Smithsonian Agreement December 1971

Opening Address to the Director General, Summary Proceedings, 1971, 8-15. Quotes are p. 12 and 13-14, respectively. On 13 September 1971, shortly before the Group of Ten ministerial meeting, the finance ministers of the COMMUNITY countries agreed on the common position they would adopt at the meeting. This position included, among other things, the need to redirect the currencies of all industrialized countries, including the dollar, against gold and to eliminate the U.S. import surcharge. Differences of opinion between the industrialized countries have meant that the merger of the finance ministers and central bank governors of the Group of Ten on 15 and 16 September did little to succeed, except in general. Ministers and governors simply agreed on the need for a very important adjustment to restore the situation in the United States, with appropriate adaptations of the positions of other countries; that much of this adjustment should be achieved through selective monetary adjustment; and that “fair global trade agreements and [military] burden-sharing should be considered.” Differences continued on the most important issues: exchange rates, the approximate magnitude of the improvement needed in the U.S. position, and the timing of the abolition of the U.S. import premium. It was clear that we were facing large and complex multilateral negotiations. The Smithsonian agreement became necessary when the United States then stopped President Richard Nixon in August 1971 to allow foreign central banks to exchange dollars for gold. A sharp rise in the inflation rate in the United States in the late 1960s had made the system unstable and encouraged a shift towards currencies and gold at the expense of the U.S.

dollar. President Nixon`s move triggered a crisis that led to an International Monetary Fund call for negotiations between the Group of Ten (G-10). These negotiations, in turn, led to the Smithsonian Agreement in December 1971. The Smithsonian agreement, touted by President Nixon as the “biggest monetary agreement in world history,” was even more wobbly and less solid than the 1920s gold exchange standard or Bretton Woods. Indeed, once again, countries around the world have committed to maintaining fixed exchange rates, but this time without gold or the world currency, to give any monetary support. In addition, many European currencies have been fixed against the dollar at undervalued parities; the only concession used to be a slight depreciation of the official dollar at $38 per ounce. But although far too little and too late, this devaluation was significant to violate an endless cycle of official U.S. statements that had pledged to keep the $35 rate forever. Finally, the $35 price was implicitly recognized as not buried on stone tables. 3 Based on the face value in effect before May 9, 1971. In the absence of results from the Group of Ten ministerial meeting, Mr.

Schweitzer presented the Executive Directors, on the weekend prior to the annual meeting, with a proposal for a decision for its presentation to the Governing Council. Executive Directors discussed the draft decision at unusual meetings of the office during the week of the general meeting on Monday and Tuesday afternoons, September 27 and 28.

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