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Smithsonian Agreement Definition

The failure of the world`s governments to establish a system in which the exchange rates of currencies would be fixed and stable left no alternative to a market for currencies free of fluctuation. That is the phase we are in today. The forex market as we know it today is the result of the failure of the Bretton Woods and Smithsonian agreements. The Smithsonian Agreement was an agreement signed in 1971 by 10 leading industrialized countries to settle international payments and trade at that time. The agreement provided for a change in the fixed exchange rates set by the Bretton Woods Agreement of 1944. When the Smithsonian Agreement was signed in 1971, it created a new standard for the U.S. dollar, in which the currencies of the other nine countries that signed the agreement were tied to the U.S. dollar. 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!

This provision seemed weak on paper. However, it collapsed under pressure from real-world markets. The U.S. trade deficit continued to rise, and as a result, the value of gold rose to $210 per ounce in 1972. As a result, all members of the G-10 abandoned the Smithsonian agreement. This ended with the forex markets closing for a while! Welp, the agreements provided for in the Smithsonian agreement did not last long. Sometimes currencies separate, 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 exchange rate against the U.S. dollar, not a fixed rate. Nixon officially stripped the U.S. dollar of the price of gold and put a nail in the coffin of the gold standard. The Smithsonian Agreement was a revision of the Bretton Woods Agreement of 1944, which provided for changes to fixed exchange rates.

This agreement has also contributed to the creation of forex markets. As a result of the Smithsonian agreement, the US dollar was partially devalued, given that it was tied to the currencies of the countries that signed the agreement. This agreement devalued the US dollar by 8.5% against gold. The insufficiency of gold to meet global demand for international reserves in the 1960s was an important factor that led to the Smithsonian Agreement. But this agreement became mandatory in 1971, when then-US President Richard Nixon banned the exchange of US dollars for gold. The Smithsonian Agreement was signed by a group of ten countries commonly known as the G10. .

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