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Nixon Shocks &Amp; The Birth Of The Petro Dollar

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By Anusha Gupta

Till date the only source of our misery was the US Dollar. The recent fluctuation in the value of the rupee have catastrophic implications on both economy and politics. To understand why the US dollar causes soo much misery we need to understand what the petro dollar is and how it came to be.

In 1945, the Bretton Woods agreement established the US Dollar as the world reserve currency which meant that international commodities were priced in terms of dollars and these dollars were convertible into gold at a fixed rate of $35 per ounce. Thus, the United States was committed to back every dollar overseas with gold. Other currencies were fixed to the dollar and the dollar was pegged to gold. In the first few years after World War II, the Bretton Woods system worked well. Japan and Europe  rebuilt after the war and foreigners wanted dollars to spend on American goods such as cars, steel, machinery, etc. The system appeared secure, because the U.S. owned over half of the world’s official gold reserves – 574 million ounces at the end of World War II.

However,(from 1950 to 1969) as Germany and Japan recovered from the war, the US share of the world’s economic output dropped significantly from 35 to 27 percent. Furthermore, with increased expenditure in the Vietnam War and the negative balance of payments, many countries started to withdraw their gold from the system. As a result the value of the dollar began to decline rapidly. In 1971, the president, Richard Nixon suspended the convertibility of the dollar into gold and undertook various measures to protect the value of the currency. These series of measures came to be known as the Nixon shocks.

In 1973 Nixon asked King Faisal of Saudi Arabia to only accept US Dollars as payment for oil and to invest the profits in US treasury bonds. In return the US offered military protection to Saudi oil fields. This offer was extended to each of the key oil producing countries under OPEC. What did it imply?

It meant that all oil importing countries had to now maintain a constant supply of the dollar and the value of the dollar was carefully detached from gold and was pegged to oil. This was the birth of the petro-dollar. Many believed that it was the largest financial con in recorded history.

Many oil producing countries including Iraq have protested against this system and currently they seek to trade oil only for gold or Euros, but the US has shunned every voice that ever went against it.

 

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