The Smithsonian meeting focused on broader reforms of the international monetary system. These included the central role of the dollar. At the same time, foreign nations agreed to lessen restrictions on trade and take on a greater share of the military burden. These changes have largely led to today’s stable international economic system.
Flexible exchange rate system
In 1971, the Smithsonian Agreement brought the world to a new dollar standard. At that time, other industrialized nations were pegged to the dollar as well. The end of the gold standard and Nixon’s halt to the practice of foreign central banks exchanging dollars for gold paved the way for the new dollar system.
The Paris Agreement was another major international monetary treaty, and a step toward restoring confidence in the Bretton Woods system. It brought 44 countries together to solve the global financial crisis and strengthen the world economy. It also gave the international trading community the opportunity to maximize profits.
The Bretton Woods system aimed to bring stability to the international monetary system by fixing currencies against gold and the dollar. However, American officials warned that fixing an exchange rate would bring rigidity. They also argued that maintaining a peg would delay the external adjustment process.
Foreign investment disincentives
The Bretton Woods Agreement, a historic international agreement, created the World Bank and International Monetary Fund. These institutions were critical to the rebuilding of Europe after World War II. Although they have remained loyal to their founding objectives, they have also evolved to serve global government interests.
The United States, a member of the G-10, persuaded the other G-10 countries to sign this agreement, which included an agreement that the U.S. would not tie its currency to gold. This arrangement was effectively the Bretton Woods Agreement but without the gold backing. In return, Central Banks were allowed to let their currency values fluctuate by up to 2.5% over the value of the dollar. This system created a monetary system that lasted for 27 years until it collapsed in the Nixon shock.
The Bretton Woods agreement and the Smithsonian Agreement are examples of asymmetrical agreements. The former was signed to stabilize the dollar, while the latter is a free-floating agreement. Neither of these agreements imposes foreign investment disincentives.
Cooperation with other countries
The Smithsonian Agreement and the Bretton Woods Agreement are both international agreements aimed at regulating the value of gold. The Smithsonian Agreement was signed in 1971 by the ten largest industrialized countries. It suspended the conversion of dollars into gold and fixed the dollar-gold parity at US$38 per ounce. The goal was to prevent inflation by keeping gold prices as stable as possible. However, the agreement was ineffective. In the end, the Bretton Woods System collapsed as a result.
The Smithsonian Agreement also addressed broader issues, including the role of the dollar in the international monetary system. In addition, foreign nations agreed to ease trade restrictions and share a greater burden of military obligations.