Smithsonian Agreement Upsc
Nixon`s speech was a success at home and shocked many people abroad, whom they saw as an act of troubling unilateralism; Connally`s strong conduct of subsequent foreign exchange negotiations with his foreign counterparts did little to allay those fears. Nevertheless, after months of negotiations, the Group of Ten Industrialized Democracies (G10) agreed to a new set of fixed exchange rates focused on a devalued dollar in the Smithsonian Agreement of December 1971. Although Nixon was described by Nixon as “the most important monetary agreement in the history of the world,” the exchange rates set by the Smithsonian agreement did not last long. Fifteen months later, in February 1973, speculative pressure on the market led to a further depreciation of the dollar and a new set of exchange rate parities. A few weeks later, the dollar was again under pressure in the financial markets; But this time there would be no attempt to support Bretton Woods. In March 1973, the G-10 approved an agreement whereby six members of the European Community merged their currencies and swam together against the U.S. dollar, a decision that effectively indicated the abandonment of the Bretton Woods fixed exchange rate system in favour of the current variable exchange rate system. The inability of world governments to establish a system in which exchange rates of currencies would be fixed and stable has left no alternative but to have a floating currency 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.
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. The agreement devalued the U.S. dollar by 8.5% against gold and increased the price of one ounce of gold from $35 to $38. Other G10 countries also agreed to revalue their currencies against the U.S. dollar. President Nixon hailed the agreement as “the most important monetary agreement in the history of the world.” 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 Smithsonian Agreement was an agreement negotiated in 1971 between the world`s top ten industrialized countries, namely Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom and the United States.