Smithsonian Agreement History

President Nixon removed the world from the gold standard in 1971. However, he expressed concern that free market operations in foreign exchange markets would bring difficulties and devaluations to many currencies. That`s why he convinced many countries to make a deal called the Smithsonian Agreement. This agreement had largely failed because it lasted less than a few years and resulted in the total suspension of the foreign exchange markets! As far as the procedure was concerned, Mr Schweitzer considered the unification of the major industrialised countries to be an essential first step. He is convinced that the finance ministers and central bank governors of the Group of Ten countries should not wait for their meeting scheduled in Washington on 26 September, the Sunday before the opening of the annual meeting of the Fund`s Board of Governors. It would be too late, he thought, for the Fund to take appropriate action through the governors of all Member States. That is why he would insist that the group of ten meet earlier. The question of when the Group of Ten would meet was not a matter on which the Fund could decide, but Mr. Schweitzer informed the Executive Directors that he had informed Canada`s Minister of Finance, Mr. Benson, then Chairman of the Group of Ten, of his strong belief that Mr. Benson should convene such a meeting. The problems associated with the Fund`s operations, referred to by Mr Schweitzer, have already been described in Chapters 12 and 17. In short, the Fund`s financial operations and operations have been hampered by three circumstances.

First, the widespread expectation of a rise in the future price of gold and foreign currency RDS prompted members to reduce their debt to the Fund and avoid a decrease in their CSD stocks and reserve positions in the fund. Secondly, the exchange rates of almost all the currencies that the Fund would use for drawings, redemptions and other transactions under its regular procedures were not effectively maintained within the margins established in accordance with the articles or decisions of the Fund, and the decision on fluctuating currencies was applied only to the three currencies that were variable before 15 August. 1971. As a result, purchases and redemptions in the general account could not be made in the usual manner on the basis of agreed nominal values or provisionally agreed exchange rates and transactions in the special drawing account.1This, in the absence of agreed convertibility agreements, members might find it difficult to use the currencies they held in their reserves, but which could not be accepted by the Fund when acquiring other currencies necessary for their operations with the Fund. In addition, without agreement on the values to be used for currencies and gold, there was a problem with the valuation of the Fund`s assets. In mid-November, the prospects for an agreement on a monetary race between the Group of Ten countries were better. .