Smithsonian Agreement

The Smithsonian Agreement, announced in December 1971, created a new dollar standard, whereby the currencies of a number of industrialized states were pegged to the US dollar. These currencies were allowed to fluctuate by 2.25% against the dollar. The Smithsonian Agreement was created when the Group of Ten (G-10) states (Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the United States) raised the price of gold to 38 dollars, an 8.5% increase over the previous price at which the US government had promised to redeem dollars for gold. In effect, the changing gold price devalued the dollar by 7.9%. Despite President Nixon calling the agreement the "greatest monetary agreement in the history of the world," it failed to encourage discipline by the Federal Reserve or the United States government. It attempted to maintain fixed exchange rates without gold backing for any currency and offered only a token devaluation of the dollar. As a result, U.S. inflation continued to increase, making the dollar's overvaluation untenable. By 1973, Japan and European nations abandoned the fixed rates and allowed their currencies to float, with all industrialized states following suit within a decade. The Bretton Woods Conference of 1944 established an international fixed exchange rate system based on the gold standard, in which currencies were pegged to the United States dollar, itself convertible into gold at $35/ounce. A deteriorating balance of trade, growing public debt incurred by the Vietnam War and Great Society programs, and monetary inflation by the Federal Reserve caused the dollar to become increasingly overvalued in the 1960s.