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The U.S. dollar has dom­i­nated the inter­na­tional eco­nomic system for almost a century, but that may be coming to an end.

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.