Smithsonian Agreement

The Smithsonian Agreement was concluded on 18 December 1971 at the Smithsonian Institution in Washington, D.C., by the finance ministers and central bankers of the Group of Ten (G-10) — the United States, United Kingdom, West Germany, France, Italy, Japan, Canada, the Netherlands, Belgium and Sweden. It was a direct response to the collapse of confidence in the dollar that followed President Richard Nixon's announcement of 15 August 1971 (the "Nixon Shock"), which suspended the dollar's convertibility into gold and imposed a 10 percent import surcharge. The agreement sought to restore the par-value system established by the Bretton Woods Agreement of 1944 and administered by the International Monetary Fund under its original Articles of Agreement, which required members to maintain fixed parities against the dollar, itself pegged to gold at $35 per ounce.

Under the agreement the United States devalued the dollar by raising the official gold price from $35 to $38 per ounce — a devaluation of roughly 8.57 percent — though convertibility into gold was not restored, leaving the dollar inconvertible. Other major currencies were revalued upward against the dollar: the Japanese yen by about 16.9 percent and the Deutsche Mark by about 13.6 percent, among others. Crucially, the agreement widened the permitted band of fluctuation around the new central rates from ±1 percent to ±2.25 percent, giving currencies greater room to move — a regime sometimes called the "tunnel" within which the European "snake" later operated. In exchange, the United States agreed to remove the 10 percent import surcharge. Nixon famously hailed the accord as "the most significant monetary agreement in the history of the world."

The Smithsonian arrangement proved short-lived. Persistent US balance-of-payments deficits, continued dollar outflows and speculative pressure undermined the new parities almost immediately. The United Kingdom floated the pound sterling in June 1972; a further dollar devaluation to $42.22 per ounce of gold followed in February 1973; and by March 1973 the major industrial currencies had moved to floating exchange rates, definitively ending the Bretton Woods par-value system. This transition was later formalised by the Second Amendment to the IMF Articles of Agreement (the Jamaica Accords of 1976, effective 1978), which legalised floating rates and demonetised gold. As of 2026 the world continues to operate under the managed-float regime that the failure of the Smithsonian Agreement ushered in.

For the exam, the Smithsonian Agreement is tested in the International Economy and International Relations segments — UPSC GS Paper II/III and economics optional, the FSOT's economics and US foreign-policy components, and the international-affairs papers of CSS and BCS. Candidates should be able to place it in the precise sequence: Bretton Woods (1944) → Nixon Shock (August 1971) → Smithsonian Agreement (December 1971) → collapse and floating (1973) → Jamaica Accords (1976). Typical question angles ask for the gold-price change ($35 to $38), the widened ±2.25 percent band, the G-10 membership, and why the agreement failed despite Nixon's grandiose praise.