Despite pressure from foreign nations to protect the dollar’s value by reining in excessive government spending, Washington displayed little fiscal constraint and continued to live far beyond its means. It had become obvious to all that America lacked the basic fiscal discipline that could prevent a destruction of its own currency. Like previous governments before it, America had figured out how to “game” the global reserve currency system for its own benefit, leaving foreign nations in an economically vulnerable position.
It is unfair, however, to say that the Washington elites were blind to the deep economic issues confronting it in the late 1960s and early 1970s. Washington knew that the “dollars for gold” had become completely unsustainable. But instead of seeking solutions to the global economic imbalances that had been created by America’s excessive deficits, Washington’s primary concern was how to gain an even greater stranglehold on the global economy.
After America, and its citizens, had tasted the sweet fruit of excessive living at the expense of other nations, there was no turning back.
But in order to maintain global dollar demand, the Washington elites needed a plan. In order for this plan to succeed, it would require that the artificial dollar demand that had been lost in the wake of the Bretton Woods collapse be replaced through some other mechanism.
That plan came in the form of something known as the petrodollar system. To understand the petrodollar system, let us begin by defining what a petrodollar is: a petrodollar is a U.S. dollar that is received by an oil producer in exchange for selling oil and that is then deposited into Western banks.
Despite the seeming simplicity of this arrangement of “dollars for oil,” the petrodollar system is actually highly complex and one with many moving parts. It is this complexity that prevents the petrodollar system from being properly understood by the American public.
If you have never heard of the petrodollar system, it would not surprise me. It is certainly not a topic that makes its way out of Washington circles too often. The mainstream media rarely, if ever, discusses the inner workings of the petrodollar system and how it has motivated, and even guided, America’s foreign policy in the Middle East for the last several decades.
Allow me to provide a very basic overview regarding the history and the mechanics of the petrodollar system. It is my belief that once you understand this “dollars for oil” arrangement, you will gain a more accurate understanding of what motivates America’s economic (and especially foreign) policy. So, let’s take a closer look. . . .
The Rise of the Petrodollar System
The petrodollar system originated in the early 1970s in the wake of the Bretton Woods collapse.
President Richard M. Nixon and his globalist sidekick, Secretary of State Henry Kissinger, knew that their destruction of the international gold standard under the Bretton Woods arrangement would cause a decline in the artificial global demand of the U.S. dollar. Maintaining this artificial dollar demand was vital if the United States were to continue expanding its welfare and warfare spending.
U.S. Secretary of State Henry Kissinger worked his diplomatic "magic" in Saudi Arabia to create the petrodollar system.
In a series of meetings, the United States — represented by then U.S. Secretary of State Henry Kissinger — and the Saudi royal family made a unique agreement.3
According to the agreement, the United States would offer military protection for Saudi Arabia’s oil fields. The United States also agreed to provide the Saudis with military assistance, weapons, and perhaps most importantly, protection from Israel’s growing military arsenal.
The Saudi royal family knew a good deal when they saw one. They were more than happy to accept American military protection of their oil fields along with assurances of intervention between themselves and neighboring Israel.
Naturally, the Saudis wondered how much was all of this U.S. military muscle was going to cost. . . . What exactly did the United States want in exchange for their weapons and military protection? The Americans laid out their terms. They were simple, and two-fold.
1) The Saudis must agree to price all of their oil sales in U.S. dollars only. (In other words, the Saudis were to refuse all other currencies, except the U.S. dollar, as payment for their oil exports.)
2) The Saudis would be open to investing their surplus oil proceeds in U.S. debt securities.
You can almost hear one of the Saudi officials in a meeting saying: “Really? That’s all? You don’t want any of our money or direct ownership of our oil? You just want to tell us how to price our oil and then you will give us military support and protection from our enemies? You’ve got a deal!”
However, the United States had done its homework. They knew that gaining economic favor with the Saudis would be a good start to maintaining their dollar hegemony.
Fast forward to 1974, and the petrodollar system was fully operational in Saudi Arabia. And as the United States had perhaps cleverly calculated, it did not take long before other oil-producing nations wanted in. By 1975, all of the oil-producing nations of OPEC had agreed to price their oil in dollars and to hold their surplus oil proceeds in U.S. government debt securities in exchange for the generous offers by the United States. Just dangle weapons, military aid, and protection from Israel in front of Third World, oil-rich, Middle East nations . . . and let the bidding begin.
Nixon and Kissinger had succeeded in bridging the gap between the failed Bretton Woods system and the new petrodollar system. The global artificial demand for U.S. dollars would not only remain intact, it would soar due to the increasing demand for oil around the world in the decades to come. And from the perspective of empire, this new “dollars for oil” system was much preferred to the former “dollars for gold” system because it had much less stringent economic requirements. Without the constraints imposed by a rigid gold standard, and with global oil transactions on the rise, the U.S. monetary base could be grown at exponential rates.
It should come as no surprise that the United States maintains a major military presence in much of the oil-rich Persian Gulf region to this day, including the following countries: Bahrain, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates, Egypt, Israel, Jordan, and Yemen.
The truth is hard to find when you look to the corporate-controlled mainstream media. But it is simple when you follow the money. . . .
| "I hereby find that the defense of Saudi Arabia is vital to the defense of the United States." —President Franklin D. Roosevelt |
How the Petrodollar System Encourages Cheap Exports to the United States
While the U.S./Saudi agreement may have smelled of desperation at a time of decreasing global dollar demand, it can now be considered one of the most brilliant geopolitical and economic strategies in recent political memory.
Today, virtually all global oil transactions are settled in U.S. dollars. (There are a few exceptions and they will be highlighted in our next chapter, appropriately titled “Petrodollar Wars.”) When a country does not have a surplus of U.S. dollars, it must create a strategy to obtain them in order to buy oil.
The easiest way to obtain U.S. dollars is through the foreign exchange markets. This is not, however, a viable long-term solution as it is cost-prohibitive.
Many countries have opted instead to develop an export-led strategy with the United States to exchange their goods and services for the dollars they need to purchase