Speculative inflows and intervention to defend fixed rates forced some countries to step away from dollar pegs to protect domestic monetary stability. West Germany temporarily allowed the Deutsche Mark to float, reducing the Bundesbank’s obligation to buy dollars at a fixed rate. This was an early sign that defending fixed parities was becoming too costly under heavy speculation.
President Richard Nixon announced a package called the New Economic Policy, including a temporary freeze on wages and prices and a 10% import surcharge. The most important international step was suspending official convertibility of U.S. dollars into gold (often called closing the “gold window”), which had anchored the Bretton Woods fixed-rate system. This triggered immediate uncertainty and intensified speculative pressure in foreign exchange markets.
After the U.S. move, many countries struggled to hold their exchange rates within existing Bretton Woods bands. Several major currencies moved upward against the dollar despite heavy central-bank intervention, and countries began experimenting with restrictions on cross-border capital flows (money moving between countries). The short-term result was a stopgap period of de facto floating and bargaining over a new set of parities (official exchange rates).
Finance ministers and central bankers from major industrial countries reached the Smithsonian Agreement in Washington, D.C., aiming to rebuild a fixed-rate system. The agreement devalued the dollar against gold (to about $38 per ounce) and reset exchange-rate parities, while widening the allowed trading bands to reduce frequent crises. It was intended as a repair of Bretton Woods, but it did not solve underlying pressures from inflation, payments imbalances, and fast-moving capital.
As part of the Smithsonian realignment, Japan revalued the yen sharply—from 360 to 308 yen per U.S. dollar—reflecting pressure for stronger surplus-country currencies. This change mattered because Japan’s currency was central to trade and capital flows in Asia and with the United States. The revaluation also showed how the “repair” required large, politically difficult exchange-rate moves.
To implement the Smithsonian realignment in U.S. law, the official price of gold was increased from $35 to $38 per ounce. This formal step matched the dollar’s devaluation against gold while the United States still declined to restore dollar–gold convertibility. It highlighted the growing gap between official rules and market realities in the international monetary system.
European Economic Community (EEC) countries created a joint arrangement to keep their currencies closer to each other than the wider Smithsonian bands allowed. The “tunnel” referred to the wider dollar-based bands, while the “snake” referred to narrow limits among European currencies themselves. This was an early attempt to manage speculative pressure by coordinating intervention and reducing exchange-rate swings inside Europe.
Sterling came under heavy pressure from short-term capital movements, despite intervention by the Bank of England and other European central banks. The UK government announced that sterling would be allowed to float as a temporary measure, and the London foreign exchange market was closed briefly to manage the transition. Sterling’s float weakened the European “snake” effort and underscored how speculation could overwhelm fixed-rate defenses.
Through 1972, speculators repeatedly pushed currencies toward the edges of the wider Smithsonian bands, forcing central banks to intervene and accumulate unwanted dollars. Those dollar inflows expanded domestic money supplies and added inflation pressure in some countries, increasing political resistance to continued intervention. The rising market price of gold was widely watched as a signal of weakening confidence in the patched-up system.
With exchange markets closed in parts of Europe and Japan, the United States announced another devaluation of the dollar against gold—moving the official price to about $42 per ounce. Instead of calming markets, the move reinforced expectations that fixed parities would keep changing under speculative pressure. The second devaluation made the Smithsonian “reset” look temporary rather than durable.
In March 1973, six European Community members tied their currencies together and jointly floated against the U.S. dollar, ending routine intervention to hold fixed dollar parities. This choice reflected a practical conclusion: defending fixed rates against large, fast capital flows was no longer credible. The move also pushed Europe further toward regional monetary cooperation as the global system fragmented.
By early March 1973, major currencies were largely floating against the dollar, and the obligation to maintain fixed parities had broken down in practice. This marked the end state of the 1971–1973 crisis sequence: speculative pressures repeatedly forced realignments until governments stopped trying to restore the old rules. The outcome was the modern pattern of predominantly floating exchange rates among major currencies, with occasional coordination rather than a single fixed-rate anchor.
Speculative currency pressures, the Smithsonian Agreement, and realignments (1971–1973)