Smithsonian Agreement
Encyclopedia
The Smithsonian Agreement was a December 1971 agreement that ended the fixed exchange rate
s established at the Bretton Woods Conference of 1944.
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 inflation
ary pressures due to the aging economic infrastructure.
In response
, on August 15, 1971, President Richard Nixon
unilaterally suspended the 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 per ounce. In addition, further devaluation of the dollar occurred against 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.
Fixed exchange rate
A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold.A fixed exchange rate is usually used to...
s established at the Bretton Woods Conference of 1944.
History
The Bretton Woods Conference of 1944 established an international fixed exchange rateFixed exchange rate
A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold.A fixed exchange rate is usually used to...
regime in which currencies were pegged to the United States dollar
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
, which was based on the gold standard
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of 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
Lyndon B. Johnson
Lyndon Baines Johnson , often referred to as LBJ, was the 36th President of the United States after his service as the 37th Vice President of the United States...
's Great Society
Great Society
The Great Society was a set of domestic programs in the United States promoted by President Lyndon B. Johnson and fellow Democrats in Congress in the 1960s. Two main goals of the Great Society social reforms were the elimination of poverty and racial injustice...
and the Vietnam War
Vietnam War
The Vietnam War was a Cold War-era military conflict that occurred in Vietnam, Laos, and Cambodia from 1 November 1955 to the fall of Saigon on 30 April 1975. This war followed the First Indochina War and was fought between North Vietnam, supported by its communist allies, and the government of...
. The American economy was also coming under serious inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
ary pressures due to the aging economic infrastructure.
In response
Nixon Shock
The Nixon Shock was a series of economic measures taken by U.S. President Richard Nixon in 1971 including unilaterally cancelling the direct convertibility of the United States dollar to gold that essentially ended the existing Bretton Woods system of international financial exchange.-Background:By...
, on August 15, 1971, President Richard Nixon
Richard Nixon
Richard Milhous Nixon was the 37th President of the United States, serving from 1969 to 1974. The only president to resign the office, Nixon had previously served as a US representative and senator from California and as the 36th Vice President of the United States from 1953 to 1961 under...
unilaterally suspended the 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
Smithsonian Institution
The Smithsonian Institution is an educational and research institute and associated museum complex, administered and funded by the government of the United States and by funds from its endowment, contributions, and profits from its retail operations, concessions, licensing activities, and magazines...
, the Group of Ten
Group of Ten (economic)
The Group of Ten or G-10 refers to the group of countries that have agreed to participate in the General Arrangements to Borrow...
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 per ounce. In addition, further devaluation of the dollar occurred against European currencies. The end of the system came in March 1973 when the major currencies began to float
Float (money supply)
In economics, float is duplicate money present in the banking system during the time between a deposit being made in the recipient's account and the money being deducted from the sender's account. It makes up the smallest part of the money supply....
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
- Floating currency
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- History of moneyHistory of moneyThe history of money spans thousands of years. Numismatics is the scientific study of money and its history in all its varied forms.Many items have been used as commodity money such as natural scarce precious metals, cowry shells, barley, beads etc., as well as many other things that are thought of...