The Petrodollar

After Nixon ended the gold standard in 1971, the US dollar needed a new reason to be the world’s reserve currency. In 1974, it got one.

The US negotiated a deal with Saudi Arabia: oil would be priced and traded globally in US dollars. In exchange, the US would provide Saudi Arabia with military security. The arrangement became known as the petrodollar system.

The consequences were enormous. Every country that needed oil — which was every industrialised country — needed US dollars to buy it. To get dollars, you had to trade with the US or sell assets to dollar holders. The dollar became structurally necessary for global commerce, not because America was especially trustworthy, but because everyone needed it to buy energy.

This gave the US a privilege no other country had: it could run large deficits, print money, and project military power — knowing that global demand for dollars would absorb the supply. Other countries that tried this caused inflation. The US could absorb it.

Fifty years later, that arrangement is fraying. China and Russia settle increasing amounts of energy trade in non-dollar currencies. Saudi Arabia has accepted yuan for oil sales. The BRICS countries are building alternative payment systems. The dollar is still dominant — but its dominance is no longer unquestioned.

Bitcoin enters this picture as the first asset that is genuinely neutral. No government issues it. No military backs it. No sanctions regime applies to it. For countries looking to reduce dollar dependence without substituting one country’s currency for another, Bitcoin offers something that hasn’t existed before.

Tomorrow: 300 days. The week in review — sovereignty and the monetary landscape.

— The Daily Bit