There is no such thing as a petrodollar. Yet, the term continues to garner use in today’s discussions about global currencies and financial arrangements. The word is frequently thrown around whenever some oil producing state does something in partnership with another country not named United States.
From a certain, narrow perspective, the mistake is somewhat understandable. The real global currency, eurodollar, has remained entirely in the dark. As so, by the time of the oil embargo in 1973, and the newfound, price-soaked gains redistributed to OPEC, it only seemed like a new currency system had been arranged out of the 1971 ashes of Bretton Woods with oil replacing gold as its commodity center.
No.
The fact that the very idea of the petrodollar keeps going to this day is instead a poignant if inadvertent acknowledgement of the limited monetary literacy provided by the dastardly discipline of statistics-obsessed Economics. We’ve all been left in the dark, and it began that way all the way back decades ago with the very people tasked with being “our” monetary stewards.
Whereas the eurodollar system was already blooming by the early 1960’s, those at the Federal Reserve were caught unprepared and struggled mightily to make sense of its designs, aims, and methods. From their primitive viewpoint, these “dollars” (there weren’t pallets of physical stacks of Federal Reserve notes, merely book entries on a shared ledger system) must have been “exported” by the loud American balance of payments (BoP) deficits.
By importing more merchandise than what had been exported, US-based companies and individuals were obliged, in the aggregate, to send more dollars overseas to pay for the imports than what came back to pay for exports. Many times during those early sixties discussions raising the eurodollar subject, or Euro-currency as it was often written, the FOMC blamed the country’s BoP deficit as its sole source.
The example below from early March 1962 (quoting the FOMC’s Memorandum of Discussion, or MoD) among plenty, a time, it should be noted, barely months following the formation of the London Gold Pool in response to, essentially, a near-complete breakdown in Bretton Woods so soon after its implementation and a very long time before Nixon.
“Everyone would agree, [Vice Chairman Alfred Hayes] thought, that the basic solution was in remedying the U. S. balance of payments. At such time as it was demonstrated that the United States was doing that, the desire for gold would fade away.”
Rebalance US trade, fewer dollars abroad, the drain of gold reserves “would fade away.” Seemed easy enough.
Yet, at the same time, in fact, the few sentences immediately prior to the above, Vice Chairman Hayes apparently already admitted how, “The holding of dollars had served to promote a degree of world liquidity that could never have been achieved if everyone held gold.”
In other words, Robert Triffin. However they got there, the floatation of so many “dollars” around the world had indeed at that early stage worked to solve what would be called Mr. Triffin’s paradox. Form, therefore, followed the demand function.
Not balance of payments, desire for elasticity, “a degree of world liquidity” Bretton Woods was incapable of achieving. And if that was the case, as it would easily prove to be, then the issue of overseas dollars went way beyond US BoP, having already at such an ancient date become a far more fundamental matte
