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Not many people know the relationship between oil and the US dollar. The golden age of the US dollar was the Bretton Woods system, where every currency was bac

Not many people know the relationship between oil and the US dollar. The golden age of the US dollar was the Bretton Woods system, where every currency was backed in dollars and dollars were backed in gold. There was however no obligation for the Federal Reserve to accept audits of any kind to validate there was enough gold. Therefore the US could print money at will (and it did), until countries such as France started demanding the conversion of their dollars to gold. To avoid the equivalent of a bank run at the Federal Reserve level, Nixon moved away from the gold standard and since then the US dollar has been allowed to float. A less known fact, is how the US dollar has preserved its value in this current setup. The answer is: by having an exclusive deal with oil producers where oil is sold exclusively in US dollars. Since everyone needs oil, if you need dollars to buy oil, the dollar gains a relative value. Having said this, it is important to understand that as energy consumers move away from oil, the US will need to find another way to sustain its currency or it will inevitably crash, along with everything valued in dollars, such as savings, wages, etc.

FLUX-YOU 9y ago
>the US will need to find another way to sustain its currency The threat of the US economy collapsing is plenty enough reason to strike new deals to sustain its currency.
- partycoder 9y ago
  Since economies are deeply interconnected it is clear that it is in nobody's interest to allow the US economy to collapse. The problem of bimetallism (silver/gold) or just gold, is that they are scarce and not suitable to produce enough circulating currency for everyone, so a replacement seemed fair. But fossil fuels are an environmental liability. Maybe the future is in some crypto-like thing.
leereeves 9y ago
> by having an exclusive deal with oil producers where oil is sold exclusively in US dollars. I think you're overstating the role of oil here. Other currencies without that exclusive deal, and backed by less economic and military power, have also preserved their value.
gnaritas 9y ago
The dollar doesn't get its value from oil, it gets its value from being the sole currency accepted for your tax bill, i.e. its value derives from its tax base. That is why fiat works, it's what "by fiat" means, and why commodity backing is not necessary. The dollar has been a far better currency since gold backing was removed. Gold was and is a terrible currency.
- partycoder 9y ago
  It is more complicated than that. There's the relative value among different currencies (exchange rates).
  - gnaritas 9y ago
    You're on HN, please don't assume only you understand the complexities of the world. Everything is more complicated than one simple thing, but you don't get to level that critique after claiming the value comes from oil. We're obviously talking about primary driver of value and for every fiat currency its primary value is in its tax base, not in any commodity backing. The values between currencies fluctuate short term because capital moves around, but that doesn't drive the value of a currency, it merely alters it a very tiny amount. Fundamental forces, i.e. government policies, control exchange rates long term as any currency trader will tell you however this isn't relevant to the topic as bringing up exchange rates is simply a deflection to avoid admitting or accepting that oil isn't why the dollar has value which was the point you made that is being refuted.
    - partycoder 9y ago
      You are downplaying the role of energy as just a mere commodity. Every single economic activity requires energy. Motorized vehicles in their majority use fossil fuels. By restricting oil trade to a specific currency, the US has a share of every productive activity involving motorized vehicles.
      - gnaritas 9y ago
pm24601 9y ago
You are ignoring history. The US is the one (of 2) major countries to: * NOT have been invaded/conquered * NOT had major currency hyperinflation/devaluation * long lasting (centuries at this point) * currency reissue/replacement The other arguable is the UK and the pound.
- maxerickson 9y ago
  There have been significant foreign incursions. Not a real occupation I guess. https://en.wikipedia.org/wiki/Burning_of_Washington https://en.wikipedia.org/wiki/Burning_of_Washington
  - qbrass 9y ago
    Even when Canada invades, they just end up saving you from a tornado.

FLUX-YOU 9y ago

>the US will need to find another way to sustain its currency The threat of the US economy collapsing is plenty enough reason to strike new deals to sustain its currency.

partycoder 9y ago
Since economies are deeply interconnected it is clear that it is in nobody's interest to allow the US economy to collapse. The problem of bimetallism (silver/gold) or just gold, is that they are scarce and not suitable to produce enough circulating currency for everyone, so a replacement seemed fair. But fossil fuels are an environmental liability. Maybe the future is in some crypto-like thing.

leereeves 9y ago

> by having an exclusive deal with oil producers where oil is sold exclusively in US dollars. I think you're overstating the role of oil here. Other currencies without that exclusive deal, and backed by less economic and military power, have also preserved their value.

gnaritas 9y ago

The dollar doesn't get its value from oil, it gets its value from being the sole currency accepted for your tax bill, i.e. its value derives from its tax base. That is why fiat works, it's what "by fiat" means, and why commodity backing is not necessary. The dollar has been a far better currency since gold backing was removed. Gold was and is a terrible currency.

partycoder 9y ago
It is more complicated than that. There's the relative value among different currencies (exchange rates).
- gnaritas 9y ago
  You're on HN, please don't assume only you understand the complexities of the world. Everything is more complicated than one simple thing, but you don't get to level that critique after claiming the value comes from oil. We're obviously talking about primary driver of value and for every fiat currency its primary value is in its tax base, not in any commodity backing. The values between currencies fluctuate short term because capital moves around, but that doesn't drive the value of a currency, it merely alters it a very tiny amount. Fundamental forces, i.e. government policies, control exchange rates long term as any currency trader will tell you however this isn't relevant to the topic as bringing up exchange rates is simply a deflection to avoid admitting or accepting that oil isn't why the dollar has value which was the point you made that is being refuted.
  - partycoder 9y ago
    You are downplaying the role of energy as just a mere commodity. Every single economic activity requires energy. Motorized vehicles in their majority use fossil fuels. By restricting oil trade to a specific currency, the US has a share of every productive activity involving motorized vehicles.
    - gnaritas 9y ago

pm24601 9y ago

You are ignoring history. The US is the one (of 2) major countries to: * NOT have been invaded/conquered * NOT had major currency hyperinflation/devaluation * long lasting (centuries at this point) * currency reissue/replacement The other arguable is the UK and the pound.

maxerickson 9y ago
There have been significant foreign incursions. Not a real occupation I guess. https://en.wikipedia.org/wiki/Burning_of_Washington https://en.wikipedia.org/wiki/Burning_of_Washington
- qbrass 9y ago
  Even when Canada invades, they just end up saving you from a tornado.