We Have Made Lies Our Refuge

If you are not concerned, you should be

An Outline of What I Am Going to Present

• A brief history of the USD and its backing by gold from 1913-2023

• The “petrodollar”

• Risks to the U.S. Dollar (USD) as petrodollar

• Further to International Relations

• Fiscal health of the United States; impact of our fiscal health on resilience of the USD

• What we can do

I have been beating a drum to draw attention to our fiscal situation since at least 2016; so why am I beating the drum again now? Because the economic and geopolitical situation has changed markedly over the course of the past 12 months, and our status as “world reserve currency” and perhaps more importantly as the beneficiaries of petrodollar-privilege, is at great risk. Before I get into what has changed more recently, let’s look briefly at the history of the U.S. Dollar (USD) as it relates to gold in particular.

A Brief History of the USD vis-à-vis Gold

USD History: 1913-1934

1913 The Federal Reserve Act was passed “After Democrats won unified control of Congress and the presidency in the 1912 elections…” This created the Federal Reserve System, which to this day we are still suffering under. The first Federal Reserve Notes were printed in 1914. “‘At the time of the Federal Reserve's creation, the law provided for notes to be redeemed to the Treasury in gold or ‘lawful money.’”

1933 “Executive Order 6102 is an executive order signed on April 5, 1933, by US President Franklin D. Roosevelt ‘forbidding the hoarding of gold coin, gold bullion, and gold certificates within the continental United States…”

The main rationale behind the order was actually to remove the constraint on the Federal Reserve preventing it from increasing the money supply during the depression. The Federal Reserve Act (1913) required 40% gold backing of Federal Reserve Notes that were issued. By the late 1920s, the Federal Reserve had almost reached the limit of allowable credit, in the form of Federal Reserve demand notes, which could be backed by the gold in its possession.

Executive Order 6102 required all persons to deliver on or before May 1, 1933, all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve in exchange for $20.67 per troy ounce. Under the Trading with the Enemy Act of 1917, as amended by the recently passed Emergency Banking Act of March 9, 1933, a violation of the order was punishable by fine up to $10,000, up to ten years in prison, or both.

The 1934 Gold Reserve Act subsequently changed the statutory gold content of the U.S. Dollar from $20.67 to $35 an ounce. While this might be seen to some as a move that increased the value of gold, it actually merely devalued the U.S. Dollar so that less gold was required to back U.S. Currency, and the Federal Reserve was free to print more paper money.

In other words, FDR by proclamation devalued the dollars just “exchanged” for the citizens’ gold by 42%. That’s the FDR we’ve all come to know and love, and reminds me of John 10:10 NKJV, “The thief does not come except to steal, and to kill, and to destroy.” Stealing, it is what government does. And note that word “hoarding;” hoarding is simply a manifestation of “Gresham’s Law:”

Gresham's law is a principle that states that "bad money drives out good…"

The law stemmed from the historical use of precious metals to manufacture coins and their subsequent value.

The law observes that legally overvalued currency will drive legally undervalued currency out of circulation.

In other words, when people see devaluation of the currency in real time or in the future, they “hoard” undervalued currency (taking it out of circulation) that will hold its value in place of the overvalued currency. Happens every time, and that is why it is referred to as a Law.

USD History: 1935-2010

The below is largely but not entirely from A Brief History of Gold and the U.S. Dollar’s Relationship.

1944 – Towards the end of WW II, it was clear that the U.S. would be the only nation left standing, and hence the Bretton-Woods agreement made the U.S. $ the official global currency and it was defended by setting the value of gold at $35 per ounce.

1965 - Just 20 years later, the Coinage Act of 1965, enacted July 23, 1965, eliminated silver from the circulating United States dime (ten-cent piece) and quarter dollar coins.

Why you might ask.

The early 1960s was a time of increased use of silver both in the coinage and in industry, putting pressure on the price of silver, which was capped at just over $1.29 per ounce by government sales at that price. The silver in a dollar's worth of quarters would be worth more as bullion than as money if the price of the metal rose past $1.38 per ounce, and there was widespread hoarding of silver coins.

There’s that word again, Gresham’s Law in evidence; hoarding.

1968 saw a surge in gold demand and resulted in a U.S. Congressional repeal of the requirement that Federal Reserves Notes be backed by gold.

From 1968 until 1971, the US government quite often changed the gold-dollar parity. The cost of the Vietnam War and the huge economic disturbances caused by the oil crisis significantly contributed to this change.

In 1971, President Richard Nixon said the U.S. would no longer convert dollars into gold at the official exchange rate, this was only supposed to be temporary, however, other countries didn’t want to hold U.S. $, but rather convert them into gold, resulting in depleted U.S. gold reserves.

In 1972, the U.S. $ amount required to buy a troy ounce of gold was raised from $35 to $38.

In 1973, the price of gold was raised to $42.22. The arrangement was still unfeasible, as the U.S. would have needed to convert too many U.S. $ into gold – the U.S. $ then became a free-floating currency. This resulted in the definitive end of the Bretton-Woods system.

By the end of 1974, gold had reached a price of $183. Long term stagflation, economic and financial crises, the rapid growth of oil prices and the Yom Kippur War in the Middle East caused panic and a run on gold.

In 1975, gold began trading, for future delivery on New York and Chicago exchanges and in 1976, Nixon officially abandoned the gold standard altogether.

In 1979, Khomeini’s revolution broke out in Iran and that caused a second oil crisis, which pushed gold prices to record heights. In January 1980, these prices reached $678.

In September 1980, gold still cost $675, but Reagan economics then solved a lot <of> the USA’s economic problems. The Fed ended inflation with double-digit interest rates but caused a recession.

In June 1999, the gold price was merely $256 an ounce, but those who had trusted in gold had been proved to be right and in October 1999 gold reaches a two-year high of $338 after an agreement to limit gold sales by 15 European central banks.

Between 2003-2004, gold breaks above $400 and investors increasingly bought gold as risk insurance for portfolios.

In April 2006, gold prices surpass $600.

In 2008, gold shot up to $869.75 an ounce during the financial crisis. In the following months, gold reached the $1,000 mark for the first time in US future market history.

In September 2010, gold hits record heights for five successive sessions, peaking at $1,296.10. A few months later, in December, gold reached a fresh record high above $1,425 an ounce.

USD History: 2011-2023

In 2020, gold peaked at $2,277.29, and in February 2023 it ended at $1,811.27.

A New Price Support for the USD, the Petrodollar

So, since 1976 we’ve been “officially” off the gold standard, and the programmed devaluation of the dollar, which is nothing more than a stealth tax on the citizenry, has persisted. The transition to a pure fiat currency arguably began with FDR’s devaluation of the USD in 1933, and accelerated further in 1968, but as it became clear that the end was near, something had to be done to prop up the value of the USD; that “something” turns out to have been the “Petrodollar.”

US–Saudi Tensions: Implications for the Petrodollar System

Simply put, the petrodollar is the combination of two words “petroleum” and the “US dollar”. Most of the oil traded worldwide today is in US dollars. This arrangement goes back to a 1974 US–Saudi agreement, arrived at in the aftermath of the Yom Kippur War and the subsequent oil embargo imposed by the Gulf states. In June 1974, then US Secretary of State Henry A. Kissinger and then Crown Prince Fahd of Saudi Arabia signed an agreement to establish two joint commissions—the US–Saudi Joint Commission for Economic Cooperation (JCEOR) and the US–Saudi Arabian Joint Security Commission (JSCOR).36

According to these agreements, the US government promised to provide increased economic and military innovation and aid to Saudi Arabia and in exchange Riyadh agreed to exclusively price all of its oil in US dollars. Thus, any nation that would import Saudi oil was required to exchange their currency to US dollars before completing the transaction. The remaining OPEC countries followed Saudi Arabia’s petrodollar precedent in 1975.

The US aim in establishing this new petrodollar system was to protect the value of and increase the demand for the US dollar. Countries around the world started purchase of US dollars and kept them as reserves often in US banks to buy oil for their country, which made the greenback strong and the reserve currency of the world. Other commodities, such as gold, copper, agricultural products, natural gas, etc., are today also traded in US dollars. The rising strength of the US dollar had many world leaders and economists worried for a long time. It was former French finance minister Valéry Giscard d’Estaing who first alleged that the US enjoyed an “exorbitant privilege” on account of the reserve status of its currency.

The US dollar, though, fell precipitously in value after President Richard Nixon decoupled the currency from the gold peg in 1971. It found a new support in the proverbial ‘black gold’ or petroleum. This started the age of the petrodollar.

Side note: Of the 19 hijackers in the September 11 attacks, 15 were citizens of Saudi Arabi. Knowing what you know now, is it any wonder that we did not attack Saudi Arabia after 9/11?

Now, we have exacerbated an already bad situation.