Smithsonian Agreement – Definition

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Smithsonian Agreement Definition

The Smithsonian Agreement was an agreement signed by 10 top industrialized countries in 1971to regulate international payment and exchange at that moment. The agreement made an amendment to the fixed exchange rates stipulated in the 1944 Bretton Woods Agreement. When the Smithsonian Agreement was signed in 1971, it created a new standard to the U.S dollar in which the currencies of the other nine countries that signed the agreement were pegged to the U.S dollar.

The 10 countries that signed the Smithsonian Agreement were; Netherlands, Japan, Belgium, Sweden, France, Canada, Germany, Italy, the United Kingdom, and the United States. As contained in the agreement, the currencies of the above countries are allowed to fluctuate against the US dollar by 2.25%.

A Little More on What is a Smithsonian Agreement

The Smithsonian Agreement was a revision of the 1944 Bretton Woods Agreement, this agreement saw to the amendment of fixed exchange rates. This agreement also contributed to the emergence of Forex markets. As a result of the Smithsonian Agreement, the US dollar was partially devalued as it was pegged against the currencies of countries that signed the deal. This agreement devalued the  U.S. dollar by 8.5% relative to gold.

The insufficiency of gold to meet global demands for international reserves during the 1960s was a major factor that gave rise to the Smithsonian Agreement. This agreement, however, became mandatory in 1971 when the then U.S president, Richard Nixon prohibited te exchange of US dollars for gold. The Smithsonian Agreement was signed by a group of ten countries popularly called G10.

The Smithsonian Agreement and the End of the Gold Standard

The Smithsonian Agreement became pertinent when President Richard Nixon stopped the exchange of US dollars for gold, this marked an end to the Gold standard. With ten top industrialized countries coming to sign the agreement, theU.S dollar became a fiat currency that was pegged against other currencies. The Smithsonian Agreement only lasted for 15 months because as of 1973, most major currencies had changed from a fixed rate to a floating exchange rate just like the US dollar.

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