The Nixon shock and the birth of the petrodollar
On August 15, 1971, US President Richard Nixon ends the Bretton Woods monetary system after a quarter-century. He cancels the gold peg of the USdollar. At first, this is merely “temporary” and is intended to “strengthen” the US economy. At this point, the US has “only” about 8,000 tons of gold in its reserves.
- Europeans are shocked at the unilateral decision. Instead of giving up the “exorbitant privilege” and moving the world to a neutral reserve asset, the US continues to expand its privilege. Starting in 1971, Washington no longer has to fear losing gold when printing money.
- The 1970s see high inflation rates and two oil shocks. The production of US oil reaches its temporary peak at the end of the 1960s, and the Arab oil countries see Nixon’s move as a devaluation of the USdollar. Prices rise and crises break out in the Arab region. For the first time, Western industrialized countries have todealwith oil shortages.
- In 1972, US President Richard Nixon visits communist China, marking a turning point in relations between the two countries. Nixon spends seven days in China. This signals the startof a new form of cooperation that will jumpstart China’s economic development.
- At these meetings, a deal is negotiated that is to have a massive impact for decades to come. In return for military and political support, Saudi Arabia agrees to recycle its petrodollars into USTreasuries.
- The petrodollar is born. From this point on, the world’s reserve currency, the USdollar, isno longer backed by gold but by “black gold”. From then on, all countries must hold large reserves of the US currency to pay their energy bills.