Background
The term “Smithsonian parities” refers to the new exchange rate arrangements for the world’s major currencies that were established during the Smithsonian conference in December 1971. These parities were meant to correct and replace the *Bretton Woods system which had collapsed under immense pressure.
Historical Context
The Smithsonian conference took place in Washington D.C. and involved major economies agreeing on a reform of the international monetary system. This meeting came after the United States suspended the convertibility of the dollar into gold in August 1971, effectively ending the Bretton Woods agreement established in 1944. The purpose was to establish a new framework for currency valuation post-Bretton Woods.
Definitions and Concepts
- Smithsonian Agreement: The pact reached during the Smithsonian conference that led to the setting of new central rates for currencies, maintaining a pegged but adjustable exchange rate.
- Bretton Woods System: A system established post-World War II for monetary and exchange rate management based on the U.S. dollar being convertible to gold.
Major Analytical Frameworks
Classical Economics
Classical economists may view the breakdown of fixed parities such as Bretton Woods as inevitable due to market forces and the inability of government controls to maintain artificial constraints.
Neoclassical Economics
Neoclassical theories emphasize market efficiency and could argue that the attempted fixed exchange rates under the Smithsonian parities were bound to fail due to imbalances in supply and demand for different currencies.
Keynesian Economic
From a Keynesian perspective, fixed parities under the Smithsonian agreement were an attempt to avoid the instability and uncertainty that flexible exchange rates might bring, which could destabilize investment.
Marxian Economics
Marxian analysis might critique the Smithsonian parities agreement as a temporary measure by capitalist states to preserve economic stability without addressing underlying structural issues in international capital flow.
Institutional Economics
Institutional economists might analyze the Smithsonian parities by focusing on the role institutions played in negotiating and enforcing these agreements, as well as the interaction between monetary policy and national interests.
Behavioral Economics
Behavioral economists could study the expectations and behaviors of currency traders and policymakers around the transition from fixed exchange rates to more flexible systems post-Smithsonian agreement.
Post-Keynesian Economics
This perspective could highlight the failure of these soft-pegged arrangements in addressing the inherent trade imbalances and floats arising from the divergence of national economic policies.
Austrian Economics
Austrian economists would argue that Smithsonian parities continue the coercive intervention seen in Bretton Woods and inevitably fail due to the ignorance of human action and preference reflected in true market prices.
Development Economics
This perspective might explore how the temporary stability offered by Smithsonian parities instantaneously affected emerging economies’ liquidity and capital investment from developed nations.
Monetarism
Monetarism focuses on the role of governments in manipulating currency values and seeks nominal anchors like floating exchange rates that result in more natural adjustments in the money supply.
Comparative Analysis
Comparing the flexibility and enforcement mechanisms of the Smithsonian parities with the Bretton Woods system shows that while both aimed to stabilize international trade and finance, neither could withstand the emergent pressures of a changing global economy, leading to the eventual shift to floating exchange rates.
Case Studies
- The rapidity with which the seemingly fixed Smithsonian parities were abandoned primes a study on the transition years of the 1970s which marked a century-long move to more flexible exchange arrangements worldwide.
Suggested Books for Further Studies
- “Globalizing Capital: A History of the International Monetary System” by Barry Eichengreen
- “Exchange Rate Regimes: Choices and Consequences” by Dominick Salvatore
- “The End of Alchemy: Money, Banking, and the Future of the Global Economy” by Mervyn King
Related Terms with Definitions
- Exchange Rate Mechanism: A system established to manage the fluctuation of member states’ currencies relative to each other.
- Gold Standard: A monetary system where a country’s currency had a value directly linked to gold.
- Floating Exchange Rate: A system in which the value of currency is allowed to fluctuate according to the foreign exchange market.
[Note: The description and historical interpretations offered in different economic perspectives properly constrain themselves to the overview nature of major frameworks, while primarily emphasizing developments contextual to the institution decisions proprietary to the time in light of post-Bretton dynamics. Specificity on nuanced divergences in perspectives can stretch in detailed policy works.]
