- Huge Debt Got Us Hooked on Petrodollars — and on Saudi Arabia
by Ryan McMaken, https://mises.org/
The Iranian regime and the Saudi Arabian regime are longtime enemies, both vying for control of the Persian Gulf region. Part of the conflict stems from religious differences — differences between Shia and Sunni Muslim groups. But much of it stems from mundane desires to establish regional dominance.
For more than forty years, however, Saudi Arabia has had one important ace in the hole in terms of its battle with Iran: the US’s continued support for the Saudi regime.
But why should the US continue to so robustly support this dictatorial regime? Certainly, these close relations can’t be due to any American support for democracy and human rights. The Saudi regime is one of the world’s most illiberal and antidemocratic regimes. Its ruling class has repeatedly been connected to Islamist terrorist groups, with Foreign Policy magazine last year calling Saudi Arabia “the beating heart of Wahhabism — the harsh, absolutist religious creed that helped seed the worldviews of al Qaeda and the Islamic State.”
Saudis behind the Petrodollar
The answer lies in the fact that the Saudi state is at the center of US efforts to maintain the dollar as the world’s reserve currency, and to ensure global demand for US debt. The origins of this system go back decades.
By 1974, the US dollar was in a precarious position. In 1971, thanks to profligate spending on both war and domestic welfare programs, the US could no longer maintain a set global price for gold in line with the Bretton Woods system established in 1944. The value of the dollar in relation to gold fell as the supply of dollars increased as a byproduct of growing deficit spending. Foreign governments and investors began to lose faith in the dollar, and both Switzerland and France demanded gold in exchange for their dollars, as stipulated by Bretton Woods. If such demands continued, though, US gold holdings would soon be depleted. Moreover, the dollar was losing value against other currencies. In May of 1971, Germany left the Bretton Woods system and the dollar fell against the Deutsche mark.