Special Report: Unpegging the Petrodollar // FAI ONLINE

*US President Richard Nixon meets with Saudi King Faisal bin Abdul-Aziz al Saud in Jeddah, Saudi Arabia after signing a landmark agreement with the Arab kingdom (June 15, 1974).*

Pegging the Gold Dollar

July, 1944. As the Allies pushed inland from the Normandy coast towards Nazi-occupied Paris, a group of government ministers, economists, and other delegates from 44 nations descended on Bretton Woods, New Hampshire. Building upon the Atlantic Charter negotiated by Franklin Roosevelt and Winston Churchill in 1941, the Bretton Woods conference convened to devise a new economic order for the world. Present was the famed British economist John Maynard Keynes, whose writings had reshaped internationally-accepted theories of macroeconomics. Over the course of three weeks, the delegates agreed upon the formation of two institutions which would undergird the new global economy: the International Monetary Fund (IMF) and the lending arm of the World Bank. Through these two agencies, an international exchange rate would be set, using a global reserve currency. John Keynes lobbied for the creation of a new international currency for this purpose, which would be called the Bancor. But the American delegation had another idea in mind.

Since the turn of the twentieth century, the United States government had been gradually amassing a significant supply of gold. American gold holdings skyrocketed to almost two-thirds of the entire world supply during the Second World War, as Allied nations sold their gold to the United States for weapons and other commodities, or else deposited their gold in the US Federal Reserve for safekeeping. Emboldened by this, US Treasury senior advisor Harry Dexter White aggressively opposed Keynes’ idea for the Bancor, instead lobbying for the adoption of the US Dollar as the global reserve currency, pegged to American gold holdings at $35.00 an ounce. The weight of US political, economic and military power won the day, and the Bretton Woods Act was passed by the US Congress in December, 1945, which codified the new economic policies into law. Various gold standards had existed in different forms across the globe for centuries, but through the IMF and World Bank, for the first time in human history, the world would have a universally-accepted gold standard, underpinning the world’s first reserve currency, the US Dollar.

To rebuild Europe after the war, the United States loaned billions of dollars to European central banks through the World Bank for reconstruction programs known collectively as the Marshall Plan. The skyrocketing US economy created a dilemma for the gold standard: There weren’t enough gold-pegged dollars to go around for world trade and debt-repayment. The size and value of US gold holdings were relatively fixed, and so therefore were the number of US Dollars. Under the Truman, Eisenhower and Kennedy administrations, the US government encouraged the outflow of dollars and ran trade deficits, while encouraging competition from Europe and a reformed Japan, in order to keep the gold standard afloat and the price of gold at $35.00 an ounce. Controlling the price of gold became increasingly difficult during times of Cold War instability, such as during the Cuban Missile Crisis, when public uncertainty led to a rush on the gold market, spiking prices by several dollars an ounce.

However, it was the grand policies of welfare and warfare in Lyndon Johnson’s White House that made the gold standard untenable. To fund the War on Poverty and the Vietnam War at the same time without raising taxes significantly, the Johnson administration adopted bloated spending policies which incurred deficits. Inflation grew, and the US government effectively reversed its monetary dilemma from a dollar shortage to a dollar glut. In 1965, French President Charles de Gaulle articulated the French policy of banaliser le dollar, or “dethroning the dollar,” stating that it was impossible for the US Dollar to remain "an impartial and international trade medium . . . It is in fact a credit instrument reserved for one state only." By 1968, it was clear that the gold standard at $35.00 an ounce was unsustainable. World governments began converting their US dollars to gold, creating a vicious circle which weakened the US dollar and increased gold conversion even more. By 1971 under the Richard Nixon administration, US gold holdings had diminished to just 22% of world supply, and gold backed only 16 cents of every US dollar. Inflation and unemployment continued to rise across America as the Vietnam War dragged on, and as the Baby Boomers came of age. Something had to give.

PEGGING THE PETRODOLLAR

Ironically, it was the British and French governments, co-pillars of the post-war economic order, which would summon the demise of the Bretton Woods system and the gold-pegged US dollar. In early August, 1971, French president Pompidou dispatched a French warship to New York Harbor with orders to retrieve the entirety of his nation’s gold bullion from the US Federal Reserve. It was a massive blow, as the United States had secured over 210 tons of French gold for over three decades, after France evacuated its gold in 1940 to avoid its capture by advancing German forces. Then on August 11, the British government signaled its intent to covert over $3 billion US dollars to US-held gold, hammering the nail into the coffin of the gold standard. On August 13, 1971, President Nixon met secretly with a group of White House and Treasury officials at Camp David to formulate a plan.

On August 15, 1971, Richard Nixon gave a televised speech from the White House, announcing that the United States would close the “gold window” by suspending conversion of the US Dollar to gold. The dollar was effectively un-pegged from the gold standard to become fiat currency, just another player in the basket of international currencies. Although markets initially reacted positively to the “Nixon Shock,” and the dollar was temporarily bolstered by a fixed exchange rate, the value of the Dollar began to drop soon afterward in March, 1973 when fixed rates were abandoned and the value of currencies were “floated,” with fluctuating exchange rates based on market conditions. Unmoored from the stability of a gold supply, the dollar was floating precipitously on an unstable world market, and it needed to find another commodity to anchor it down.

On October 6, 1973, after the first night of the Jewish holiday of Yom Kippur, the combined forces of Syria, Egypt, Saudi Arabia, and Morocco crossed ceasefire lines into territory held by the State of Israel, sparking the Yom Kippur War. Surprised and ill-prepared, the Jewish State soon found itself in dire straits, with Syrian forces on the verge of breaking through Israeli lines in the disputed Golan Heights. Israeli Prime Minister Golda Meir urgently appealed to the Nixon administration for military aid, but the president’s Jewish national security advisor, Henry Kissinger, advised against it. However, the president broke from Kissinger’s advice, ordering the US military to “send everything that can fly” under the auspices of Operation Nickel Grass, airlifting tens of thousands of tons of military vehicles, weapons, ammunition, and electronic systems to beleaguered Israeli forces. By the end of the second week of conflict, the Israelis had turned the tide on both their northern and southern fronts. Israeli infantry advanced deep into Syria before the Arab parties called for a ceasefire, which took effect on October 25th, less than three weeks after the war had begun. Richard Nixon’s bold decision to airlift military aid was instrumental in preserving the balance of power in the Middle East. However, the reaction of Israel’s enemies was swift, leveraging their control over what had become the world’s most valuable commodity, oil.

On October 19th, 1973, within days of the commencement of Operation Nickel Grass, and before the Yom Kippur War had even ended, the 12 member states of the Organization of Petroleum Exporting Countries (OPEC) voted unanimously to suspend the sale of their oil to the United States, effectively placing the US under embargo. The decision sent massive shock waves through world markets, ballooning the price of oil by 400% in the following months, and causing an economic recession between 1973-1975. Even after the embargo was lifted in March, 1974, inflation continued to rise, stocks continued to fall, and the US economy continued to freefall. As the unraveling Watergate scandal reached its peak in the summer of 1974, the Nixon White House was desperate to avoid implosion. The president’s inner circle hatched an ambitious but quiet plan in an attempt to stave off political and economic disaster. Ironically, the commodity which had become the greatest problem for the United States in Fall of 1973 was about to become its greatest economic success for the next half-century.

Newly-appointed Treasury secretary William Simon boarded a flight from Washington, DC on a rainy morning in July, 1974. Officially, Simon was leading a diplomacy tour across Europe and the Middle East. But in reality, the hard-nosed former financier had been dispatched by Nixon on a secret mission to make a deal with OPEC’s biggest player, the Kingdom of Saudi Arabia. Just one month before in Washington, DC, President Nixon had signed a “milestone” deal with Saudi King Faisal bin Abdul-Aziz Al Saud, the first of its kind between the United States and an Arab nation. The pact created a government commission which would partner with the Kingdom on a range of initiatives, including economic development and defense cooperation. Oil was never explicitly mentioned in the written agreement, although the Nixon administration made no secret of its desire for the Saudis to increase oil output. However, the public détente was only half of the story. William Simon’s “four-day layover” in Jeddah along the Arabian coast was the other half.

What happened in those four days of secret negotiations was not officially acknowledged by the US government for over 40 years. Simon was under the gun, having been warned against returning home empty-handed. A straight negotiator, the secretary leveraged his years of experience in the private sector selling US treasuries (i.e. bonds financing US public debt), and in the end, he delivered. Sworn to secrecy by the Saudi king, Simon’s plan was as simple as it was brilliant. The United States would secure the survival of the Saudi monarchy by ensuring economic solvency and providing military aid. In return, the Saudis would agree to sell oil exclusively in US dollars, which they would subsequently reinvest back into the American economy, including US treasury bonds. Soon afterward, most other OPEC members would follow the Kingdom in selling oil for dollars. The United States had successfully decoupled the world’s reserve currency from a finite supply of gold, instead pegging it to a seemingly infinite supply of oil. The petrodollar was born.

Simon returned home triumphant to a relieved White House. But the administration’s relief was short-lived. On August 8th, facing imminent impeachment in the US House of Representatives, Richard Nixon announced his intention to resign the presidency in a televised speech. Nixon’s time in power was coming to an end, but his legacy in the establishment of the petrodollar was just beginning. The dollar stabilized in international markets, the economy recovered in the early 1980’s, and the Saudi monarchy secretly invested at least $117 billion US dollars in US treasuries. Combined with its roles as the world’s largest economy and strongest military force, the United States petrodollar has ensured the Greenback’s dominance as the global reserve currency. However, just as unsustainable trends eventually hastened the collapse of the gold standard, so too are cracks beginning to appear in the petrodollar system.

UN-PEGGING THE PETRODOLLAR

For the past 48 years, the global system of oil-for-dollars has facilitated global trade and buoyed the US economy. The Saudi royal family has enjoyed a special relationship with every US presidency since 1974, Republican and Democrat alike, prompting critics to cry favoritism when evidence of Saudi corruption and human rights abuses are overlooked. As the global threat of the Iranian regime has increased and as the Middle East has destabilized, the relationship between the United States and the Gulf kingdoms has only strengthened. On the other hand, the petrodollar has kept the US dollar strong and US Treasuries attractive to foreign investors. While the sovereign debt of the United States government has grown exponentially from 3 trillion dollars in 2000 to over 30 trillion in 2022, the US Dollar has remained strong. The outflow of dollars in oil, trade, and financed debt has empowered foreign investment and development, and nowhere is this more evident than in China.

Richard Nixon’s other lasting achievement in foreign affairs was his détente with the People’s Republic of China. In an effort to drive a wedge between Communist China and Soviet Russia, and to pressure the Communist North Vietnamese government in the waning days of the Vietnam War, Nixon met with an ailing Chairman Mao Tse-Tung in February, 1972. The United States later officially normalized relations with China in 1978, followed by an explosion in bilateral trade. As the Chinese economy developed rapidly in the 1980’s, especially in the construction and goods manufacturing sectors, the Chinese government implemented a policy of “going out” to the world in search of export markets and energy sources. China’s Belt and Road Initiative, a 4.3 trillion-dollar pan-Eurasian program to connect China’s economic hub with the world, has tied Muslim nations in the Middle East and Central Asia together in the pursuit of grand, transcontinental infrastructure projects.

Besides China’s global initiatives, the oil-rich Gulf kingdoms are prime targets for an energy-hungry Chinese economy. In 2021, trading between China and the nations of the Gulf Cooperation Council (GCC) exceeded $200 billion US Dollars. China has become Saudi Arabia’s largest import partner and its largest petroleum export customer, enjoying China’s coveted status as a “comprehensive strategic partner.” China regularly hosts trade forums and technology expos targeting OPEC nations, even outmaneuvering the United States by spoiling a trade deal with the UAE for American F-35 fighter jets. In 2022, China revived its effort to clinch a free trade agreement with the GCC, including Saudi Arabia, the UAE, Kuwait, Bahrain, and Oman. If such a trade deal were realized, it would be a major blow to the petrodollar and American economic hegemony on the Arabian Peninsula. Already, diplomatic cracks in the system have begun to show.

In 2018, OPEC member Venezuela ditched the petrodollar, instead accepting Euros for oil payments. It was an unprecedented move, but not particularly consequential. Venezuela is far from OPEC’s largest oil producer, and over 80% of the world’s oil supply is still traded for US dollars. However, last month, reports surfaced of talks between China and Saudi Arabia to consider pricing at least some Saudi oil in Chinese yuan. The Kingdom has reportedly become increasingly disillusioned with US-Saudi relations, as the Biden Administration has recently removed the Iranian-sponsored Houthi rebels from the list of designated terror groups, even as the Houthis continue to attack Saudi and Emeriti oil facilities with rocket fire from Yemen. The US government’s renewed commitment to revive the Iranian nuclear deal (JCPOA) has also been viewed with suspicion by the Saudis, who have become the Iranian regime’s number two target in the region after Israel. Many analysts believe that the reports were a Saudi bluff, intended to course-correct US diplomacy back towards the Gulf states. They claim that the petrodollar is still in the best interests of both China and Saudi Arabia, who have pegged their own currencies to the dollar through massive investment in US Treasury bonds and other trade. To this day, the US Dollar still makes up 55% of the entire world’s trading currency, while the yuan is only 2.5%.

However, an increasing volume of trade between Saudi Arabia and China within the context of a “floating” currency market makes a yuan-for-oil deal more and more plausible. According to the Wall Street Journal, it "would be a profound shift for Saudi Arabia to price even some of its roughly 6.2 million barrels of day of crude exports in anything other than dollars." In other words, the petrodollar would not have to be completely replaced as the world’s reserve currency, as even just a partial displacement could have massive consequences for the global economy. An economic system which operates on two competing reserve currencies would dramatically reshape geopolitics across the world, and especially in the Middle East, where economies continue to revolve around oil. The growing purchasing power of the yuan in the basket of currencies with other non-aligned nations would prove to be an attractive alternative for Middle Eastern governments which appreciate financing and investment without the West’s moral strings attached. Already this trend has become apparent, as China has played a key role in NEOM, Saudi Arabia’s massive city-building project along the Red Sea coast.

Although we don’t know exactly how or when the US Dollar will be diminished in global trade, according to Revelation 18, we do know that an economic system will one day arise which will “enrich the merchants of the Earth” as the nations get drunk on the “wine of her immorality.” The Apostle John witnessed how the Beast which opposes God and His people will take advantage of this economic system before turning in a murderous rage on the seat of its power in Mystery Babylon. It is difficult to imagine such a system arising in the current global economy, but the growth an alternate base of wealth and trade amongst non-aligned nations could allow for such scenario, especially considering that many of those same nations are opposed to the West, and hostile towards Israel. Only time will tell how close we are to the death of the petrodollar. But we can be assured of one thing: all human systems recede and collapse in time, and are replaced by a new order. The unchecked ballooning of US debt, the withdrawal of US influence in the Middle East, and the ascendency of China all indicate that a dramatic shift in the global economic order could be much closer than we think.