What Is Smithsonian Agreement

The inability of world governments to create a system in which currency exchange rates would be fixed and stable has left no choice but to have a fluctuating foreign exchange market. That is the phase we are going through today. The forex market, as we know today, is the result of the failure of Bretton Woods and the Smithsonian agreement. Welp, the agreements established in the Smithsonian agreement did not last long. Sometimes currencies diverge, you know? You can`t force a relationship that doesn`t work. Just two years after the Smithsonian Agreement, most major currencies used a variable and unseated exchange rate against the U.S. dollar. Nixon officially separated the U.S. dollar from the gold price and put a nail in the coffin of the gold standard. Many of the tenacious economic institutions we see today were created as a result of the Bretton Woods agreement.

Institutions such as the International Monetary Fund (IMF) and the World Bank were created as a result of this agreement. Fixed exchange rates: The United States persuaded the G10 countries to enter into an agreement in which they would maintain their dollar-linked exchange rates. However, the dollar would not be tied to gold. So it was essentially a Bretton Woods agreement, minus the support for gold. In addition, some freedoms were granted to central banks, since the value of their currency could vary to 2.5% plus or minus the value of the dollar before their central banks carried out open market transactions. President Nixon took the world out of the gold standard in 1971. He feared, however, that free market operations on foreign exchange markets in many currencies would lead to necessity and devaluation. As a result, he convinced many countries to enter into an agreement called the Smithsonian Agreement. This agreement had largely failed since it lasted less than a few years and ended with the total suspension of the foreign exchange markets! The ten countries that signed the Smithsonian agreement were: the Netherlands, Japan, Belgium, Sweden, France, Canada, Germany, Italy, the United Kingdom and Usa. As stipulated in the agreement, the currencies of the aforementioned countries can fluctuate by 2.25% against the U.S. dollar. This ended with the closure of the foreign exchange markets for a while! The Smithsonian agreement became relevant when President Richard Nixon suspended the exchange of U.S.

dollars for gold and ended the gold standard. With the signing of the agreement in ten major industrialized countries, the U.S. dollar has become a Fiat currency linked to other currencies. The Smithsonian agreement lasted only 15 months, with most major currencies ranging from a fixed price to a fluctuating exchange rate such as the U.S. dollar from 1973. Fixed exchange rates: The United States persuaded the G10 countries to enter into an agreement in which they would maintain their dollar-linked exchange rates. However, the dollar would not be tied to gold. So it was essentially a Bretton Woods agreement, minus the aid to gold.

In addition, some freedoms have been granted to central banks, as the value of their currencies could vary between 2.5% plus or minus the value of the dollar before their central banks conduct open market transactions. The lack of gold to meet global international reserve requirements in the 1960s was an important factor that led to the Smithsonian agreement.