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The Smithsonian Agreement was an agreement negotiated in 1971 between the world`s top ten industrialized countries, namely Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom and the United States. The agreement reoriented the fixed exchange rate system established under the Bretton Woods Agreement and effectively created a new standard for the dollar, with other industrialized countries tying their currencies to the U.S. dollar. The Smithsonian agreement became necessary when the United States then stopped President Richard Nixon in August 1971 to allow foreign central banks to exchange dollars for gold. A sharp rise in the inflation rate in the United States in the late 1960s had made the system unstable and encouraged a shift towards currencies and gold at the expense of the U.S. dollar. President Nixon`s move triggered a crisis that led to an International Monetary Fund call for negotiations between the Group of Ten (G-10). These negotiations, in turn, led to the Smithsonian Agreement in December 1971. At its meeting in December 1971 at the Smithsonian Institution in Washington D.C. The Group of Ten signed the Smithsonian Agreement. The United States has promised to attach it to the dollar at $38/ounce (instead of $35/ounce); In other words, the USD lost 7.9 per cent. with 2.25% trading margins, and other countries have agreed to revalue their currencies against the dollar: yen -16.9%; Deutsche Mark up 13.6%, French franc up 8.6%, British pound the same, Italian lira up 7.5%. [3] The group also planned to balance the global financial system solely with special drawing rights.

Fixed exchange rates: The United States persuaded the G10 countries to enter into an agreement in which they would maintain their dollar-linked exchange rates. However, the dollar would not be tied to gold. So it was essentially a Bretton Woods agreement, minus the support for gold. In addition, some freedoms were granted to central banks, since the value of their currency could vary to 2.5% plus or minus the value of the dollar before their central banks carried out open market transactions. Situation: European countries fought during the Second World War. As such, the world`s economies had been destroyed. Many countries had money to finance the war spending of the humungous.