The Dollar Runs on a Deal Nobody Signed

It looks like trust. It behaves like necessity.

Insert after this sentence:
“Gold backing, cancelled. On a Sunday night. On television.”

In 1971, the United States removed the one thing that gave every other country a reason to hold its currency.

Gold backing, cancelled. On a Sunday night. On television.

The logical consequence was obvious. If dollars were no longer redeemable for anything, countries would stop accumulating them. The dollar would lose its position as the world's reserve currency. America would lose the extraordinary financial advantage that came with that position.

That consequence did not happen.

 

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Fifty-four years later, the dollar still sits at the centre of global finance. Its share of foreign exchange reserves has fallen from about 71% in 1999 to roughly 58% in 2023, a real decline, but it remains larger than the next four reserve currencies combined. Every central bank in every serious economy holds significant dollar reserves. The dollar is still the price the world pays for oil.

If you find these two facts genuinely puzzling when held together, you are in the right place.

The explanation most people reach for that the dollar is strong because America is powerful answers a different question.

It does not explain why countries keep choosing to hold an asset that the issuing country deliberately untethered from any backing.

The real answer was built under pressure, between 1973 and 1975, in a series of agreements between Washington and Riyadh that have never been fully declassified.

No formal treaty was signed.
No international body voted on it.

The architecture that replaced gold backing was assembled in a panic, worked, and then hardened into something that now feels permanent.

How a Crisis Became an Architecture

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The 1973 oil embargo was the proximate cause.

Arab OPEC members cut supply to countries that had supported Israel in the Yom Kippur War. The United States was a primary target. Oil prices went from roughly three dollars per barrel to over eleven dollars within months. Fuel queues stretched around city blocks. Inflation, already running above 6% annually, began moving into double digits.

The embargo made visible something the Nixon administration had been avoiding.

The United States could be materially damaged by oil exporters.

The dollar needed a new reason for the world to want it.

Oil provided one.

The Agreement That Replaced Gold

Insert after this line:
“The dollar needed a new reason for the world to want it.”

The negotiations with Saudi Arabia that followed are only partially documented in declassified Treasury Department records surfaced by Bloomberg reporting in 2016.

What is known is the core exchange:

• Saudi Arabia would price its oil in US dollars
• It would invest surplus revenues in US Treasury bonds
• The United States would provide military guarantees and political support

Because Saudi Arabia led OPEC and because oil markets needed pricing in a currency liquid enough to handle the volume, other major producers followed.

By 1975, dollar oil pricing was the effective global standard.

What this created was not a confidence arrangement. It was a necessity arrangement.

The Part Most Analysis Misses

Every country that imports oil, Japan, South Korea, Germany, India, every industrialising economy in Asia and Africa must hold dollar reserves to pay for it.

Not because they respect American monetary policy.
Not because they trust the Federal Reserve.

Because oil is priced in dollars.

You cannot pay for crude without first converting your currency into dollars.

The requirement arrives before any investment preference. It is logistical before it isinancial.

This matters because it means the demand for dollars is not tied to confidence.

The US can run a $1.7 trillion deficit, as it did in 2023, and demand still holds.

Energy dependency creates a floor under the currency.

Compare this to gold.

Gold backing was a constraint.

Countries like France could demand gold when they lost confidence.

The petrodollar offers no such exit.

You cannot demand oil for your dollars.

You either hold dollars or accept higher costs and friction every time you transact.

The Trap Runs Both Ways

The system does not just bind other countries.

It binds the United States, too.

To supply dollars globally, the US must run trade deficits.

It imports more than it exports.
Send dollars outward.

The system that sustains dollar dominance also erodes domestic manufacturing over time.

This is the dynamic Robert Triffin identified in 1960.

The architecture feeds the problem it depends on.

Why the Exit Is Harder Than It Looks

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Russia tested the exit after 2022.

Sanctions cut it off from the dollar systems.
It shifted to ruble and yuan trade.

Oil kept flowing.

But at a cost.

Russian crude sold at discounts of $20 to $35 per barrel.

Buyers charged for currency risk and limited liquidity.

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China is building an alternative.

Yuan-based oil contracts launched in 2018.
Settlement agreements are expanding.

But the yuan is capital-controlled.

Money cannot move freely. That limits trust at scale.

Until that changes, the yuan cannot replace the dollar fully.

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What the Exchange Rate Actually Measures

The IMF estimated in 2023 that the dollar’s share of global reserves declined from 71% in 1999 to about 58%.

A real decline.
A slow one.

Happening through small shifts, not a single event.

The dollar is not ending.

It is thinning.

None of this was designed.

The Bretton Woods system had a conference, agreements, structure.

The petrodollar system had none of that.

It was built under pressure and lasted long enough to become invisible.

Final Thought

The next time you see an exchange rate

any exchange rate

Remember what part of it reflects.

A deal no one signed.
Built to prevent collapse.
Still shaping the system decades later.