Through the third year of World War I, the British pound remained on the gold standard and as the world reserve currency, but Britain’s war deficit accumulated. Britain had to take out loans, and due to the state of Europe, the U.S. was the creditor-of-choice. This, coupled with Britain’s eventual departure from the gold standard in 1919, firmly established the dollar as the world’s leading reserve currency.
In 1944, allied countries met in New Hampshire to create an equitable foreign exchange system. Most countries desired a return to the gold standard, but the United States owned a large majority of the world’s gold supply as a result of its weapons sales and late entrance into World War II. The Bretton Woods Agreement, recognizing the need for a gold standard, tied the dollar to gold and all other currencies to the dollar. This configuration centralized the dollar as a necessary component of every country’s economy and strengthened U.S. economic growth.
Due to massive spending policies during the Cold War, however, the United States abandoned the gold standard. Notably, the Vietnam War exposed the U.S.’s inability to reign in its printing and spending habits. It became evident to other countries that the dollar was no longer linked to gold, so they began requesting gold for dollars at the designated exchange rate. As a result, President Nixon admitted a divorce of the dollar from the precious metal. “I directed [Treasury] Secretary Connally to suspend temporarily the convertibility of the dollar into gold…except in amounts and conditions determined to be in the interest of monetary stability and the best interest of the United States,” he said in an incident later dubbed the “Nixon Shock.” While Nixon promised the dollar’s value would remain intact, the announcement resulted in enormous inflation, peaking above 12 percent in 1974, and monstrous price volatility. Just one year before the climax of the crisis, though, a new agreement was born; the petrodollar, a contract requiring Saudi Arabia to sell all their oil in U.S. currency, would salvage and stabilize the dollar for decades to come.
By 1975, every member of the Organization of the Petroleum Exporting Countries had agreed to sell their oil explicitly in U.S. dollars after seeing Saudi Arabia’s profits. An oil-based economic system largely replaced the gold-backed system in a very short time frame. Since then, the U.S. has wielded its military in the Middle East unceasingly supporting its petrodollar sponsors and defending its oil interests. Countries that sought to change the world order either had their leaders deposed, like Libya and Iraq, or were ostracized by the U.S. and NATO, like North Korea, Iran, Venezuela, Syria and Russia. Yet countries opposed to the petrodollar seem to be popping up more often, and the dollar could suffer dramatically because of last month’s announcement from the Chinese government.
CNBC reported on Oct. 24 that “Beijing may introduce a new way to price oil in coming months… this benchmark would use China’s own currency.” Unlike a majority of current oil contracts, China’s offer would be Yuan-based and gold-backed. This would offer an alternative to oil traders seeking to circumvent U.S. sanctions or oppose the dollar’s influence worldwide like Russia, Iran, and Venezuela. Additionally, the futures would have a direct exchange back to gold, providing an attractive stability measure.
If this new oil market caught on, the implications for the dollar would be daunting. The artificial demand created by the petrodollar has allowed the U.S. to print alarming amounts of fiat currency for a colossal military and massive administrative state with few consequences.
If another viable option for purchasing oil arose and became popular, the artificial demand for the dollar would collapse, leaving the U.S. in an inflationary spiral that some economists say could be worse than the Great Depression. Chris Martenson, the CEO of Peak Prosperity, said, “Since 2000, roughly seven trillion U.S. dollar equivalents have been accumulated by oil exporting nations.” Additionally, countries that wanted oil had to acquire dollars, and as the preferred avenue became exports to the U.S., the richest country in the world secured even more wealth.
China’s announcement has been seriously under-reported by U.S. news outlets, especially considering its implications. If China, which imports about 25 percent of the world’s exported oil, successfully implements their version of petrocurrency, the dollar could lose its dominant status.
Cal Abbo is a freshman studying the liberal arts.