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Smithsonian Agreement Slideshare

Posted byadminon17 12 2020. 0 Comments

The gold standard has significantly reduced risk in exchange rates, as it has established fixed exchange rates between currencies. Fluctuations have been relatively small. This has facilitated the management of costs and prices by global companies. International trade has increased worldwide, although economists do not always agree on whether the gold standard was an essential part of this trend. “The challenge,” writes Ngaire Woods in his book The Globalizers: The IMF, the World Bank, and Their Borrowers, “was to reach an agreement between states on how to finance post-war reconstruction, stabilize exchange rates, promote trade and prevent balance-of-payments crises from unravelling. Ngaire Woods, Globalizers: The IMF, the World Bank, and Their Borrowers (Ithaca, NY: Cornell University Press, 2006), 16. The agreement devalued the U.S. dollar by 8.5% against gold and increased the price of one ounce of gold from $35 to $38. Other G10 countries also agreed to revalue their currencies against the U.S.

dollar. President Nixon hailed the agreement as “the most important monetary agreement in the history of the world.” Fixed exchange rates are sometimes considered blocked rates. One of the determining factors that led to the fall of the gold standard was that, after the United Kingdom res resting its commitment to maintain the value of sterling, countries attempted to attach it to the US dollar. As the U.S. economy grew strong, the supply of gold increased in the United States, while many countries had less gold in reserve than the currency in circulation. The Bretton Woods system has worked to remedy this situation by linking the value of the U.S. dollar to gold, but also by linking all other countries to the U.S. dollar and not directly to gold.

The face value of the U.S. dollar was set at 35 to one ounce of gold. All other countries then set the value of their currency on the U.S. dollar. In light of developments, sterling had suffered a significant decline in its value and, at that time, its value was $2.40 to $1. Member States had to maintain the value of their currency within 1% of the fixed exchange rate. Finally, the agreement stipulated that only governments, and not all those who requested it, could convert their assets into U.S. dollars in gold, a significant improvement over the gold standard. In fact, most businessmen ended up ignoring the technical fact of the U.S. dollar`s allocation to gold and simply used real exchange rates between countries (for example. B the pound sterling against the dollar) as an economic measure for activity.

In the early 1980s, the value of the U.S. dollar increased, pushing up U.S. export prices, increasing the trade deficit. To address imbalances, five of the world`s largest economies met in September 1985 to find a solution. The five countries were Great Britain, France, Germany, Japan and the United States; This group became known as the Group of Five the five largest industrial powers originally – Britain, France, Germany, Japan and the United States – which met to reduce and stabilize the value of the dollar. The 1985 agreement, called Plaza Accord because it took place at the Plaza Hotel in New York, focused on reducing the value of the U.S. dollar through joint efforts. Later that year, Member States reached the Smithsonian Agreement, which devalued the U.S. dollar at $38 per ounce of gold, increased the value of other countries` currencies against the dollar and increased a currency`s fluctuation margin from 1% to 2.25%.

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