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TheSmithsonian Agreement, announced in December 1971, created a new dollar standard, whereby the currencies of a number ofindustrialized states were pegged to theUS dollar. These currencies were allowed to fluctuate by 2.25% against the dollar. The Smithsonian Agreement was created when theGroup of Ten (G-10) states (Belgium,Canada,France,Germany,Italy,Japan,the Netherlands,Sweden, theUnited Kingdom, and theUnited States) raised the price ofgold 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%.
TheBretton Woods Conference of 1944 established an internationalfixed exchange rate system based on thegold standard, in which currencies were pegged to theUnited States dollar, itself convertible into gold at $35/ounce.
A deteriorating balance of trade, growingpublic debt incurred by theVietnam War andGreat Society programs, andmonetary inflation by the Federal Reserve caused the dollar to become increasingly overvalued in the 1960s.[1] The drain on US gold reserves culminated with theLondon Gold Pool collapse in March 1968.[2]
On August 15, 1971, US PresidentRichard Nixon unilaterallysuspended theconvertibility of US dollars into gold. The United States had deliberately offered this convertibility in 1944; it was put into practice by theU.S. Treasury. The suspension made the dollar effectively afiat currency.
Nixon's administration subsequently entered negotiations with industrialized allies to reassess exchange rates following this development.
Meeting in December 1971 at theSmithsonian Institution inWashington D.C., theGroup 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 toappreciate their currencies versus the dollar: Yen +16.9%;Deutsche Mark +13.6%,French Franc +8.6%,British pound the same,Italian lira +7.5%.[3] The group also planned to balance the world financial system usingspecial drawing rights alone.
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 goldfree market continued to cause pressure on its official rate; and soon after a 10% devaluation was announced on 14 February 1973,Japan and theOEEC countries decided to let their currencies float. A decade later, all industrialized states had done the same.[4][5][6]
