The Dollar as Reserve Currency — From Gold Backing to Petrodollar

A global reserve currency is a foreign currency that is chosen to be the bedrock of any global financial system that other central banks and large financial institutions hold, that most international trade is conducted in, and that international investments are conducted in. As a result of the reserve currency’s level of usage being so high, as countries with a non-reserve currency must exchange their currency for the reserve currency, there tends to be a continuous demand for the reserve currency.

The U.S. Dollar (USD) is currently the global reserve currency which began as a result of the Bretton Woods agreement in 1944. Bretton Woods placed the USD as the focal point of the global system and required that other central banks could exchange the USD for gold upon demand with the Federal Reserve Bank. In the late 60s and early 70s the U.S. was suffering from rising inflation from a combination of foreign wars, expanded social programs funded by the U.S. Government, and a highly valued dollar in global FX markets. Countries started to demand gold for their dollars and the U.S. gold vaults started to quickly drain. Allegedly to stop the outflow of gold for USD, Nixon suspended the convertibility of USD to gold in 1971.This did not stop the United States inflationary spiral though and another solution was needed.

The solution came through the Petrodollar system. By the early 70s, oil was the dominant global fossil fuel, having beat out coal for the title. The U.S. was still a major oil producing country and the countries of the Middle East were starting to really ramp up their extraction of petroleum. Kissinger helped establish a trade between these Middle Eastern countries who were threatened by a rising technologically advanced and economically strong Israel that in exchange for military protection, arms sales and in some cases like in Saudi Arabia, a defacto secret Alliance, oil producing countries in the Middle East (and beyond) would only accept payment in USD.

The requirement that global oil be purchased in USD only resulted in a massive demand for USD globally as countries had to exchange their own currency for USD in order to purchase oil that was required to keep industrialized countries producing economically. This massive increase in demand for USD effectively solved the problems that had arisen from the U.S. Government overspending and enabled their new fiat currency, a currency not backed by gold or silver, to be printed in massive amounts to fund even more growth in government programs, foreign wars, and social programs. The amount of USD that could be created out of thin air had effectively become a derivative of production of crude oil, in a time period where crude oil demand was rising as new nations all over the world were rapidly industrializing and demanding increasingly more oil.

Analysis: The USD’s rise to the reserve currency status led to prolific spending by the government and massive growth in government all funded by the Federal Reserve Bank which culminated into a currency crisis that resulted in the removal of gold from backing the USD in 1971. The abandonment of the gold exchange for USD combined with the petrodollar system enabled the Federal Reserve to create massive amounts of currency and debt in the subsequent decades which inflated real prices dramatically, annihilated the middle class, provided funding of a national and global “deep state” with interests completely divorced from that of the People, and has fundamentally transformed our USA Republic into a bureaucratic nightmare of corruption and incompetence.

Financial limitations that other governments that do not have the reserve currency must battle with are also a blessing in disguise as they prevent a tiny few from having an undesirable and destructive influence in all segments of society. Having a nation’s currency backed by a finite resource like gold and/or silver can naturally create financial limitations and therefore checks on the power of central banks and governments and their owners/operators.

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