By 1971, Washington insiders knew that “dollars for gold” was no longer sustainable. In the first six months of that year, over $20 billion of assets had left the country as foreign nations expressed their deep distrust in Washington’s financial stewardship. In May, West Germany completely abandoned the Bretton Woods system, which led to an immediate rise in the value of its currency over the U.S. dollar. In July, Switzerland converted nearly $50 million back into gold. France was particularly aggressive and demanded nearly $200 million in gold.
On August 15, 1971, under the leadership of President Richard M. Nixon, Washington chose to maintain its reckless consumption and debt patterns by detaching the U.S. dollar from its convertibility into gold. By “closing the gold window,” Nixon destroyed the final vestiges of the international gold standard. Nixon’s decision effectively ended the practice of exchanging dollars for gold, as directed under the Bretton Woods agreement. It was in this year, 1971, that the U.S. dollar officially abandoned the gold standard and was declared a purely fiat currency.
Did You Know?
Since August 15, 1971, all global currencies (with the temporary exception of the Swiss franc) have been issued by fiat with no real commodity backing of any kind.
Goodbye, Yellow Brick Road
As all other fiat empires before it, Washington eventually came to view gold as a constraint to its colossal spending urges. A gold standard, like the one provided by the Bretton Woods system, required America to publicly demonstrate fiscal restraint by maintaining holistic economic balance.
The Nixon Shock
Want to watch an excerpt of the actual televised speech delivered by President Nixon on August 15, 1971, in which he ended the U.S. dollar's convertibility into gold? Go online to http://www.ftmdaily.com/nixonshock.
By “closing the gold window,” Washington had affected not only American economic policy — it also affected global economic policy. Under the international gold standard of Bretton Woods, all currencies derived their value from the dollar. And the dollar derived its value from the fixed price of its gold reserves. But when the dollar’s value was detached from gold in 1971, it became what economists call a “floating” currency. (By “floating,” it is meant that a currency is not attached, nor does it derive its value, from anything externally.) Put simply, a “floating” currency is a currency that is not fixed in value.
Like any commodity, the dollar could be affected by the market forces of supply and demand. When the dollar became a “floating” currency in 1971, the rest of the world’s currencies, which had been previously fixed to the dollar, suddenly became “floating” currencies as well.
In this new era of floating currencies, the U.S. Federal Reserve, America’s central bank, had finally freed itself from the constraint of a gold standard. Now, the U.S. dollar could be printed at will — without the fear of having enough gold reserves to back up new currency production. And while this newfound monetary freedom would alleviate pressure on America’s gold reserves, Washington was quick to recognize that this seismic shift in economic policy could eventually lead to a declining global demand for the U.S. dollar. After all, the primary reason that the world had so readily held dollars in reserve was due to its international convertibility into gold. With the dollar no longer convertible into gold, how long would it be before global dollar demand declined?
Did You Know?
Floating currencies, with floating exchange rates, attract manipulation by speculators and hedge funds. Currency speculation is, and remains, a threat to floating currencies. Proponents of a single global currency point to the ongoing manipulation of currencies to promote their agenda.
Strong global demand for a nation’s currency can help a nation grow from a small economy to a vast empire. This global demand for dollars, which had fueled America’s prosperity and had allowed it to continue its warfare and welfare policies, was now seriously threatened.
Another concern facing Washington had to do with America’s extravagant spending habits. Under the international gold standard of Bretton Woods, foreign nations willingly held U.S. debt securities because they were denominated in gold-backed U.S. dollars. Would foreign nations still be eager to hold America’s debts despite the fact that these debts were denominated in a fiat debt-based currency that was backed by nothing?
The elites in Washington were not interested in learning the answers. Instead, they took swift action to ensure global demand for the dollar would not be permanently affected by its new “fiat” and “non-convertible” status.
Enter the petrodollar system.
Quick Summary
The devastation of the global economic order in the wake of World War II led world leaders to form a conference to create solutions. This conference, known as Bretton Woods, led to the creation of a new global fixed exchange rate regime with the U.S. dollar playing a central role.
Under the Bretton Woods system, an ounce of gold could be purchased at a fixed international rate of $35 per ounce. Because this fixed rate was regulated, the U.S. dollar was considered “as good as gold.”
This new international “dollars for gold” system created under Bretton Woods restored global economic stability to war-weary economies. As a result, foreign nations pegged their currencies to the dollar with the ability to convert their dollar holdings to gold at any time.
In the late 1960s, the Bretton Woods system broke down as foreign nations cashed in their dollars for gold. This was largely due to global concern over Washington’s reliance upon deficit spending to fund its warfare and welfare policies.
On August 15, 1971, President Richard Nixon closed the international gold window, which ended the Bretton Woods system and the dollar’s convertibility to gold. It was on this day that virtually every global currency became fiat, with no commodity backing.
Chapter 4
The Petrodollar System:
Same Game with a New Name
I hereby find that the defense of Saudi Arabia
is vital to the defense of the United States.1
— Franklin D. Roosevelt, U.S. president 1933–1945
There is nothing new in the world except the history you do not know.2
— President Harry Truman
OVERVIEW: In 1971, the Bretton Woods system collapsed after Washington severed the link between the dollar and the international gold standard. The United States was acutely aware that the failure of the “dollars for gold” arrangement could potentially strike a major blow to global dollar demand. In response to these concerns, and with the protection of global demand for the dollar as their highest priority, Washington soon unleashed its craftiest ploy yet: the petrodollar system. With global demand for oil increasing, the Nixon administration held a series of high-level talks with Saudi Arabia and other oil-producing nations, with the goal of requiring every global oil sale to be priced in dollars. In exchange, Washington offered military assistance and protection for the region’s vast oil fields. In this chapter lies the origin of our modern global economy. It is a story that few Americans have heard.
“Dollars for Oil” Replaces “Dollars for Gold”
In the early 1970s, the final vestiges of the international gold-backed dollar standard, known as the Bretton Woods system, had collapsed. Many foreign nations, who had previously agreed to a gold-backed dollar as the global reserve currency, were now having serious mixed