The Smithsonian agreement had two main objectives: (a) to quickly reassure foreign exchange markets and to stop massive financial flows from the United States and Europe in order to manage fixed exchange rates; and (b) to gradually allow revised exchange rates (devalued US dollars and revalued European currencies) to change trade patterns to allow the United States to reduce its balance-of-payments deficit and reduce its massive external surpluses for countries such as Germany. The BIS`s 1973 Annual Report (BIS, 1973: 1973: 20) concluded that “the most immediate objective was not achieved and that in 1972 there were no real signs of progress on the path to the longer-term adjustment process.” As we shall see, this led to a new crisis in early 1973. Figure 1.1 Snake and Tunnel – Theron Panel of Experts, February 1972 If both are at the same time, then Currency A would appreciate by 9% compared to Currency B. This was deemed excessive, and the 1972 Basel Agreement[4] between the six current EEC members and three about to join queued in the tunnel with bilateral margins between their currencies, limited to 2.25%, implying a maximum variation between two currencies of 4.5% and all currencies tend to be closer to the dollar. [5] This agreement also led to the formal end of the sterling zone. It didn`t take long for the underlying injuries to pass through the Smithsonian Band-Aids. By January 1972, most currencies had appreciated against the U.S. dollar and reached the upper limits of the Smithsonian groups. Further speculation that the U.S. dollar was still overvalued and currency brokers clearly felt that the Smithsonian agreement was unsustainable and would keep it in the short term would require a huge intervention by the Central Bank in the form of purchases of U.S. dollars in foreign exchange markets (BIS, 1972: 32). The Bank for International Settlements (BIS, 1973: 20) referred to developments in early 1983, “in the rather troubled international monetary system, it can be said that this is the rubric of unfinished operations that remain the upheavals of 1971.

More broadly, they represented a new phase of the more or less permanent crisis that has been raging since 1967. The Council resolution states that from 1 July 1972, currency fluctuations between Member States will not exceed 2.25%, which was a thinner snake than the 3% recommended by the Theron Group, but still corresponds to the hope of returning to largely fixed exchange rates. On 10 April 1972, the Committee of Central Bank Governors of the Member States met in Basel to outline the practicalities of the March Council resolution, which called on them to obtain measures to reduce the margins of currency fluctuations. During the meeting, the central banks of the Member States as well as the central banks of Denmark, Ireland and the United Kingdom (the last three accessions to the EEC in January 1973) agreed to limit fluctuations between their currencies to plus or minus 2.5%. They kept the Smithsonian band 4.5 percent against the U.S. dollar. This agreement became known in 1972 as the Basel Agreement. Council of the European Community (1972) Resolution on the phased realization of economic and monetary union in the Community, Official Journal, No C038, April 18, 1972, Theron, Mr.