The Petrodollar Story

Before The Dollar Was King The currency wars and trade collapse of the 1930s didn't just deepen the Great Depression. They helped cause World War II. By 1944, the Allied leaders understood that winning the war was only half the task. They also had to build a monetary system that would prevent the next one. That was the purpose of the meeting at Bretton Woods, New Hampshire. In 1945, the United States held roughly two-thirds of the world's monetary gold. Its factories produced half of everything manufactured on earth. Its military had just ended two wars on opposite sides of the planet simultaneously. And Roosevelt, physically fading but politically untouchable, was the man every Allied leader needed and none could replace. When forty-four nations gathered at Bretton Woods in July 1944 to design the postwar monetary system, the outcome was never in doubt. The dollar would sit at the center of the world. Every other currency would peg to it. And the dollar itself would be convertible to gold at a fixed rate of thirty-five dollars per ounce. It was an elegant system with a fatal flaw. For it to work, the United States had to be both the world's banker and the world's biggest spender. Eventually, those two roles would become irreconcilable. But in 1945, that contradiction was decades away. America was rich, confident, and sitting on more gold than any civilization in history had ever accumulated. Fort Knox was full. The dollar was, quite literally, as good as gold. No one at Bretton Woods anticipated what would happen next. Military-Industrial Complex Drains The US Dollar The system began to strain almost immediately, though it took years for the stress fractures to become visible. The Marshall Plan pumped billions of dollars into Europe. American military bases spread across the globe: Germany, Japan, Korea, the Philippines, Turkey, and dozens of other nations. U.S. corporations expanded overseas at an unprecedented rate. The numbers were staggering. By 1953, the Korean War alone had cost $30 billion — roughly $340 billion in today's money. The Pentagon's annual budget tripled between 1950 and 1953 and never came back down. Eisenhower warned about exactly this in his farewell address, but by then the machine was self-sustaining. Defense contracts fed congressional districts. Congressional districts protected defense budgets. Bases in 30 countries required supply chains that bled dollars overseas around the clock. Vietnam would eventually consume another $150 billion that the Treasury didn't have — paid for by printing the very dollars the world was already losing faith in. All of this meant dollars leaving the country faster than they were coming back. This wasn't a bug. It was, in a sense, the point. The world needed dollars to conduct trade, rebuild economies, and hold as reserves. The United States was the only source. Economists warned as early as 1960 that the system contained a fatal contradiction: for the dollar to serve as the world's reserve currency, America had to run deficits. But persistent deficits would erode confidence in the dollar's gold backing. It couldn't do both forever. By the late 1950s, the Korean War, the arms race, and global military commitments were burning through gold reserves. - 1950: The United States held 20,279 tonnes of gold. - 1957: The decline began. - 1960: America's dollar liabilities exceeded its gold holdings for the first time. The world now held more claims on American gold than America had gold to honor. Anyone paying attention could do the arithmetic. The system was living on borrowed credibility. The French Gold Break with America Charles de Gaulle looked at Bretton Woods and saw a rigged game. The United States could print dollars and exchange them for real goods. Other countries had to earn their foreign exchange through trade. In February 1965, he called for an end to the dollar's privileged position and announced France would begin converting its dollar reserves into gold. Between 1963 and 1966, France repatriated 3,313 tonnes of gold from New York and London. It took 44 boat trips and 129 flights. France even dispatched a warship. Other nations followed. The Gold Pool collapsed by March 1968. American gold holdings fell from 20,312 tonnes to 9,679 tonnes. Nearly half the reserve was gone. The Nixon Shock By the summer of 1971, the situation was an acute crisis. Vietnam was draining the treasury. Inflation was rising. Speculators were dumping dollars for gold. On August 9, Switzerland left the Bretton Woods system entirely. Two days later, Britain requested that $3 billion in gold be repositioned for potential redemption. America's closest ally was preparing to cash out. If Britain was getting ready to leave, the game was over. Nixon convened an emergency meeting at Camp David on August 13. On August 15, he went on national television and severed the dollar from gold. He framed it as temporary. It was permanent. Treasury Secretary John Connally told foreign fi