The biggest financial con in history
The year was 1944 and bankers from all the 44 Allied nations gathered in Bretton Woods, New Hampshire. Their mission was to create a set of agreements to manage international trade after WWII. Their agreement, known as The Bretton Woods agreement, established the dollar as the world's reserve currency.
This international game-changer gave the United States a distinct economic advantage, but with one caveat: every dollar the Fed printed would be redeemable for gold at the rate of $35/oz. This part of the agreement was put in place to ensure that the Fed wouldn't print dollars with reckless abandon. But of course, the Fed eventually printed and distributed more dollars than it had in gold to exchange. Finally, with massive expenditures on the Vietnam War, the rest of the world became suspicious of America's ability to pay. So nations began to demand the gold they were promised for their US dollars.
So, in 1971, President Nixon recognized that the US would not be able to meet its obligations and closed the so-called gold window. It was the first American default and it set off a rapid decline in the value of the dollar. Oil prices soared. Inflation soared to 15% and higher. At the same time, GDP fell 3.2% and unemployment rose to 9%. Price/Earnings ratios crashed down, from 16 to 8, and stocks had the worst 15-year period in history -- even worse than during the Great Depression. The government then imposed wage and price controls which caused gas shortages around the country.
Then, in 1973, Secretary of State Henry Kissinger hatched a brilliant plan
America had great military might and Saudi Arabia needed protection for its vast oil empire. So, in a stroke of genius, Kissinger exchanged America's military might for Saudi Arabia's promise to sell oil for US dollars only. This meant that any country wanting to purchase oil from OPEC was forced to use US dollars. In other words, anytime another country wanted to buy oil from the Middle East, they had to first convert their currency into US dollars and take a loss in that conversion process. And since oil is required in modern economies -- and the Saudis are a main player in the oil trade -- this put the US in a unique and very powerful position: Countries around the world were hereby pressured into exporting goods and services to the USA in order to get the dollars they needed to buy oil. And where would we get those dollars? Mostly by borrowing money from the central bank of China, the central banks of Japan and the UK, and from all other investors, foreign and domestic, public and private, who wanted to buy US treasury certificates. And to the extent that such purchases of our treasury bonds finally began to lag, our own Federal Reserve would simply create money out of thin air and buy those bonds itself, thereby supplying the US Treasury with unlimited amounts of dollars.
Therefore, to that extent, in order to get its oil, America's government could, to whatever degree necessary, simply create out of thin air the dollars it needed to buy that oil -- which meant that the US could run massive trade deficits. Why did this work so well? It worked because we were exporting the most valuable "commodity' in the world at that time, the US dollar -- the currency that was needed for any other country to buy oil.
The terrible side-effect that eventually came to accompany this racket