In the 1960’s America’s debt was out of control. Entitlement spending, the war on poverty, the Vietnam War, the space race, and the Cold war were all areas that were draining America’s pockets. Our debt began to climb during the Johnson administration. Nations around the world watched as our debt skyrocket.
Since foreign nations had their currency backed by US dollars, and since our dollar was backed by gold, these nations wanted to trade the American dollars they held for the gold America had in its possession. This would completely drain America’s gold supply as nations sought to back their currencies with gold. America’s debt became their motivation. This was in essence a run on the bank and America was the bank.
Therefore, on August 15 1971 Nixon removed us from the gold standard, thus ending the Bretton Woods System. This is also known as the Nixon Shock. By doing this one action, Nixon made all currencies backed by our dollar fiat paper. Fiat means money without intrinsic value. It is faith-based. It only has value because people believe and perceive value in the currency.
Something had to be done to restore our currency’s value once again, and the petro-dollar was born in 1973. Henry Kissinger was instrumental in setting up this agreement with the Arabs. It works like this, OPEC and Arab nations went into an agreement with the United States. Their part was simple. All they had to do is sell their oil only using US dollars. In return for this, the United States promised these Arab nations military protection. They also promised the Arabs they would become rich.
This action created global demand for the US dollar, and the petro-dollar was born. If you are a nation that does not have oil as a resource, you have got to find a way to buy oil for your country, and to make matters worse, you can only use United States Dollars to get that oil. If you are a nation like Japan, you got two choices; exchange yen for dollars and buy oil, or sell the Americans a Toyota, Datsun, Honda, or Nintendo. Use the tax revenue from those items to buy oil.
Jobs in the 1970’s began to be exported to foreign countries around the world so that these countries could generate the US dollars needed to buy oil. This is when America began to export its manufacturing base. Nations also traded with each other using the dollar as a means of trade. It seemed as though this petro-dollar system was pure genius!
The petro-dollar has been the new system since Bretton Woods. It is the main cause of the globalization of our economy. This petro-dollar system gives the US fiat dollar artificial value. This is because the petro-dollar creates a demand for the US currency. If America wants to import more oil, all it has to do is print more money.
Our dollar is not a totally worthless currency as some claim. Today our dollar is backed by oil. America has successfully convinced the oil-producing nations to back our currency. In addition, these nations have agreed to take some of the profits made from selling oil and put those profits back into the US by investing in US bonds. This is brilliant! America gets foreign nations to back their currency with their oil and then they get these nations to buy their debt!
This petro-dollar system has created many problems. Nations fight to keep their currency values low because this acts as a tariff on imported goods. This is why the Chinese yuan has been kept artificially low. Nations with low currency values benefit because this practice serves to accelerate their manufacturing base. The higher your currency value the less you export and the more your economy imports.
An artificially low value acts as a tariff on imported goods. If nations want to keep a low value on their currency all they need to do is print a lot of currency. The more currency they have the lower the value.
Another problem with the petro-dollar system is that America lost a lot of its manufacturing base to overseas markets. Jobs started to leave the United States in the 1970’s. Countries needed these jobs to get U.S. dollars. They needed U.S. dollars to buy oil. The job losses accelerated in the first decade of the new millennium as China became a member of the World Trade Organization.
Watch this short video that explains the Petro-dollar system
The dirty little secret is our dollar went from being backed by gold to being backed by oil. This is not exactly the same definition of fiat currency. The dollar has value because other nations back the dollar and purchase our debt. This is why the EPA was used in the past to prevent excessive oil drilling in America. Democrats blame lack of environmental controls as the reason to shut down drilling along the coasts. Republicans blame democrats as the reason oil is not drilled in America like it once was. The real reason drilling is controlled in America is due to the petro-dollar system!
America fights to maintain the petro-dollar. It is the Titans of the gilded age that put this banking system into play. They own it! and it is those Titans that will defend it at all costs
The Petro-dollar has given America’s dollar more strength over the years and our dollar has become the main reason for the economic globalization of the planet. Today in the information age people are starting to figure out what the petro-dollar is. Countries have known this for years. Fiat currencies don’t typically have this kind of strength. eventually this system will fall and collapse because it is unsustainable. Exactly when that is going to happen is anyone’s guess.
Gold got our economic system to a certain point. Oil took over and globalized everything. The next system that is coming will be completely different from anything we experienced in the past. I will leave you with this recap on the petro-dollar system.