Saturday, April 11, 2009

Smithsonian agreement

In December 1971,at the Smithsonian Institution in Washington,the main IMF nations reached an interim agreement.Here are some of its features. To correct the decade-old (overvaluation)of the dollar,which had kept our costs and price so high that we ran chronic deficits of imports over exports,the dollar was depreciated sharply relative to the mark and yen,and more moderately relative to most other European currencies.
In the several years since 1971,the Swiss franc and Germany mark have floated further upward,as in lesser degree have most Common Market currencies;the Italian lira however,and the British pound,in accordance with their greater rates of internal price inflation,have predictably floated downward since 1971.
The two-tier system was retained at Smithsonian.The official gold price was marked up by a token amount,from $35 to$38 an ounce,and again in 1973 to$42.22 an ounce. This was meaningless in any case as no transactions took place at this price.In 1975,the IMF took the final step and abolished the official price of gold completely.The IMF system of special Drawing Rights(SDRs)was retained.the IMF in effect creates international money when it gives each member an account to draw on up to a specified quota.This is just like the process within a country of my receiving a checking deposit that I can draw on for my excess spending.The value of the unit in the SDR accounts is defined in effect as a market basket of 16 leading currencies-so many dollars,marks,pounds,yen,francs,and so forth.Instead of stating the parity of a currency,or its day-to-day floating value,in so many meaningless ounces of $42.22 official gold,the modern system uses the SDRs as the(paper gold)in terms of which international reserves are to be evaluated.Even the OPEC oil cartel,fearful that the dollar might float downward in value,in 1975 began to quote its monopoly oil price in SDR units.
The world in the post-Smithsonian 1970s finds itself on a (somewhat!)"managed floating " exchange-rate system .

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