---
title: "Smithsonian Agreement | International Economics"
description: "Smithsonian Agreement: the 1971 accord that briefly widened fixed exchange-rate bands after Bretton Woods, easing pressure on global currency markets."
canonical: "https://fiveable.me/international-economics/key-terms/smithsonian-agreement"
type: "key-term"
subject: "International Economics"
unit: "Unit 11"
---

# Smithsonian Agreement | International Economics

## Definition

The Smithsonian Agreement was a 1971 international currency deal that adjusted exchange rates after Bretton Woods weakened. In International Economics, it marks the short-lived move from rigid pegs toward more flexible managed exchange rates.

## What It Is

The Smithsonian Agreement was a 1971 international monetary accord that tried to patch up the collapsing Bretton Woods system by realigning major exchange rates and making them a little more flexible. In International Economics, it is the bridge between fixed exchange rates and the floating system that came after.

The agreement came out of a problem the world economy could not ignore anymore. The U.S. had growing inflation, trade deficits, and pressure on the dollar, while other major currencies were under strain from trying to stay tied too tightly to a dollar that no longer matched market conditions. Instead of letting exchange rates break apart all at once, governments tried one coordinated reset.

Under the deal, the U.S. dollar was devalued, and other major currencies were adjusted upward or given more room to move. The point was to restore confidence and reduce immediate imbalance without fully abandoning exchange-rate management. That is why the Smithsonian Agreement is often described as a managed float step, not a clean switch to free-floating currency values.

The practical idea was simple: if a currency is clearly overvalued or undervalued, trade imbalances can get worse. An overvalued dollar makes U.S. exports more expensive and imports cheaper, which can widen the trade deficit. Repricing currencies was meant to reduce that pressure and make exchange rates fit economic reality better.

It did not solve the deeper problems for long. The system still depended on governments agreeing to support rates that markets were pushing away from those targets, and that became harder and harder to maintain. So the Smithsonian Agreement is best understood as a temporary repair, one that showed how difficult it was to keep a rigid international monetary system alive once the underlying conditions had changed.

## Why It Matters

This term matters because it shows the transition point between the Bretton Woods era and the modern era of more flexible exchange rates. If you are tracing how global monetary rules changed, the Smithsonian Agreement is one of the clearest examples of governments trying to defend stability after the old system had already started to fail.

It also gives you a concrete way to think about exchange-rate policy. The agreement is not just a date, it is a case study in how countries respond when a currency is misaligned, trade balances are under strain, and market pressure is stronger than official pegs. That makes it useful for essays or short answers about why fixed systems can break down.

The Smithsonian Agreement also connects directly to policy tradeoffs. A country can try to stabilize trade by adjusting currency values, but if inflation, capital flows, and market expectations keep moving, the fix may only last a short time. That tension is a recurring theme in international economics, especially when comparing fixed, pegged, and floating systems.

If a prompt asks why the world moved away from Bretton Woods, this agreement is one of the strongest pieces of evidence. It shows that reform was attempted before the full shift to floating exchange rates, but the reform was too limited to restore long-term stability.

## Connections

### Bretton Woods System

The Smithsonian Agreement was a response to the collapse of Bretton Woods. Bretton Woods had relied on fixed exchange rates tied to the U.S. dollar, so when pressure on the dollar grew, the old rules stopped working well. If you understand Bretton Woods, the Smithsonian Agreement makes sense as a repair attempt, not a new system from scratch.

### Floating Exchange Rates

The Smithsonian Agreement sits right before the move toward floating exchange rates. It shows the last effort to keep governments in charge of exchange values before market forces became the main driver. A question might ask you to compare the two systems, with Smithsonian-style management on one side and market-determined pricing on the other.

### [currency intervention](/international-economics/key-terms/currency-intervention)

Currency intervention is the policy tool governments use when they want to influence exchange rates. The Smithsonian Agreement relied on coordinated intervention and official realignment rather than leaving values entirely to markets. This makes it a good example of how states can try to support or adjust a currency when pressures become too strong.

### [adjustable pegs](/international-economics/key-terms/adjustable-pegs)

Adjustable pegs are exchange-rate systems that stay fixed for a while but can be changed when the currency becomes misaligned. The Smithsonian Agreement is closely related to this idea because it allowed exchange-rate realignment instead of permanent rigidity. It helps explain why some systems aim for stability without pretending rates should never change.

## On the AP Exam

A quiz or short essay usually asks you to place the Smithsonian Agreement in the timeline of the international monetary system and explain what problem it was trying to solve. You might be given a scenario about a weakening dollar, trade deficits, or pressure on fixed exchange rates and need to identify the agreement as a managed response to Bretton Woods instability.

If you get a comparison question, focus on the difference between fixing exchange rates and letting them float. A strong answer explains that the Smithsonian Agreement adjusted par values and widened the room for movement, but it did not fully embrace market-determined rates. In a timeline, graph, or case prompt, treat it as a short-lived transition step toward the floating system that followed.

## Smithsonian Agreement vs Bretton Woods System

Students mix these up because both involve fixed or managed exchange rates. Bretton Woods was the larger postwar monetary framework, while the Smithsonian Agreement was a later 1971 attempt to patch that framework after it started to fail. Bretton Woods set the system up, and Smithsonian tried to rescue it briefly.

## Key Takeaways

- The Smithsonian Agreement was a 1971 international currency accord meant to stabilize exchange rates after Bretton Woods started falling apart.
- It devalued the U.S. dollar and adjusted other major currencies so trade imbalances would be less severe.
- The agreement allowed more flexibility than strict fixed exchange rates, but it still was not a fully floating system.
- It is best seen as a temporary repair, not a permanent solution, because market pressure kept pushing currencies away from official targets.
- In International Economics, the term marks the transition from rigid postwar exchange-rate rules to the more flexible system that followed.

## FAQs

### What is the Smithsonian Agreement in International Economics?

It was a 1971 currency agreement that adjusted exchange rates after Bretton Woods came under pressure. The U.S. dollar was devalued, and other major currencies were realigned to help reduce imbalances. It is usually taught as a short-lived step toward more flexible exchange rates.

### Why was the Smithsonian Agreement needed?

The old Bretton Woods arrangement was under strain because the dollar was facing inflation, trade deficits, and growing pressure in global markets. Countries wanted to avoid a sudden collapse, so they agreed to change currency values and widen the room for adjustment. The deal was meant to buy time, not solve every underlying problem.

### How is the Smithsonian Agreement different from floating exchange rates?

Floating exchange rates are set by market supply and demand, while the Smithsonian Agreement still involved government-managed exchange-rate targets. It gave currencies more flexibility, but they were not left completely to the market. That is why it is often described as a bridge between fixed and floating systems.

### What should I remember about the Smithsonian Agreement for class?

Remember three things: it happened in 1971, it was a response to Bretton Woods pressure, and it moved exchange rates toward greater flexibility. If a question mentions dollar devaluation, managed adjustment, or the end of strict fixed rates, the Smithsonian Agreement is probably the concept being tested.

## Related Study Guides

- [11.1 Evolution of the international monetary system](/international-economics/unit-11/evolution-international-monetary-system/study-guide/H4jKF7VWms2Im8VY)

## About This Document

Canonical Fiveable pages are available as Markdown at the same path plus `.md`.

- [llms.txt](https://fiveable.me/llms.txt): index of Fiveable's sections and URL patterns
- [llms-full.txt](https://fiveable.me/llms-full.txt): complete subject and unit listing
- [MCP server](https://fiveable.me/mcp): call Fiveable as tools instead of fetching pages (`https://fiveable.me/api/mcp`)
- [MCP server for AP teachers](https://fiveable.me/mcp/teachers): a teacher's classes, assignments and AP-rubric grading (`https://fiveable.me/api/mcp/teacher`)

## Structured Data

```json
{"@context":"https://schema.org","@graph":[{"@type":"LearningResource","@id":"https://fiveable.me/international-economics/key-terms/smithsonian-agreement#resource","name":"Smithsonian Agreement | International Economics","url":"https://fiveable.me/international-economics/key-terms/smithsonian-agreement","learningResourceType":"Concept explainer","educationalLevel":"AP® / High School","about":{"@id":"https://fiveable.me/international-economics/key-terms/smithsonian-agreement#term"},"audience":{"@type":"EducationalAudience","educationalRole":"student"},"dateModified":"2026-07-03T02:22:24.884Z","isPartOf":{"@type":"Collection","name":"International Economics Key Terms","url":"https://fiveable.me/international-economics/key-terms"},"author":{"@type":"Organization","@id":"https://fiveable.me/editorial#content-team","name":"Fiveable Content Team","url":"https://fiveable.me/editorial","parentOrganization":{"@id":"https://fiveable.me/#organization"},"member":[{"@type":"Person","name":"Amanda DoAmaral","sameAs":["https://www.linkedin.com/in/adoamaral"]},{"@type":"Person","name":"Becky Bahr","sameAs":["https://www.linkedin.com/in/becky-bahr-b52743132"]}]},"publisher":{"@type":"Organization","name":"Fiveable","url":"https://fiveable.me"}},{"@type":"DefinedTerm","@id":"https://fiveable.me/international-economics/key-terms/smithsonian-agreement#term","name":"Smithsonian Agreement","description":"The Smithsonian Agreement was a 1971 international currency deal that adjusted exchange rates after Bretton Woods weakened. In International Economics, it marks the short-lived move from rigid pegs toward more flexible managed exchange rates.","url":"https://fiveable.me/international-economics/key-terms/smithsonian-agreement","inDefinedTermSet":{"@type":"DefinedTermSet","name":"International Economics Key Terms","url":"https://fiveable.me/international-economics/key-terms"}},{"@type":"FAQPage","mainEntity":[{"@type":"Question","name":"What is the Smithsonian Agreement in International Economics?","acceptedAnswer":{"@type":"Answer","text":"It was a 1971 currency agreement that adjusted exchange rates after Bretton Woods came under pressure. The U.S. dollar was devalued, and other major currencies were realigned to help reduce imbalances. It is usually taught as a short-lived step toward more flexible exchange rates."}},{"@type":"Question","name":"Why was the Smithsonian Agreement needed?","acceptedAnswer":{"@type":"Answer","text":"The old Bretton Woods arrangement was under strain because the dollar was facing inflation, trade deficits, and growing pressure in global markets. Countries wanted to avoid a sudden collapse, so they agreed to change currency values and widen the room for adjustment. The deal was meant to buy time, not solve every underlying problem."}},{"@type":"Question","name":"How is the Smithsonian Agreement different from floating exchange rates?","acceptedAnswer":{"@type":"Answer","text":"Floating exchange rates are set by market supply and demand, while the Smithsonian Agreement still involved government-managed exchange-rate targets. It gave currencies more flexibility, but they were not left completely to the market. That is why it is often described as a bridge between fixed and floating systems."}},{"@type":"Question","name":"What should I remember about the Smithsonian Agreement for class?","acceptedAnswer":{"@type":"Answer","text":"Remember three things: it happened in 1971, it was a response to Bretton Woods pressure, and it moved exchange rates toward greater flexibility. If a question mentions dollar devaluation, managed adjustment, or the end of strict fixed rates, the Smithsonian Agreement is probably the concept being tested."}}]},{"@type":"BreadcrumbList","itemListElement":[{"@type":"ListItem","position":1,"name":"International Economics","item":"https://fiveable.me/international-economics"},{"@type":"ListItem","position":2,"name":"Key Terms","item":"https://fiveable.me/international-economics/key-terms"},{"@type":"ListItem","position":3,"name":"Unit 11","item":"https://fiveable.me/international-economics/unit-11"},{"@type":"ListItem","position":4,"name":"Smithsonian Agreement"}]}]}
```