Era 06 · 1971 — 2008

Fiat & Petrodollar

What backs it

Backed by government trust

Pulse cycle

4.5s

On August 15, 1971, Nixon ended the dollar's convertibility into gold. Every major currency in the world became pure fiat — backed by nothing but the taxing power and political stability of its issuer. Two years later, a US-Saudi agreement priced oil in dollars, giving the dollar one more thing to stand on: the global energy trade.

Events in this era

Aug 15, 1971

Nixon closes the gold window

Facing dwindling US gold reserves (down from 20,000 tonnes in 1950 to roughly 8,100 tonnes) and foreign central banks lining up to redeem dollars, Nixon announced in a televised Sunday-evening address that the Treasury would no longer convert dollars to gold at $35 per ounce. He also imposed a 90-day wage and price freeze and a 10 percent import surcharge. Bretton Woods ended that evening. The world was now on pure fiat, and stagflation followed for the rest of the decade.

Ended 2,500 years of metallic-backed currency

1973

Petrodollar agreement

Treasury Secretary William Simon negotiated a bilateral deal with Saudi Arabia after the 1973 oil embargo and the fourfold price spike that followed. Saudi Arabia would price oil exclusively in US dollars and recycle its surpluses into US Treasury bonds. In exchange, the US guaranteed Saudi security and provided military equipment. Other OPEC members followed by 1975. The dollar became the global reserve currency by diplomatic design, and every nation that imported oil was structurally obligated to hold dollars, a rare second act for a currency that had just been unpegged from gold.

Dollar became the world's settlement currency

Oct 1979 — Aug 1982

The Volcker shock

Federal Reserve Chairman Paul Volcker raised short-term rates to nearly 20 percent to break inflation. The fiat dollar faced its first real test: could it hold value without gold backing, when inflation had already reached 14.8 percent? Yes, but only at the cost of two recessions and double-digit unemployment. The decision defined modern central banking.

Inflation broken from 14.8% to 3% by 1983

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Bretton Woods & the Dollar

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