I. Historical Recap.
For those of you not entirely caught up on monetary history, let me bring you up to speed. I’ll try to make this as brief as possible as monetary history is complex and can be especially difficult for people who do not understand finance or economics at all.
1. For all of human history, Gold and other precious metals of finite quantity served as money par excellence. This is because Gold and other such metals work as a medium of exchange, are fungible, portable, divisible, durable, and work as units of account. Likewise, such moneys prevent what might be called “deficit spending” as a nation could only spend what it had in actual gold & silver etc. Some nations, such as Athens in the Peloponnesian war, debased their gold by re-smelting it with copper in order to produce more coins than they had in their treasury initially. This created an inflationary situation as public trust in the currency led to its devaluation and was a contributor to the Athenian defeat in that conflict against Sparta.
2. Fast-forward to the 20th century, and European powers, as well as America, maintained the Gold Standard. During World War I the U.S. sold food and weapons to the Allies (and sometimes even to the central powers) in exchange for Gold. Because of the expensive nature of the conflict, the United States acquired nearly all of Europe’s gold reserves and would acquire more as it assumed its former role for a good portion of WWII until it entered late following the attack on Pearl Harbor in December 1941.
3. Because the world economy was dependent on Gold, and the arbitrary printing of money has always led to inflationary crash (see #1 above and apply the results to all who have tried fiat currency), a conference was called by world leaders in order to stabilize the global economy to prevent total financial collapse. In 1944 the Bretton-Woods system was devised that enthroned the American dollar. The brilliance of this system was that it allowed the Gold standard to remain globally while most countries did not have their own Gold. This was done by making the U.S. dollar the global reserve currency requiring all nations to first trade in the U.S. dollar to do global exchanges. Because the U.S. dollar was “as good as gold” nations began storing up dollars instead of physical gold given that paper dollars were guaranteed checks for physical gold.
4. The United State then cheated their dependents. The U.S. did this by printing more paper dollars then they had Gold. Essentially, the U.S. was writing bad checks in order to pay for the Vietnam War and Johnson’s “Great Society” welfare program. A bank run began as foreign investors suspicious of the con tried to exchange all of their dollars for Gold, had they succeeded, the U.S. would have fallen into economic collapse along with the entire world (as everyone who used U.S. dollars as gold would have worthless notes and would have to default on debts paid under the assumption that they were worth gold).
5. Nixon knowing the pending crisis, arbitrarily took the U.S. dollar off of the Gold Standard in 1972. The currencies of the world were now in a state of float, and OPEC, being furious over the U.S. con as well the complicity of it and other nations in supporting Israel in Yom Kippur War, placed an embargo on western nations in 1973.
6. To prevent oil from ever being used as a weapon against the U.S., to gain back the dollar’s reserve currency legitimacy, and to also allow the U.S. to spend with impunity without having to suffer any consequence, Henry Kissinger under the direction of Richard Nixon made a deal with Saudi Arabia and the OPEC nations to make the U.S. dollar the reserve currency, but instead of being so for Gold, it was now the reserve currency for oil. The reason oil was different, was because its demand would only increase, though still being theoretically “finite.” This meant, that for as long as a demand for oil increased (with more countries using petroleum based goods), the demand for U.S. dollars would increase throughout the world and therefore the U.S. could print and spend dollars and never really have to worry about “breaking the bank,” or runaway “inflation,” all while still recovering a backing for the dollar and preventing it from becoming a mere fiat currency. This situation now made the U.S. government’s spending the first fiscally legitimate form of deficit spending in human history. Saudi Arabia and various other OPEC states received U.S. protections and military investments in exchange and is why the U.S. has been involved in middle-eastern affairs ever since.
II. The Case for The Petro-Dollar.
1. Let me being by saying, that under the circumstances outlined above, I do not see how an American politician representing American interests could really have done otherwise if presented with the same options. That is, it seemed morally responsible to trade Gold for resources in aiding the allies, the Bretton-Woods system seemed to be a reasonable solution, and the Kissinger plan was equally brilliant. Obviously the U.S. should not have engaged in deficit spending while under the gold standard, but what is done is done. Given the options in 1974, the Kissinger-plan was brilliant, in fact, it was probably one of the most brilliant diplomatic moves in world history.
2. If the U.S. were to arbitrary end the petro-dollar, or if it were ended by someone else, it would invariably lead to economic collapse for both the U.S. and arguably the whole globe, and for basically the same reasons as the bank-run that led to the end of the gold-standard in 1972. Thus it is a marriage that cannot be annulled. The U.S. and the world have a vested interest in the continuation of the Petro-Dollar.
3. The Petro-Dollar has allowed spending unlike anything the world has ever seen and the dollar is not a fiat currency. That is, despite what some libertarians might say, the American dollar is NOT a fiat paper currency and if was, it would have ended before 1980. The Petro-Dollar is backed by something “better” than Gold in the sense that it still gives the dollar a real tangible backing, but unlike Gold, Oil is in continued production, continued demand, and is consumed through manufacturing and combustion. Thus, dollars can be continually printed and wealth grown beyond what physical gold could actually support. Hence, the wealth and prosperity as it currently exists in the world, could not have been achieved by a Gold standard, only by an oil standard.
4. Any instability in the middle-east that would threaten the petro-dollar, or any alliance of governments to bypass it, is by definition a threat to global stability and the actual survival of the United States. Hence, attacking the Petro-Dollar seems to be a perfectly legitimate cause for the U.S. to declare war. Likewise, and this is the most cynical conclusion of all, the U.S. and world leaders have a vested interest in NEVER making public the possible reality of a “peak oil” situation. If they did, even if the end of oil were decades away, it would lead to financial panic among investors and lead to the collapse of the Petro-dollar as public trust devalued it.
I hope I’m wrong, but I don’t think I am……so sing along with me: “Long Live The Petro-Dollar and The Pax Americana!”
“Fallacies do not cease to be fallacies because they become fashions.”
- G. K. Chesterton