Smithsonian Agreement

Almost the entire meeting took place during the executive meeting, when ministers and governors agreed on a model of exchange rate relations between their currencies. With the approval of the Board of Directors, the Managing Director sent a message to all The Fund`s Governors on 19 August. Recent developments, he said, have raised serious concerns, while creating an opportunity to strengthen the system. If action was not taken immediately, there was a prospect of disorder and discrimination in monetary and trade relations, which would seriously disrupt trade and undermine the system that had rendered good services to the world and that had served as the basis for effective cooperation for a quarter of a century. As a result, all members of the G-10 abandoned the Smithsonian agreement. This ended with the forex markets closing for a while! In addition to the monetary instructions, the Finance Ministers and Central Bank Governors of the Group of Ten agreed, under the Smithsonian Agreement, that exchange rate fluctuations of 2 1/4% above and in the new parity ratios should be provided for pending agreement on longer-term monetary reforms. Ministers and Governors also agreed that talks should be initiated without delay, including within the framework of the Fund, in order to consider a reform of the international monetary system. particular attention should be paid to the appropriate means and distribution of competences for the defence of stable exchange rates and the assurance of the convertibility of currencies; the appropriate role of gold, reserve currencies and RDS in the system; the corresponding volume of liquidity; a revision of the permitted fluctuation margins around defined parities and other means of achieving exchange rate flexibility; and measures to deal with the volatility of capital movements. At the afternoon meeting of the Board of Directors on 16 August, the Economic Adviser presented the Staff`s reflections on the relative exchange rates of the currencies of the major industrialized countries.

He divided the topic into two parts: (1) the determination of the relative exchange rates of major currencies, a provision that affected the competitiveness of countries in international transactions and the relative value of reserves held in different currencies; and (2) the relationship between the exchange rate model and gold, a link determined by the indication of the price of gold against one of the participating currencies, probably the dollar. This second part influenced the value of gold, SDR and reserve positions in the fund, which were in the form of currencies. The Economic Adviser stated that, although he was satisfied only with the issue of relative exchange rates, he considered that it was more likely that an agreement could be reached if the issues relating to exchange rates and gold were resolved simultaneously. The insufficiency of gold to meet global demand for international reserves in the 1960s was an important factor that led to the Smithsonian Agreement. However, this agreement became mandatory in 1971, when then-U.S. President Richard Nixon banned the exchange of U.S. dollars for gold. .

This entry was posted in Uncategorized. Bookmark the permalink.