The Nixon Shock and the Petrodollar (1971-1980)
On August 15, 1971, President Nixon unilaterally suspended the exchange of the US dollar for gold, ending the Bretton Woods system and cutting off the last link between the US dollar and gold. This marks a shift towards a legal tender system, where the US dollar and other major currencies float freely and their value is determined by market forces. Despite losing its gold support, the US dollar has retained and expanded its position as a global reserve currency due to a lack of alternatives and sustained confidence in the US financial market. After the 1973-74 oil crisis, OPEC significantly increased oil prices, forcing importing countries to obtain more dollars to pay for energy costs. In 1974, the United States and Saudi Arabia reached a strategic agreement: Saudi Arabia priced oil in dollars in exchange for military protection and weapons and invested its oil revenue in US treasury bond bonds. This arrangement was quickly followed by other OPEC member countries, establishing the petrodollar system. Oil exporting countries accumulate a large surplus of US dollars, which are deposited into international banks or reinvested in US dollar assets, a process known as the petrodollar cycle. By 1975, all OPEC countries had adopted US dollar pricing, embedding the US dollar into global trade and financial centers. This supports the sustained budget and trade deficits of the United States, while suppressing interest rates, strengthening dollar hegemony, and granting the United States new ‘excess privileges’. In the 1970s, money market funds emerged as enterprise cash management tools, with the first (reserve fund) launched in 1971 with assets of $1 million.
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Deregulation, Globalization, and the Euro Dollar (1980-1999)
In the 1980s and 1990s, the hegemony of the US dollar was consolidated against the backdrop of financial deregulation, inflation victories, and accelerated globalization. Under the leadership of Federal Reserve Chairman Paul Volcker, inflation dropped from around 13% in 1980 to around 3% in 1983, restoring confidence in the US dollar as a stable store of value. By the mid-1980s, the US dollar had soared to historical highs, prompting the Plaza Accord of 1985, in which the United States coordinated with its major allies to devalue the dollar. By 1987, the US dollar had fallen by about 40% against the Japanese yen and the mark, helping to reduce trade imbalances. Financial deregulation, including the Deposit Institution Deregulation and Monetary Control Act of 1980, abolished the upper limit on deposit interest rates and expanded the scope of Federal Reserve services, enabling banks to compete more effectively for deposits. In the 1990s, globalization intensified and the US dollar became the preferred currency for expanding global capital markets. The euro dollar market flourished, and by the end of the 1990s, about 64% of global debt was denominated in US dollars. The US dollar accounted for 59% of foreign exchange reserves and 58% of international payments, consolidating its core position in the global financial system.