Monetary issues were in a critical state after the United States` announcement on August 15, 1971. On the morning of Monday, August 16, most foreign exchange markets around the world were closed: it was unclear what exchange rates would prevail or how they would be determined. There was an urgent need for monetary officials to decide what to do in the new circumstances. The ten countries that signed the Smithsonian Agreement were the Netherlands, Japan, Belgium, Sweden, France, Canada, Germany, Italy, the United Kingdom and the United States. As provided for in the agreement, the currencies of the aforementioned countries can vary by 2.25% against the US dollar. The situation posed serious problems not only for industrialized countries, but also for developing countries and other primary producer members, who were concerned about the negative effects of exchange rate fluctuations, the resulting uncertainties and the United States import supplement. Many of them were unsure of the exchange rate policy to be adopted and sought the advice of the Fund`s management and staff. Schweitzer was also concerned that the vast majority of countries would have no chance of participating in a solution. As noted above, the Executive Directors also discussed, in October and November, measures to address the practical difficulties faced by the Fund in carrying out its financial and operational operations. Since August 15, the operations have been based on the preliminary valuation of the fund`s assets in US dollars at the former nominal value of the dollar and on a hub technique that takes into account redemptions to the extent that the draws on the fund have been made.
The need for a better method became more urgent when hopes for a rapid reorientation of exchange rates began to dwindle. The questions to be answered fell into two categories: (1) the exchange rates at which the Fund would hold foreign currency, gold and CSD and transact in foreign currencies, gold and CSDs; and (2) the currencies to be used for drawings, redemptions and similar transactions and the terms of conversion. The director general had been invited to come to the US Treasury on the evening of Sunday, August 15. He was accompanied by the Deputy Director General, Mr. Southard. You have been informed by the Under Secretary of State for Monetary Affairs, Mr. Paul Volcker, of the actions that President Nixon would announce on radio and television in less than an hour from the White House. Treasury Secretary Connally was in the White House. The U.S. monetary authorities informed the Fund`s management that no one else had been informed in advance of the U.S. measures and that they did not have in mind a set of proposals, including exchange rate adjustments, that should be discussed with officials from other countries.
They had acted thinking that they could not negotiate a new exchange rate structure while maintaining gold sales for officially held dollars.