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: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...

. 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, ; french: Belgique ; german: Belgien officially the Kingdom of Belgium, is a country in Northwestern Europe. The country is bordered by the Netherlands to the north, Germany to the east, Luxembourg to the southeast, France to ...

Canada Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by tota ...

France France (), officially the French Republic ( ), is a country primarily located in Western Europe. It also comprises of overseas regions and territories in the Americas and the Atlantic, Pacific and Indian Oceans. Its metropolitan ar ...

Germany Germany, officially the Federal Republic of Germany (FRG),, is a country in Central Europe. It is the most populous member state of the European Union. Germany lies between the Baltic and North Sea to the north and the Alps to the sou ...

Italy Italy ( it, Italia ), officially the Italian Republic, ) or the Republic of Italy, is a country in Southern Europe. It is located in the middle of the Mediterranean Sea, and its territory largely coincides with the homonymous geographical ...

, Japan,

the Netherlands ) , anthem = ( en, "William of Nassau") , image_map = , map_caption = , subdivision_type = Sovereign state , subdivision_name = Kingdom of the Netherlands , established_title = Before independence , established_date = Spanish Nether ...

, Sweden, 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 Europe, off the north-western coast of the European mainland, continental mainland. It comprises England, Scotlan ...

, and the

United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., federal district, five ma ...

) raised the price of

gold Gold is a chemical element with the symbol Au (from la, aurum) and atomic number 79. This makes it one of the higher atomic number elements that occur naturally. It is a bright, slightly orange-yellow, dense, soft, malleable, and ductile ...

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 The Bretton Woods Conference, formally known as the United Nations Monetary and Financial Conference, was the gathering of 730 delegates from all 44 Allied nations at the Mount Washington Hotel, situated in Bretton Woods, New Hampshire, Unit ...

of 1944 established an international

fixed exchange rate system A fixed exchange rate, often called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed or pegged by a monetary authority against the value of another currency, a basket of other currencies, or another ...

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 (symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...

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

Vietnam War The Vietnam War (also known by #Names, other names) was a conflict in Vietnam, Laos, and Cambodia from 1 November 1955 to the fall of Saigon on 30 April 1975. It was the second of the Indochina Wars and was officially fought between North Vie ...

and

Great Society The Great Society was a set of domestic programs in the United States launched by Democratic President Lyndon B. Johnson in 1964–65. The term was first coined during a 1964 commencement address by President Lyndon B. Johnson at the University ...

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 to 1974. A member of the Republican Party, he previously served as a representative and senator from California and was t ...

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 (from la, fiat, "let it be done") is a type of currency that is not backed by any commodity such as gold or silver. It is typically designated by the issuing government to be legal tender. Throughout history, fiat money was sometim ...

. 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 and education and research centers, the largest such complex in the world, created by the U.S. government "for the increase and diffusion of knowledge". Founded ...

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

+13.6%,

French Franc The franc (, ; sign: F or Fr), also commonly distinguished as the (FF), was a currency of France. Between 1360 and 1641, it was the name of coins worth 1 livre tournois and it remained in common parlance as a term for this amount of money. It ...

+8.6%, British pound the same,

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

+7.5%. The group also planned to balance the world financial system using

special drawing rights Special drawing rights (SDRs, code ) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF). SDRs are units of account for the IMF, and not a currency ''per se''. They represent a claim ...

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 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 government or any o ...

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

OEEC The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organisation with 38 member countries, founded in 1961 to stimulate e ...

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

References

External links

Britannica
{{Richard Nixon Foreign exchange market 1971 in economics December 1971 events in the United States Smithsonian Institution 1971 in international relations

Background

Development

See also

References

Further reading

External links