During the first half of the 1970s the pegged exchange rate system finally gave way to a less coherent system that combined floating, flexible and pegged rates. International financial flows accelerated rapidly and volatile commodity prices (including oil) added to inflation and slowing growth, which proved to be the greatest post-war challenge for policy-makers and economists. Britain abandoned the sterling peg before most others, in June 1972, but this did not mean that the Sterling Agreements became less important to managing sterling's reserve role, and they were maintained until the end of 1974. This chapter examines these years of crisis and transformation in the international monetary system.

The Nixon shock and the Smithsonian Agreement, August–December 1971

With the advent of the administration of Richard Nixon in 1969 came a new and harder line attitude from the US government over international monetary problems, which culminated in the ‘Nixon shock’ of August 1971. The new economic policy announced at this time marked the end of the American administration's willingness to engage in prolonged negotiations to reform the international monetary system, and the end of their acceptance of the pegged exchange rate system as a constraint on their economic policy. During his first years in power Nixon was convinced that the United States' economic problems were the result of an excessive international defence burden and protectionist policies by its creditors, which pushed the American balance of payments into persistent deficit.