standard economics, economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the ...

, in which currencies were pegged to the

United States dollar The United States dollar (Currency symbol, symbol: Dollar sign, $; ISO 4217, currency code: USD) is the official currency of the United States and International use of the U.S. dollar, several other countries. The Coinage Act of 1792 introdu ...

, itself convertible into gold at $35/ounce. A deteriorating balance of trade, growing public debt incurred by the

Vietnam War The Vietnam War (1 November 1955 – 30 April 1975) was an armed conflict in Vietnam, Laos, and Cambodia fought between North Vietnam (Democratic Republic of Vietnam) and South Vietnam (Republic of Vietnam) and their allies. North Vietnam w ...

and Great Society programs, and monetary inflation by the Federal Reserve caused the dollar to become increasingly overvalued in the 1960s. The drain on US gold reserves culminated with the London Gold Pool collapse in March 1968. On August 15, 1971, US President

Richard Nixon Richard Milhous Nixon (January 9, 1913April 22, 1994) was the 37th president of the United States, serving from 1969 until Resignation of Richard Nixon, his resignation in 1974. A member of the Republican Party (United States), Republican ...

unilaterally suspended the convertibility of US dollars into gold. The United States had deliberately offered this convertibility in 1944; it was put into practice by the U.S. Treasury. The suspension made the dollar effectively a

fiat currency Fiat money is a type of government-issued currency that is not backed by a precious metal, such as gold or silver, nor by any other tangible asset or commodity. Fiat currency is typically designated by the issuing government to be legal tender, ...

. Nixon's administration subsequently entered negotiations with industrialized allies to reassess exchange rates following this development. Meeting in December 1971 at the

Smithsonian Institution The Smithsonian Institution ( ), or simply the Smithsonian, is a group of museums, Education center, education and Research institute, research centers, created by the Federal government of the United States, U.S. government "for the increase a ...

in Washington D.C., the Group of Ten signed the Smithsonian Agreement. The US pledged to peg the dollar at $38/ounce (instead of $35/ounce; in other words: the USD rate lost 7.9%) with 2.25% trading bands, and other countries agreed to appreciate their currencies versus the dollar: Yen +16.9%;

Deutsche Mark The Deutsche Mark (; "German mark (currency), mark"), abbreviated "DM" or "D-Mark" (), was the official currency of West Germany from 1948 until 1990 and later of unified Germany from 1990 until the adoption of the euro in 2002. In English, it ...

+13.6%, French Franc +8.6%, British pound the same,

Italian lira The lira ( , ; : lire, , ) was the currency of Italy between 1861 and 2002. It was introduced by the Kingdom of Italy (Napoleonic), Napoleonic Kingdom of Italy in 1807 at par with the French franc, and was subsequently adopted by the different s ...

+7.5%. The group also planned to balance the world financial system using special drawing rights alone.

Development

Although the Smithsonian Agreement was hailed by President Nixon as a fundamental reorganization of international monetary affairs, it failed to encourage discipline by the Federal Reserve or the United States government. The dollar price in the gold

free market In economics, a free market is an economic market (economics), system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of ...

continued to cause pressure on its official rate; and soon after a 10% devaluation was announced on 14 February 1973,

and the OEEC countries decided to let their currencies float. A decade later, all industrialized states had done the same.

References

External links

Britannica
{{Presidency of Richard Nixon Foreign exchange market 1971 in economic history December 1971 in the United States Smithsonian Institution 1971 in international relations

Background

Development

See also

References

Further reading

External links