Oil, dollars, and US power in the 1970s: re-viewing the connections

Introduction

There is basic agreement among scholars on three main points concerning the link between petrodollars – the dollars accumulated by oil-producing countries as revenues for oil exports – and the renewal and transformation of US power in the 1970s. The first concerns the fact that, with oil priced and sold mostly in dollars, and oil prices abruptly quadrupling in the last two months of 1973, during the 1970s the United States kept benefiting from the central position of the dollar in international monetary affairs, despite the end of its convertibility into gold in 1971.1 The notion that an oil-dollar standard replaced the gold-dollar one is debatable, but the link with oil – then the major commodity in world trade – did ensure that the dollar keep a major role in world monetary reserves and trade transactions.2 With that came what political scientist David Spiro has aptly described as a “double loan” enjoyed by the United States: the US could print dollars both to import oil from OPEC and to import goods and services “from all other economies that had to pay dollars for oil but could not print currency”.3 Thus, in historian Charles Maier’s parallel between the US and British “empires”, it was “especially because OPEC countries continued to price oil in dollars” that the United States could continue to “enjoy the monetary privileges of its imperial predecessor”.4 While putting greater emphasis on the new challenges that the abuse of such position would soon put before the US government, historical sociologist Giovanni Arrighi concluded that

[f]rom 1973 to 1978, the abandonment of the gold–dollar exchange standard appeared to have resulted in the establishment of a de facto pure dollar standard that enabled the United States to tap the resources of the rest of the world virtually without restriction, simply by issuing its own currency.5

The second point of agreement is that a significant portion of the petrodollars accruing to oil-exporting states – around 170$ billion in 1973-77, according to the IMF6 – were not “absorbed” through increased imports, but deposited in dollar-denominated accounts, particularly – though not exclusively – with US banks operating both in the US and in the London Eurodollar market.  Of course, in many ways selling oil in dollars and depositing petrodollar revenues in dollar-denominated accounts reinforced each other. Thus, in his history of the dollar’s “exorbitant privilege”, economic historian Barry Eichengreen observed that

there was no shift away from the dollar [after the end of Bretton Woods]. Volatility there was in the share of dollars in foreign exchange reserves in the 1970s, but no secular decline. The dollar’s share of total identified international reserves remained close to 80 percent in 1977, as the United States pumped out dollars and the members of the Organization of Petroleum Exporting Countries (OPEC), having jacked up oil prices, parked their earnings in New York.7

The third point of agreement concerns the transformation induced by petrodollar flows in US power itself. On the one hand, the aforementioned “double loan” facilitated the transition toward a new configuration of the international economy in which the United States, long the world’s industrial powerhouse, now exerted its influence (also) by accumulating external debts. On the other, petrodollar flows contributed to feed the transnational business of Western commercial banks, with US-based banks in a leading position. In Maier’s formulation, this was the beginning of the “striking” transformation of the United States from an “empire of production” to an “empire of consumption”.8 In historian Peter Gowan’s more radical view, it was the beginning of a “Dollar-Wall Street Regime” and of “Washington’s Faustian bid for world dominance”.9

There is more controversy, however, on what determined such outcomes. According to a well-established version of the story, “free markets” stepped in autonomously as the multilaterally-managed Bretton Woods system showed repeated symptoms of stress and crisis in the early 1970s, particularly after the second devaluation of the dollar and suspension of fixed exchange rates in March 1973. In this view the financialization of the world economy would be somewhat self-explanatory, the fact that the US dollar was the established currency for international transactions would explain its use in oil transactions, and the superiority of US banks in managing dollar-denominated assets would explain why US banks took the lion’s share of petrodollar deposits. Thus, the renewal and transformation of US power described above would have been only an indirect result of the work of “unfettered private markets” in the “recycling of petrodollars” from oil exporters with limited import capacity – particularly the Arab states of the Gulf – to oil importers with great financing needs – particularly in the developing world. In the words of the former chairman of the Federal Reserve, Paul Volcker,

the mechanism was simplicity itself. The major oil exporters found it convenient to place large parts of their dollar accumulations in the big, well-known international banks, particularly in the form of short-dated Eurodollars. […] The banks, now awash with liquidity, found willing borrowers for these huge sums in Latin America and elsewhere.10

Dear to “neoliberal” thinkers and policymakers since the 1970s, such interpretation has more to do with conventional wisdom than with factual analysis. As noted by various critics, it suffers from at least two main flaws. First, private banks in London and in the US were indeed the destination of a relatively large portion of OPEC’s investments, but by no means the only one: according to statistical data from the Bank of England, private banks collected roughly 40% of OPEC’s financial surplus (35.5% with Eurodollar banks including US banks in the Eurodollar market, and 4.5% with US banks in the US), while the rest ended in direct bilateral and multilateral aid and loans to developing countries (around 18%), US government securities (11%), portfolio investments in the US (7%), IMF and World Bank facilities (6%), and direct and equity investments in other industrialized countries (15%).11 Secondly, a large portion of the loans issued by private banks actually went to the oil producers themselves, both OPEC members or non-members such as Mexico.12 To the extent that they did “recycle” petrodollars to oil-importing countries, private banks made loans only to a very small group of rapidly industrializing countries (led by Brazil, Argentina and South Korea), while the financing of oil-related deficits for most other developing countries came from official bilateral and multilateral channels.13

If private banking was not the sole recipient of petrodollar flows, and if petrodollar flows had governments and international institutions involved at all ends (depositors, intermediaries, and final recipients), the allocation of petrodollars by just “free market” logic appears rather shaky (at least if a “free market” is considered to be incompatible with state activism).