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> So the dollar, in its current form, was born a gold certificate, that then transmuted into a currency. It's convertible into (crude) oil today ("petro dollar

> So the dollar, in its current form, was born a gold certificate, that then transmuted into a currency. It's convertible into (crude) oil today ("petro dollars"), although obviously, that varies quite a bit in price (technically, so does the price of an ounce of gold).

runeks 10y ago
You're confusing two things. Before 1971, the US Dollar was worth exactly 1/35th troy ounce of gold. Foreign central banks could redeem their dollars for this amount of gold. The USD gold price did not vary back then. The USD gold price only started floating after 1971, which is just a fancy way to say that the market (surprisingly!) didn't consider a 0% haircut acceptable for a defaulted debt obligation. Oil being traded primarily in USD doesn't make the USD backed by oil, just as the dollar is no longer backed by gold even though gold is primarily traded in dollars.
- erichocean 10y ago
  I'm arguing that just like gold pre-1971 "stabilized" the price of the US dollar, post 1971, oil is serving the same stabilization function: setting a "real world value" for the US dollar. > Since the agreements of 1971 and 1973, OPEC oil is exclusively quoted in US dollars. This created a permanent demand for dollars on the international exchange markets.[0] [0] https://en.wikipedia.org/wiki/Petrocurrency https://en.wikipedia.org/wiki/Petrocurrency
- redcalx 10y ago
  > Before 1971, the US Dollar was worth exactly 1/35th troy ounce of gold Sort of. The US gov committed itself legally to redeeming gold at a fixed stated price. It was an untenable position since by 1971 there wasn't anywhere near enough gold to back all of the dollars in existence. A floating gold price would have been higher than the legally defined price, and this created an arbitrage situation whereby one could exchange dollars for gold at the legally defined price, sell gold on an open market for more money, buy dollars, and repeat. This arrangement ends when the US gov runs out of gold or goes bust... or figures out beforehand what the end states are and annuls the law in question, which is what Nixon did. The root of the problem was the increase in dollar money supply without a matched increase in gold reserves, noting that you only have to match narrow (M0) money, rather than broad money from fractional reserve banking (i.e. loans). Why? because most broad money is inaccessible, it's a number in a ledger, to get actual dollars to redeem you have to withdraw that money, and to do that at scale requires banks to claw back loaned money, thus reducing broad money supply right to back nothing, leaving just M0 money (i.e. dollars created directly by the central bank).

runeks 10y ago

You're confusing two things. Before 1971, the US Dollar was worth exactly 1/35th troy ounce of gold. Foreign central banks could redeem their dollars for this amount of gold. The USD gold price did not vary back then. The USD gold price only started floating after 1971, which is just a fancy way to say that the market (surprisingly!) didn't consider a 0% haircut acceptable for a defaulted debt obligation. Oil being traded primarily in USD doesn't make the USD backed by oil, just as the dollar is no longer backed by gold even though gold is primarily traded in dollars.

erichocean 10y ago
I'm arguing that just like gold pre-1971 "stabilized" the price of the US dollar, post 1971, oil is serving the same stabilization function: setting a "real world value" for the US dollar. > Since the agreements of 1971 and 1973, OPEC oil is exclusively quoted in US dollars. This created a permanent demand for dollars on the international exchange markets.[0] [0] https://en.wikipedia.org/wiki/Petrocurrency https://en.wikipedia.org/wiki/Petrocurrency
redcalx 10y ago
> Before 1971, the US Dollar was worth exactly 1/35th troy ounce of gold Sort of. The US gov committed itself legally to redeeming gold at a fixed stated price. It was an untenable position since by 1971 there wasn't anywhere near enough gold to back all of the dollars in existence. A floating gold price would have been higher than the legally defined price, and this created an arbitrage situation whereby one could exchange dollars for gold at the legally defined price, sell gold on an open market for more money, buy dollars, and repeat. This arrangement ends when the US gov runs out of gold or goes bust... or figures out beforehand what the end states are and annuls the law in question, which is what Nixon did. The root of the problem was the increase in dollar money supply without a matched increase in gold reserves, noting that you only have to match narrow (M0) money, rather than broad money from fractional reserve banking (i.e. loans). Why? because most broad money is inaccessible, it's a number in a ledger, to get actual dollars to redeem you have to withdraw that money, and to do that at scale requires banks to claw back loaned money, thus reducing broad money supply right to back nothing, leaving just M0 money (i.e. dollars created directly by the central bank).