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.
The deal is one of the most consequential secret agreements of the 20th century. It explains why the US can run persistent trade deficits without a currency crisis — the rest of the world is structurally obligated to hold dollars to buy oil.
06 · Fiat & Petrodollar
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.
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