By January 1976, returning to a system of fixed exchange rates seemed unlikely. Therefore, world leaders met to draft the so-called Jamaica Agreement—an accord among members of the IMF to formalize the existing system of floating exchange rates as the new international monetary system. The Jamaica Agreement contained several main provisions. First, it endorsed a managed float system of exchange rates—that is, a system in which currencies float against one another, with governments intervening to stabilize their currencies at particular target exchange rates. This is in contrast to a free float system—a system in which currencies float freely against one another without governments intervening in currency markets.
Agreement (1976) among IMF members to formalize the existing system of floating exchange rates as the new international monetary system.
managed float system
Exchange-rate system in which currencies float against one another, with governments intervening to stabilize their currencies at particular target exchange rates.
free float system
Exchange-rate system in which currencies float freely against one another, without governments intervening in currency markets.
Second, gold was no longer the primary reserve asset of the IMF. Member countries could retrieve their gold from the IMF if they so desired. Third, the mission of the IMF was augmented: Rather than being the manager of a fixed exchange-rate system only, it was now a “lender of last resort” for nations with balance-of-payment difficulties. Member contributions were increased to support the newly expanded activities of the IMF.
Between 1980 and 1985 the U.S. dollar rose dramatically against other currencies, pushing up prices of U.S. exports and adding once again to a U.S. trade deficit. The world’s five largest industrialized nations known as the “G5” (Britain, France, Germany, Japan, and the United States) arrived at a solution. The Plaza Accord was a 1985 agreement among the G5 nations to act together in forcing down the value of the U.S. dollar. The Plaza Accord caused traders to sell the dollar, and its value fell.
By February 1987 the industrialized nations were concerned that the value of the U.S. dollar was now in danger of falling too low. Meeting in Paris, leaders of the “G7” nations (the G5 plus Italy and Canada) drew up another agreement. The Louvre Accord was a 1987 agreement among the G7 nations that affirmed that the U.S. dollar was appropriately valued and that they would intervene in currency markets to maintain its current market value. Once again, currency markets responded and the dollar stabilized.