Eight Facts about the Smithsonian Agreement

Did you know that back in 1971, currency exchange rates were fixed, and making negotiations or adjustments is somewhat unheard of? Before floating figures existed, the foreign exchange industry operated on inflexible terms; this posed problems for global markets since pricing inefficiencies and other discrepancies could not be corrected. Today, after certain regulations were followed, transactions in the market seem to go well. If you’re interested in trying out your luck in currency exchange, perhaps you may want to find out more details about the agreement that changed (and as some would insist, improved) the system of exchange rates, the Smithsonian Agreement.

Here’s a list of eight facts about the agreement:

1. It was signed in Washington, DC, in December of 1971.

2. It was passed by the G10 (or Group of 10) Nations; the line-up includes Sweden, Switzerland, Belgium, Canada, France, Italy, Japan, the UK, the Netherlands, and the US.

3. Its concept is based on restoring the financial stability of international monetary agreements, as well as playing a role on the increasing market activity of the currency exchange industry.

4. In the 1970s, it proposed the immediate re-alignment of currency exchange rates; since its main target currency was USD, the US government agreed to participate by suppressing 10% import surcharges and other related provisions. Alongside, the governments of the remaining nations gave their word regarding the appreciation of their national currencies; the list of participants includes: Germany (for DM or Deutsche Mark by at least 13%), Italy (for ITL or Italian Lira by at least 7%), and Japan (for JPY or Japanese Yen by at least 16%).

5. It goes against the 1944 Bretton Woods Conference. Its establishment meant that the international exchange rate system, which used the gold exchange standard as basis, no longer held power.

6. According to the US President in the 1970s, Richard Nixon, it is one of the most important monetary agreements of all time

7. It supports the idea of convertible currencies. Particularly, it allows the conversion of USD (or US Dollar) into gold at $ 35 per ounce.

8. It points out the importance of an intervention regarding the rate of USD’s overvaluation. According to the Federal Reserve, if the status of the currency exchange industry was retained, there would be an incoming financial crisis; the facts that the global market was suffering monetary inflation and a negative balance of payments need to be resolved.

Source: http://www.admiralmarkets.ae/education/knowledge-base