I can already hear the collective WUH?! of the Kos community, but hear me out.  

How many of you out there are familiar with the terms Gold Standard, Fiat Currency, and Petrodollar?

The most familiar of these terms is of course the Gold Standard.  Originally when the United
States issued currency, it was backed by the Gold Standard, meaning that at any point, you
could take your $1 of American currency and trade it in for $1 worth of gold.  For every dollar in existence, there would be one dollar worth of gold in reserve.  During the great depression
however, the United States saw one of the largest bank runs in history.  Both currency and gold were pulled out of national and local banks at such an alarming rate, and the federal government was forced to take drastic measures; namely, nationalize the holding of gold.  All gold bullion and gold coins were confiscated and exchanged for paper money.  In fact it was illegal for any United States citizen to hold bullion or gold coins after 1933.  The following January Roosevelt and the US Congress unilaterally raised the price of gold from $20 an ounce to $35 an ounce.  

Since all paper money was backed by gold reserve, the money supply could now be increased nearly 100% over night.  This devalued the American dollar nearly in half.  To give a brief history of the price of gold, in 1833, the value of one once of gold was $18.93.  One hundred years later in 1933, the price of one ounce of gold was $20.69.  As you can see this is a very small inflationary increase.  From 1933 to 1971 the price of gold went from $20.69 an ounce, to $40.62 an ounce under the Bretton Woods agreement, fixing the value of 35 US dollars to one troy ounce of gold.  Already we can see that this was a problem as the value of gold was worth more than what the dollar could buy, meaning that the us treasury would lose money on every exchange.  

If I haven't bored you to tears thus far, follow me past the squiggle, I promise you it is worth it.

From 1971-1978 Nixon, and the United States Commerce, declared and made law that the United States currency would no longer be based on the gold standard, and would instead be converted to a fiat currency.  There were many reasons for this: electronics required gold to operate, making new technology insanely priced, foreign countries were trading in surplus dollars for American gold resulting in more US currency and gold being held outside the US borders than in, and inflation growing at a staggering rate due to debt increases and a rise in value of the gold due to this inflation.  In fact from 1971 when gold was at $40.62, to 1978, gold prices rose an astonishing $153 an ounce to $193.40.  This is an increase of 475%, which devalued the dollar to nearly 20% in just 7 short years.  The gold standard was abandoned, and the fiat currency took its place.

A fiat currency is simply a currency that states that a value of a currency, or dollar, is worth a
particular amount because the government who issues it says so.  Fiat itself is translated from Latin to mean "it shall be".  Governments are able to issue fiat currency in any denomination, and value it at what ever value they so choose in relation to other countries based on their economic strength and debts.  This is why we hear so much about China manipulating their currency, making it appear weaker than it really is, thereby strengthening their own (Yuan) in trade agreements.

The question then remains, how do we determine which currency comes out on top in a fiat
system?  Welcome the issue of the Petrodollar.  About the same time that the United States currency was transferred to a fiat system, the institution of the Petrodollar, with help from the largest oil producing country in the world, Saudi Arabia, came into practice.  The premise for this system is pretty simple.  Under the assumption that all oil in the world will be traded in US dollars, this system allows the federal reserve to print and hold unlimited dollars on their balance sheets that can later be used to issue debt on behalf of the United States.

Here's how the system works.  In this example we will use Saudi Arabia, United States, France, the Euro, and the American dollar.  We will also, for simplification, value a barrel of oil at one US dollar.

When a barrel of oil is pulled from the ground and processed by Saudi Arabia (or any other oil
producing country) the value of this barrel, one dollar, is minted and held by the Federal
Reserve.  Now since the purchaser of this oil must purchase in petrodollars (currently US
currency), this country, France in this example, must first trade their currency, the Euro, to the United States in exchange for American Currency.  The United States now holds the Euro from France, France holds the Dollar from US, and Saudi Arabia holds the oil.  France then uses the US Dollar to purchase the oil from Saudi Arabia.  Saudi Arabia then deposits the US Dollar into the Federal Reserve in exchange for the Euro that France exchanged.

The result is the Federal Reserve now has a minted dollar, which is backed by the demand for
future dollars that MUST be purchased and exchanged in the future in order for other countries to purchase the next batch of oil.

I hope I explained that easily enough for everyone to understand.  

No longer gold standard.  Fiat currency.  Petrodollar.  Federal Reserve unlimited Funding.

So now we must ask ourselves a few questions.  1.  What would happen if we returned to the Gold Standard? and 2. What would happen if the world used a different currency for the
Petrodollar?  Lastly, 3.  What would happen if the world stopped using Petrochemicals and went GREEN?

Firstly, if we were to return to the Gold Standard, we would have to assume that the United States, just as was done in the 1930's under Roosevelt, would go on a campaign of gold confiscation.  Since the 1970's, a large percentage of the gold once held by the Federal Reserve and United States government has been released for circulation through coinage, or bullion for production, namely in electronics.  The idea that we could return to a gold standard would not only destroy the United States, its economy, and its standing in the world, but also (not even counting for inflation) would raise the cost of most electronics to astronomical levels.  So even though many people fancy a return to the gold standard, it is not feasible in our current way of life.

Secondly, what would happen if the world used a different currency for the Petrodollar?  The Federal Reserve system would immediately lose the ability to introduce new currency to the economy, would lose its ability to issue debt on behalf of the United States, and our nation would instantly need to cut our spending across by board by more than 50%, resulting in a depression far worse than the Great Depression.  Have there been attempts to trade Petrodollars in other currencies?  Yes, certain world leaders have tried to do so.  The most famous of these being Khadafi of Libya, Hussein of Iraq, Ahmadinejad of Iran, and is a goal of Al Queda.  Without delving into the politics of this (although this would make a great separate diary) it's easy to see why we keep such a military strength presence in the middle east, and why we rely so much on Israel as an ally in that region.  If the entirety of the middle east were to trade Petrodollars in a foreign currency, the United States would quickly lose our statis as the top economic country in the world.

Thirdly, and the last point I want to make here to tie this rant in with the title of the piece, what would happen if the world stopped using fossil fuels and petrochemicals for our energy source?  Well, the largest benefit of course would be a cleaner environment.  Of course, the other side of this coin would be again the complete and utter destruction of the American Economy.  Going back to point number two, the Federal Reserve would be crippled (were this to happen quickly).  Almost all entitlement programs would be cut or eliminated, and our American way of life would resemble that of the Eastern European block.  Could we, one day, rid ourselves of the use of fossil fuels and ultimately the Fiat/Petrodollar economy we now have?  It's possible, but it will not happen any time soon.  Let's just hope we can make a transition over time properly, in a way in which we can protect the fragile environment we live in, while at the same time protecting the lively hood of the American people and our way of life.

I wanted to write this diary as a way to help both sides see that there is far more complication going on in the world than "fat cat oil guys" and "tree hugging hippies".  Our world, and our way of life, is dependent upon this system that generations past have put in place.  Yes, it is possible to change this path, but this is not something that can be done over night.  So the next time you hear someone say the war was about oil, yes, yes it was.  And the next time you hear the right saying that global warming is a myth and drill baby drill, understand that we can not change things instantly over night without destroying our country.

Things will change, new technologies will replace old, new financial systems will take place of old, but changes take generations, and it is important to understand the inner workings of the world and nations, without thinking about things in such black and white terms.

Originally posted to PRRedlin on Fri Feb 01, 2013 at 04:49 PM PST.


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