Smithsonian Agreement

The Smithsonian Agreement was a December 1971 agreement that ended the fixed exchange rates established at the Bretton Woods Conference of 1944.

History

The Bretton Woods Conference of 1944 established an international fixed exchange rate regime in which currencies were pegged to the United States dollar, which was based on the gold standard.

By 1970, however, it was clear that the exchange rate regime was under threat, as the United States dollar was greatly overvalued because of heavy American spending on Lyndon B. Johnson's Great Society and the Vietnam War. The American economy was also coming under serious inflationary pressures.

In response, on August 15, 1971, President Richard Nixon unilaterally devalued the United States dollar. The government announced suspension of convertibility of dollars into gold, effectively ending the gold standard. The United States then entered negotiations with its industrialized allies to appreciate their own currencies, in response to this change.

Meeting in December 1971 at the Smithsonian Institution, the Group of Ten signed the Smithsonian Agreement. In the Agreement, the countries agreed to appreciate their currencies against the United States dollar.

Although the Smithsonian Agreement was hailed by President Nixon as a fundamental reorganization of international monetary affairs, it quickly proved to be too little and of only temporary benefit. The gold value of the dollar was realigned again in 1973, from $38.02 to $42.22. In addition, further devaluation of the dollar occurred against other European currencies. The end of the system came in March 1973 when the major currencies began to float against each other, as governments still had difficulties maintaining the exchange rates within the +/-2% band stated in the agreement, essentially bringing into effect the floating exchange rate system which determined exchange rates based on the market forces of supply and demand. A few currencies, such as the British pound, had begun to float earlier.

See also

• Currency
• Sherman Silver Purchase Act
• United States Mint
• ISO 4217
• Exchange rate
• History of money

External links

• Britannica
• ANZ