by Nick Giambruno, International Man:
On August 15, 1971, President Nixon killed the last remnants of the gold standard.
It was one of the most significant events in US history—on par with the 1929 stock market crash, JFK’s assassination, or the 9/11 attacks. Yet most people know nothing about it.
Here’s what happened…
After World War 2, the US had the largest gold reserves in the world, by far. Along with winning the war, this let the US reconstruct the global monetary system around the dollar.
The new system, created at the Bretton Woods Conference in 1944, tied the currencies of virtually every country in the world to the US dollar through a fixed exchange rate. It also tied the US dollar to gold at a fixed rate of $35 an ounce.
The Bretton Woods system made the US dollar the world’s premier reserve currency. It effectively forced other countries to store dollars for international trade, or to exchange with the US government for gold.
By the late 1960s, the number of dollars circulating had drastically increased relative to the amount of gold backing them. This encouraged foreign countries to exchange their dollars for gold, draining the US gold supply. It dropped from 574 million troy ounces at the end of World War 2 to around 261 million troy ounces in 1971.
To plug the drain, President Nixon “suspended” the dollar’s convertibility into gold on August 15, 1971. This ended the Bretton Woods system and severed the dollar’s last tie to gold.
Since then, the dollar has been a pure fiat currency, allowing the Fed to print as many dollars as it pleases.
Of course, Nixon said the suspension was only temporary. That was lie No. 1. It’s still in place over 40 years later.
And he claimed the move was necessary to protect Americans from international speculators. That was lie No. 2. Money printing to finance out-of-control government spending was the real threat.
Nixon also said the suspension would stabilize the dollar. That was lie No. 3. Even by the government’s own rigged statistics, the US dollar has lost over 80% of its purchasing power since 1971.
The death of the Bretton Woods system—which was really the US government defaulting on its promise to back the dollar with gold—had profound geopolitical consequences.
Most critically, it eliminated the main motivation for foreign countries to store large US dollar reserves and to use the US dollar for international trade.
At this point, demand for dollars was set to fall… along with the dollar’s purchasing power. So the US government concocted a new arrangement to give foreign countries another compelling reason to hold and use the dollar.
The new arrangement, called the petrodollar system, preserved the dollar’s special status as the world’s reserve currency. For President Nixon and Secretary of State Henry Kissinger, it was a geopolitical and financial masterstroke.
From Bretton Woods to the Petrodollar
From 1972 to 1974, the US government made a series of agreements with Saudi Arabia, which created the petrodollar system.
The US handpicked Saudi Arabia because of the kingdom’s vast petroleum reserves and its dominant position in OPEC—and because the Saudi royal family was (and is) easily corruptible.
The US also picked Saudi Arabia for geopolitical reasons. During the Yom Kippur War of 1973, OPEC’s Arab members started an oil embargo to punish the US for supporting Israel. Oil prices quadrupled, inflation soared, and the stock market crashed.
The US was in a vulnerable position. It needed to neutralize the Arabs’ potent Oil Weapon. Turning a hostile Saudi Arabia into an ally was the key. The alliance would also help check Soviet influence in the region.
In essence, the petrodollar system was an agreement that the US would guarantee the House of Saud’s survival. In exchange, Saudi Arabia would:
1. Take the Oil Weapon off the table.
2. Use its dominant position in OPEC to ensure that all oil transactions would only happen in US dollars.
3. Invest billions of US dollars from oil revenue in US Treasuries. This let the US issue more debt and finance previously unimaginable budget deficits.
Oil is the world’s most traded and strategic commodity. If foreign countries need US dollars to trade oil, it creates a very compelling reason to hold large dollar reserves.
For example, if Italy wants to buy oil from Kuwait, it has to purchase US dollars on the foreign exchange market to pay for the oil first.
This creates an artificial market for US dollars. The dollar is just a middleman in countless transactions that have nothing to do with US products or services.
Ultimately, the arrangement boosts the US dollar’s purchasing power. It also creates a deeper, more liquid market for the dollar and US Treasuries.
Plus, the US has the unique privilege of buying imports, including oil, with its own currency… which it can print.
It’s hard to overstate how much the petrodollar system benefits the US dollar. It’s allowed the US government and many Americans to live beyond their means for decades. And it’s the reason the media and political elite give the Saudis special treatment.