geopolitics in the Middle East (where I lived and worked for several years).

From Bretton Woods to the Petrodollar

The Bretton Woods international monetary system, which the Allied powers created in 1944, turned the dollar into the world’s premier reserve currency.

After WWII, the U.S. had by far the largest gold reserves in the world (around 706 million ounces). These large reserves - in addition to winning the war - allowed the U.S. to reconstruct the global monetary system around the dollar.

The Bretton Woods system tied virtually every country’s currency to the U.S. dollar through a fixed exchange rate. It also tied the U.S. dollar to gold at a fixed exchange rate.

Countries around the world stored dollars for international trade or to exchange with the U.S. government at the official ratecreated the petrodollar system.

The U.S. government chose Saudi Arabia because of its vast petroleum reserves, its dominant position in OPEC, and the (correct) perception that the Saudi royal family was corruptible.

In essence, the petrodollar system was an agreement that the U.S. would guarantee the survival of the House of Saud. In exchange, Saudi Arabia would:

Use its dominant position in OPEC to ensure that all oil transactions would happen in U.S. dollars.

Invest a large amount of its dollars from oil revenue in U.S. Treasury securities and use the interest payments from those securities to pay U.S. companies to modernize the infrastructure of Saudi Arabia.

Guarantee the price of oil within limits acceptable to the U.S. and prevent another oil embargo by other OPEC members.

Oil is the world’s most traded and