George Shultz and the Rise of the Petrodollar

By Joyce Nelson, for COMER, June 2019 (updated Feb 10, 2021)

William Faulkner once wrote: “The past is not dead. It’s not even past.” That observation seems especially true of the tumultuous early 1970s, when monetary policy across much of the world was completely upended by the so-called “Nixon shocks,” the policy prescriptions issued by the Bank for International Settlements, and the demise of the Bretton Woods system. The shock waves from these seismic changes continue to reverberate to this day, especially because of the petrodollar, which emerged triumphant from the initial chaos.

At issue are the financial tools of Empire, which in July 1944 – even before the end of World War II – were quietly passed to the US in a series of meetings at Bretton Woods, New Hampshire.

The Bretton Woods System

At those meetings – officially called the United Nations Monetary & Financial Conference and presided over by the US – representatives from 44 nations (the Allied nations during the war) agreed that a new international monetary system would need to be based on the stability of financial exchange rates. Given that the US was emerging from WWII as the undisputed leader of the capitalist world, the participants at Bretton Woods agreed to make the US dollar the world reserve currency by pegging it to gold at the fixed exchange rate of $35 per ounce of gold. Other countries could exchange their currencies for US dollars and assume the gold would be there to back up the exchange. The US dollar was designated as the only currency that could buy gold.

The Bretton Woods conference also created the International Monetary Fund (IMF) and the World Bank.

According to William Krehm, there was an attempt at Bretton Woods to “dissolve” the powerful Bank for International Settlements (BIS), the Basel, Switzerland-based central bank for central banks, because of allegations that the BIS had “appeased and even collaborated with the Germans, before and during World War II.”¹ But a “watereddown resolution” merely called for its liquidation “at the earliest possible moment.” That moment never came, and in fact the BIS “grew in power” and its corporatist “dogma” gained control over the IMF and the World Bank.²

It’s important to note that since the 1980s, at least three books have documented the fact that the BIS acted as a moneyfunnel for US and British funds to build up Hitler’s war machine.³ But during and after the Bretton Woods meeting, the BIS eluded close scrutiny and emerged even more powerful.

The Bretton Woods system appeared to work for a time, but in the 1950s the US embarked on a series of military invasions and covert operations to expand its empire: in Korea, Guatemala, Iran, and eventually in Vietnam, Laos, and Cambodia. To fund these expensive incursions, the US was spending its gold while also printing more US dollars – something no other country was at liberty to do.

John Perkins, author of, Confessions of An Economic Hit Man and other books, has called this Bretton Woods system “a subtle global tax” imposed by the US. corporatocracy. Because the US dollar reigned supreme, the US was able to buy foreign goods and services on credit, but when foreign creditors then used their credit (their US dollar reserves) to purchase US goods, they found that the value of their credit had been diminished by inflation.

Perkins wrote: “During the 1950s and 1960s, credit purchases were made abroad to finance America’s growing consumerism, the Korean and Vietnam Wars, and Lyndon B. Johnson’s Great Society. When foreign businessmen tried to buy goods and services back from the United States, they found that inflation had reduced the value of their dollars – in effect, they paid an indirect tax. Their governments demanded debt settlements in gold.”⁴

As a result, by the mid-l960s a number of countries distrusted the US dollar as the world’s reserve currency, believing that the exchange rate of $35 per ounce of gold was not only grossly unfair, but that the US didn’t have enough gold to back up all the money it was printing. In 1965, for example, France (led by Charles de Gaulle) announced that it wanted to exchange virtually all of its US dollar reserves for gold. By 1971, other countries were making similar demands, including Britain, Germany and Switzerland.

At the same time, by 1971 the Nixon White House was in a financial quandary: facing a high unemployment rate and a relatively high inflation rate, coupled with disappearing gold reserves and a dollar dropping in value compared to European currencies.

On Friday, August 13, 1971, Nixon and fifteen top-level White House advisors met secretly at Camp David to discuss this dilemma. It is likely that one of those present was George Shultz, who at the time was Nixon’s Director of the Office of Management and Budget.

The Rise of George Shultz

Trained as an economist, Shultz had taught at the Massachusetts Institute of Technology and the University of Chicago Graduate School of Business before becoming Dean of the Graduate School of Business from 1962 to 1968. During that time, Shultz was influenced by Milton Friedman and the “Chicago Boys” economic thinking (ensconced in the University of Chicago’s Department of Economics), which revolved around “free-market” neoliberalism. In fact, it was Milton Friedman who helped Shultz get appointed to the Nixon White House, first as Secretary of Labor (1969 to 1970) and then as Director of the Office of Management and Budget (1970 to 1972).⁵ No doubt, Friedman had high hopes for what would be done financially by the Nixon White House.

But after intense discussions at Camp David over that August 1971 weekend, Nixon emerged to break up the Bretton Woods system: announcing (1) that the US was abandoning the gold standard and that foreign governments would not be able to exchange their US dollars for gold; (2) that he was implementing a 90-day wage and price freeze to stop inflation; and 3) that he was imposing a 10 percent import surcharge to protect American products (lifted in December 1971).

These decisions (approved by George Shultz) infuriated Milton Friedman, who phoned the White House to complain – only to be told that the decisions were popular and seemed to be working.

But with the abandonment of the gold standard and the Bretton Woods system, the US dollar was a floating currency, not the tool of Empire that it had been. Moreover, having been stung by this unilateral US decision, much of the world was rejecting the US dollar post-1971. As Kei Pritsker and Cale Holmes have noted, “In order to avoid global loss of confidence in the dollar, the dollar needed to be tied to a new commodity, something equally as universally demanded” as gold had been previously.⁶

George Shultz would be central to meeting that new challenge. As Perkins noted, “Nixon’s team was not merely smart; it was cunning.”⁷

The Oil Weapon

During the financial chaos of the early 1970s, Egypt and Syria simultaneously attacked Israel on October 6, 1973 (the Yom Kippur War), in retaliation for the Six-Day War of 1967 when Israel had attacked Egyptian, Syrian and Jordanian troops along its borders and captured new territory. The SixDay War had humiliated and infuriated the Arab world, which knew that Israel could never have succeeded in that war without the financial and political support of the US.

In the October, 1973, retaliatory attack on Israel, Egypt took an important political step. According to John Perkins, “Knowing that strategically he was on shaky ground, Egypt’s President Anwar Sadat pressured Saudi Arabia’s King Faisal to strike against the United States (and therefore Israel) in a different way – by employing what Sadat referred to as ‘the oil weapon’. On October 16, Saudi Arabia and four other Arab states in the Persian Gulf announced a 70 percent Shultz from page 1 www.comer.org May 2021 Economic Reform | 3 increase in the posted price of oil; Iran (which is Muslim but not Arab) in an act of Islamic solidarity joined them.”⁸

Three days later, on October 19, President Nixon asked Congress for $2.2 billion in aid money for Israel. The next day, Saudi Arabia and other Arab oil producers in OPEC (Organization of Petroleum Exporting Countries) imposed a total embargo on oil shipments to the US.

Perkins has called this “a classic game of international chess,” and noted, “At the time, few people perceived the cunning behind Washington’s move [i.e., the October 19 aid to Israel], or the fact that it was driven by a determination to shore up a weakened [US] dollar.”⁹

The effects of OPEC’s oil embargo were immediate and severe, with long line-ups at gas stations and, by January 1974, a quadrupling of the price of oil across North America and much of the western world, with fears of an impending new Great Depression.

According to Perkins: “We know now that the corporatocracy played an active role in driving oil prices to these record highs. Although business and political leaders, including oil executives, feigned outrage, they were the puppet masters pulling the strings. Nixon and his advisors realized that the $2.2 billion aid package to Israel would force the Arabs into taking drastic actions. By supporting Israel, the administration engineered a situation that generated what was the craftiest and most significant EHM [economic hit man] deal of the twentieth century.”¹⁰

In other words, the US was about to use “the oil weapon” in its own strategic way.

The Puppet Masters

By that time, George Shultz had become Nixon’s US Secretary of the Treasury – a position he held from June 12, 1972, until May 8, 1974. According to the Zero Hedge website, the main problem the US faced at that time “was how to motivate other countries to hold and use U.S dollars.”¹¹

To address this key issue, the powerful Bilderberg group held a meeting (May 11-12, 1973) – five months before the Yom Kippur War – presided over by Henry Kissinger and including “an influential group of men: Lord Greenhill of BP, David Rockefeller of Chase Manhattan Bank [and top shareholder in Exxon], George Ball of Lehman Brothers and Zbigniew Brzezinski [US foreign policy advisor].”¹²

Also present at that Bilderberg meeting were four Canadians: Anthony G.S. Griffin (chair of Home Oil Corp. and CEO of Triarch Corp.), Peter Lougheed (Premier of Alberta), Donald S. Macdonald (PM Pierre Trudeau’s Minister of Energy, Mines & Resources), and Albert E. Ritchie (former Canadian ambassador to the US).¹³

We’ll never know exactly what was decided at Bilderberg, but it was five months after their May 1973 meeting that the Yom Kippur War erupted, with the subsequent oil price escalation, followed quickly by Nixon’s aid to Israel, and OPEC’s retaliatory oil embargo.

Did OPEC walk into a trap set by Western oil companies and high finance? Perkins implies that is what happened, with the “puppet masters” engineering a situation that would pay off for them in the long run.

George Shultz’s Treasury Department sought help from John Perkins and others.

As Perkins has written, the US Treasury Department “came to me and other economic hitmen and said, ‘Listen, you know, we can’t allow OPEC to blackmail us anymore. You guys gotta come up with a plan so this doesn’t happen again.’ We knew this plan had to involve Saudi Arabia because it had more oil than anybody else and it also, the House of Saud, was corrupt and corruptible.”¹⁴

The plan that Perkins and other EHM came up with had several important features: the House of Saud (1) agreed to invest a large portion of its oil profits into US government securities (essentially lending money to the US); (2) allowed the US Treasury Department to use the massive interest from these securities to hire US corporations to westernize Saudi Arabian infrastructure; and (3) agreed to maintain the price of oil within limits acceptable to the corporate sector. In return, the US government promised to keep the House of Saud in power and sell weapons to it.

But there was another part of the 1974 “deal of the 20th century” that Perkins considered “very, very important.” The Saudis agreed that “they will never ever sell oil for anything other than US dollars. This happened in the early 1970s right after we had [gone] off the gold standard because we were bankrupt. Because we could not pay our debts to the European countries in gold, Nixon took us off the gold standard. And then we were stuck with the situation ‘why would anyone in the world use US dollars?’ So then we came up with this plan, which in essence put the dollar on the oil standard,” rather than the previous gold standard.¹⁵

It was an incredibly important deal. After it was conceived, George Shultz left the Nixon administration to become vice president (and later, president and CEO) of the Bechtel Group, a huge engineering/construction company that had long been involved in Saudi Arabia but which (after the deal) subsequently received many lucrative construction contracts from the Kingdom.

Repercussions

This deal has had massive repercussions for US hegemonic ambitions.

As Pritsker and Holmes have explained: “Crude oil is the most traded commodity in the world; every country needs it. The petrodollar system requires every country to have US dollars on hand to buy oil. It keeps demand for the US dollar as high as it was when the dollar was the only currency that could buy gold. If a country needs oil, it will have to manufacture and export a tangible good of value, like a car or a refrigerator, to the United States, while the US can simply print or borrow paper dollars to use as immediate payment…. The deal with Saudi Arabia allowed the US to continue being the only country able to print the world reserve currency and run massive deficits to become the consumer capital of the world.”¹⁶

Russ Baker noted, in his 2009 book Family of Secrets: “As a result of the [1974- 1975] deal, not only did Saudi funding for unauthorized American covert operations increase, but Saudi money also flowed to American friends of the royal family…. There was also a calculated decision to use the Saudis as surrogates in the cold war. The United States actually encouraged Saudi efforts to spread the extremist Wahhabi form of Islam as a way of stirring up large Muslim communities in Soviet-controlled countries.”¹⁷

That strategy helped engulf the USSR in a war in Afghanistan during the 1980s, which contributed to the Soviet demise. As John Perkins has written, “The United States made no secret of its desire to have the House of Saud bankroll Osama Bin Laden’s Afghan war against the Soviet Union in the 1980s, and Riyadh and Washington together contributed an estimated $3.5 billion to the mujahideen.”¹⁸ That same mujahideen later morphed into Al-Qaeda and ISIS, with recent horrifying results across the Middle East.

Petrodollar and Empire

Over time the US petrodollar system has spread beyond oil to the point where now it has become the reserve currency used in more than 80 percent of all global trade, including trade in most commodities. As a result, “America can continue exponential military expansion, record-breaking deficits and unrestrained spending. America’s largest export used to be manufactured goods made proudly in America. Today, America’s largest export is the US dollar.”¹⁹

The shift to the petrodollar allowed the US/UK oil industry and its large financial investors to gain huge financial leverage during the past fifty years in the expanding global economy.

As Pritsker and Holmes write, “As long as countries demand dollars, the US can continue to go into massive amounts of debt to fund its network of global military bases, Wall Street bailouts, nuclear missiles, and tax cuts for the rich. But what happens if countries catch on to the scheme and try to break free of the petrodollar system?”²⁰

We can look back and see the answer as it has played out in country after country which has dared to in any way challenge the petrodollar system. As has been noted, “Threats by any nation to undermine the petrodollar system are viewed by Washington as tantamount to a declaration of war against the United States of America.”²¹

In 2000, for instance, Iraq began selling its oil for euros instead of dollars – a decision based on the fact that it had been under a brutal regime of sanctions for almost a decade and anticipated that the US would demand even more sanctions.

Only weeks after the shocking events of September 11, 2001, the US tried to pin the blame on Iraq, claiming that “weapons of mass destruction” had been found there. We now know that such claims were patently false. But in the lead-up to the new war on Iraq, the George W. Bush administration called on George Shultz to head up the Committee for the Liberation of Iraq – a group formed in 2002 by the White House to convince the public of the need for the war.

Shultz and the Committee made no mention of Saddam Hussein’s defiance of the petrodollar system, but instead focused on some vague “danger” Hussein embodied. As Shultz wrote in a September 2002 Washington Post op-ed: “If there is a rattlesnake in the yard, you don’t wait for it to strike before you take action in self-defense.” Naomi Klein later observed, “Shultz didn’t disclose to his readers that he was, at the time, a member of the board of directors of Bechtel, where he had served many years earlier as CEO. The company would collect $2.3 billion to reconstruct the country that Shultz was so eager to see destroyed.”²²

After the killing of a million Iraqis and the bombing of the country to rubble, Iraq returned to selling its oil in the US dollar and the petrodollar system was safe.

By 2010, many countries – Libya, Venezuela, China, Russia, Iran, Syria, India, Pakistan – were trying to escape from the US petrodollar system.

As Chris Hedges noted at the time, “To fund our permanent war economy, we have been flooding the world with dollars. The www.comer.org May 2021 Economic Reform | 5 foreign recipients turn the dollars over to their central banks for local currency. The central banks then have a problem. If a central bank does not spend the money in the United States, the exchange rate against the dollar will go up. This will penalize exporters. This has allowed America to print money without restraint to buy imports and foreign companies, fund our military expansion, and ensure that foreign nations like China continue to buy our Treasury Bonds.”²³

Economist Michael Hudson told Hedges in 2010 that foreign governments like China and Russia “don’t have any choice” but to recycle the US petrodollars “to buy US government debt,” and they are, in effect, “financing their own military encirclement.”²⁴

Muammar Gaddafi of Libya tried to implement a gold-for-oil plan in 2011, along with the introduction of a Libyan gold dinar as a pan-African currency. We know the brutal fate that was dealt to him, along with his country.

Similar efforts to abandon the US petrodollar – by Venezuela, Iran, Syria, and Russia – have been met by financial sanctions and US rage.

The petrodollar has become so powerful that now the US effectively can “control all electronic bank transactions and go after anyone who it believes is in breach of its rules.”²⁵ Some geopolitical analysts have argued that it is this “unipolar world” that the Trump administration was intent on locking into place forever, even if it means another world war.

But according to Reuters, by 2019 even the European Union was investigating ways to get out of the petrodollar system, having convened “a wide-ranging industrial group to work on promoting the euro and fighting the monopoly of the US dollar in oil and commodities trading.”²⁶

Then in April, 2019, Reuters reported that Saudi Arabia itself had threatened to drop the US dollar for oil trades, unless the US cancelled a piece of pending legislation called the No Oil Producing and Exporting Cartels Act (NOPEC). Industry analysts rightly explained that such a move by the Saudis “would have strong reverberations for the greenback’s status as the world’s dominant currency.”²⁷

The pending NOPEC bill was never passed, but the scary question that arises is this: Would Saudi Arabia use a similar threat against the petrodollar in order to pressure the US to bomb Iran?

By mid- 2020, the Covid-19 pandemic and a temporary oil-price war between Russia and Saudi Arabia had rocked the oil industry to such an extent that the price of oil had fallen to historical lows (even into negative territory), with a glut of oil on the market. Moreover, oil trading between Russia and China, and between Iran and China, had moved outside the petrodollar system.

As a result, geopolitical analysts have been predicting the end of the petrodollar and, with it, the end of US hegemony. But as a writer for Middle East Monitor noted, “Any move to ditch the dollar as the world’s currency will not happen without a fight from Washington.”²⁸

Recalling economist Michael Hudson’s observation that because of the petrodollar system, Russia and China “have been financing their own military encirclement” by the US’s expanding military bases, it’s understandable why these countries are ditching the petrodollar.

Given that most people are unaware of the petrodollar, and mainstream political reporters rarely refer to it, escalating world tensions are rarely explained in its terms.

A Very Subtle System

John Perkins has called the US petrodollar system “the most subtle and effective form of imperialism the world has ever known” and one which reinstated the “hidden tax” on every foreign creditor.²⁹ Indeed, the system may be so subtle that many seem to have overlooked it, at least until recently.

For example, Steve Coll, author of the 2012 blockbuster, Private Empire: ExxonMobil and American Power, makes no mention at all of the petrodollar or the system based on it.

Of the Canadian oil industry analysts I contacted for this article, only one responded with a specific example of how the US petrodollar affects the Alberta oilpatch.

In April 2019, David Hughes told me by email that oil companies extracting and producing in Canada pay their workers and their production costs in Canadian dollars, but they sell their oil for US dollars, “which is quite a bonus at current exchange rates.”

It’s worth recalling that the creation of the US petrodollar in 1974-75 took place at virtually the same time that the Bank for International Settlements (BIS) was insisting that countries like Canada (in order to join the elite, new “Basel Committee” of central banks), should stop using its publiclyowned central bank (the Bank of Canada) to make loans to the federal and provincial governments for infrastructure spending and instead borrow from the private-sector banks and pay them compound interest rates. Were these two monetary changes in Canada directly linked?

An (undated) “History of the Bank of Canada” published on the Prudent Press website states that during the 1970s oil shocks, the Canadian public “misattributed” their economic woes (including stagflation) to Bank of Canada policy; this erroneous public opinion (combined with BIS pressure) contributed to the Canadian government’s decision to change BoC monetary policy on lending, according to this “history.” The implication is that the media helped create this erroneous public opinion at the time. Prudent Press did not respond to emailed queries (and their “history” provides no author), so it is difficult to know the validity of their statements.

Nonetheless, the effect of both monetary changes was to transfer extraordinary power (and wealth) to the globalized financial sector. Obviously, more research needs to be done on the tumultuous early years of the 1970s, when so much of the economy was radically changed.

Joyce Nelson is the author of seven books, including Beyond Banksters and its sequel, Bypassing Dystopia, both published by Watershed Sentinel Books. She can be reached at www.joycenelson.ca.

Our Comment

And should it come to pass that crude oil is no longer, “the most traded commodity in the world” – one that, “every country needs” – what then?

Élan

Endnotes

1. 1. Krehm, William (1993). A Power Unto Itself (p. 19). Toronto: Stoddart Publishing Co. Ltd. 
   2. Ibid., p. 29.
   3. Cited in Nelson, Joyce (2016), Beyond Banksters: Resisting the New Feudalism (pp. 17-18). Comox: Watershed Sentinel Books. 
   4. Perkins, John (2008). The Secret History of the American Empire (p.5). New York/London: Penguin Books. 

   A note on “economic hit men.” Perkins revealed that this is the term for business economists sent by US multinational firms into Third World countries from the 1960s onwards. Their role was (and is) to convince political leaders to take on huge debt (from the World Bank, the IMF, etc.) for building massive infrastructure projects. Those leaders who refuse to do so are targeted for assassination (presumably, by the CIA). If that doesn’t work, the next step is US military invasion for regime change. 

   5. Klein, Naomi (2008). The Shock Doctrine: The Rise of Disaster Capitalism (p. 157). Toronto: Vintage Canada. 
   6. Pritsker, Kei, and Holmes, Cale, “Petrodollar Warfare: The Common Thread Linking Venezuela and Iran.” Mint Press News, February 14, 2019. 
   7. Perkins, op. cit., p. 169. 
   8. Ibid., p. 170. 
   9. Ibid. 
   10. Ibid., p. 171. 
   11. “End of an Era: The Rise and Fall of the Petrodollar System.” Zero Hedge, July 22, 2016.
   12. Ibid. 
   13. Bilderberg Participants List, 1973. 
   14. Quoted in Pritsker and Holmes, op. cit. 
   15. Ibid. 
   16. Ibid. 
   17. Baker, Russ (2009). Family of Secrets (pp. 291-2). New York/London: Bloomsbury Press.
   18. Perkins, op. cit., p. 111. 
   19. Chengu, Garikal, “Sanctions of Mass Destruction: America’s War on Venezuela.” Global Research, January 30, 2019. 
   20. Pritsker and Holmes, op. cit. 
   21. Chengu, op. cit. 
   22. Klein, op. cit., p. 383. 
   23. Hedges, Chris (2010). The World As It Is (pp. 281-282). New York: Nation Books. 
   24. Quoted in Ibid., p. 280. 
   25. Guarascio, Francesco and Zhdannikov, Dmitry, “EU Brings Industry Together to Tackle Dollar Dominance in Energy Trade.” Reuters, February 13, 2019. 
   26. Ibid. 
   27. Slav, Irina, “Saudi Arabia Threatens to Drop Dollar for Oil Trades.” OilPrice.com, April 5, 2019. 
   28. Ahmed, Omar, “Covid-19 and the Oil Market Crash Spell the End for US Hegemony and the Oetrodollar.” Middle East Monitor, April 21, 2020. 
   29. Perkins, op. cit, p. 163.