If you have never heard of the petrodollar system, rest assured you are not alone: it is certainly not a topic that makes its way out of Washington and Wall Street circles too often.Despite being the mechanism at the core of the whole dollarized financial system we use, it rarely makes major news headlines, and if it does, it is not discussed in detail as it should for the major public to understand its key concept and functioning.It goes far beyond saying that this system has motivated and even guided America’s foreign policies in the Middle East for the last several decades and caused a cascade of side effects reverberating throughout every country on the planet.In this articles series, we will cast clarity on this system, starting from its historical roots and how it has influenced our society since its inception.THE BRETTON WOODS FAILURE: VIETNAM WAR, PROSPERITY AND DEFICIT SPENDINGHistory of the 1900s echoes with the incredible technological advancements achieved characterized by the build-out of railroads, large-scale iron and steel production, widespread use of machinery in manufacturing, greatly increased use of steam power, widespread use of the telegraph, use of petroleum, and the beginning of electrification as well as mass production of goods and operating large-scale businesses. It also rhymes with the horror and despair caused by the Two Great Wars (1914–1918 & 1939–1945), which caused tragedies humanity had hardly ever experienced. It was also a significant year for a key component of human life: the economy.In July 1944, the United Nations Monetary and Financial Conference (more commonly known as the Bretton Woods conference) was held in the Mount Washington Hotel in Bretton Woods, New Hampshire. The historic gathering included 730 delegates from 44 Allied nations.The aim of the meeting: to regulate the war-torn international economic system.During the three-week conference, two new international bodies were established.These included:The International Bank of Reconstruction and Development (IBRD, later known as the World Bank)The International Monetary Fund (IMF);in addition, the delegates introduced the General Agreement on Tariffs and Trade (GATT, later known as the World Trade Organization, or WTO.)More importantly, another development that emerged from the conference was a new fixed exchange rate regime with the U.S. Dollar playing a central role.In essence, all global currencies were pegged to the U.S. Dollar.At this point, we might ask the legit question:“Why would all the nations agree the value of their currencies to be tied to the U.S. Dollar?”The answer is quite simple.The U.S. dollar would be “pegged” (and therefore be redeemable) at a fixed rate to GOLD of $35 per ounce. This international convertibility into gold allayed concerns about the fixed rate regime and created a sense of financial security among nations in pegging their currency’s value to the dollar.The system represented a dual option for countries adopting it:the United States has experienced an astonishing rate of growth during the early 1900s and, with their intervention in both WWI & WW2, playing a key role in the victory of Allied Forces, it established its role as a hegemonic power capable of leading the New World Order after WWII — hence why with Bretton Woods, countries were essentially relying on “TRUST” of the strength of the American economy and market;if a particular nation no longer felt comfortable with the dollar, they could easily convert their dollars holdings into gold and conduct trade with any partner they deemed fit.Without losing sight of the historical period we were in, this arrangement dramatically helped to restore the much-needed stability in the financial system, devastated by the immense costs of the wars.So, by the end of the war, nearly 80% of the world’s gold was sitting in U.S. vaults, and the U.S. Dollar had officially become the world’s undisputed reserve currency, and as a result of the Bretton Woods arrangement, the dollar was considered to be “as safe as gold.”This brought a huge demand for U.S. Dollars $ and, along with that, a larger supply of dollars, controlled and issued by the U.S. Central Bank (aka The Federal Reserve): it was an era of incredible prosperity for the U.S. as growth and expansion expanded beyond imagination and brought direct and indirect benefits on a worldwide scale.Everything started to change in the late 1960s when the U.S. economy faced major pressure: deficit spending (= government spending, in excess of revenue, of funds raised by borrowing rather than from taxation), was uncontrollable and parallelly, almost ignoring the current situation, President Lyndon B. Johnson, in office at that time, began to realize his plan of a “Great Society.”Great Society - WikipediaIt was a set of domestic programs in the United States in which the main goal was the total elimination of poverty and racial injustice. Huge spending programs were financed for education, medical care, urban problems, rural poverty, and transportation — an ambitious and monolithic plan to eradicate “poverty” and deeply transform the country and its social system.A program in which investments were everything but cheap and deeply in contrast with the enormous expenditure of the Vietnam War, which saw the United States’ engagement from 1955 to 1975 in a wearing conflict, harshly condemned by the majority of leaders and Americans alike.The Vietnam War Pictures That Moved Them MostA conflict funded by the record deficit spending of the U.S., cause that led many nations to question the economic set of motives of America.After all, the entire global economic order had become dependent upon a sound U.S. economy.Countries like Japan, Germany, and France, while fully on the mend from the devastation of World War II, were still largely dependent upon a financially stable American economy to maintain their economic growth.By 1971, as America’s trade deficits increased and its domestic spending soared and the perceived economic stability of Washington was being publicly challenged by many nations around the globe. Foreign nations could sense the severe economic difficulties mounting in Washington as the United States was under financial pressure at home and abroad.According to most estimates, the Vietnam War had a price tag in excess of $168 billion — the equivalent of $1 trillion in modern day.How the Vietnam War Affects You TodayThis mounting debt, plus other debts incurred through a series of poor fiscal and monetary policies, was highly problematic given America’s global monetary role.Despite the hefty price tag, the international economic community was mostly concerned by the growing imbalances related to U.S. gold reserves and its debt levels, which America has accumulated in large amounts, de-facto not being able to repay its creditors.It was almost as foreign nations could foresee the end of the Bretton Woods agreements.An important point to make is that America never intended (directly) to be the globe’s gold warehouse: instead, the convertibility of the dollar into gold was meant to generate global TRUST in U.S. paper money, as every dollar could be converted and redeemed for its equivalent in gold.Nations began to doubt America’s ability to manage its own finances, and it quickly escalated, causing the U.S. to literally bleed gold. Quite notorious is the case of France, which called America’s bluff and sent a battleship, instructed to secure and bring back French golden reserves.It was on August 5th, 1971, that Bretton Woods ceased to exist: Newyorkers woke up with the sight of the French battleship anchored in New York harbor demanding the gold to be delivered, while in Washington, in charge President Richard M. Nixon officially “closed the golden window” — in a move which became known as “The Nixon Shock”.Nixon’s quote, during his address to the nation:“I have directed the Secretary of the Treasury to take action necessary to defend the dollar against speculators. I have directed secretary Connolly to suspend temporary the convertibility of the U.S. dollar into gold or any other reserve assets… except in amounts and conditions determined to be in the interest of monetary stability and United States best interest”.https://medium.com/media/9696f83ce87cad4a5a3fd91fd83f9314/hrefA move that left the whole world baffled.It was after this move that the U.S. dollar officially abandoned the gold standard and was declared a purely “FIAT” currency:A currency that derives its value from its sponsoring government, issued and accepted by decree and solely based on “trust” towards the government.By “closing the gold window,” Washington had affected not only American economic policy — but also affected global economic policy. Under the international gold standard of Bretton Woods, all currencies derived their value from the value of the dollar.And the dollar derived its value from the fixed price of its gold reserves. But when the dollar’s value was detached from gold, it became what economists call a “floating” currency.By “floating,” it is meant that the currency is not attached, nor does it derive its value, from anything externally.Put simply, a “floating” currency is a currency that is not fixed in value.Learn About the Top Exchange Rates Pegged to the U.S. DollarLike any commodity, the dollar could be affected by the market forces of supply and demand.When the dollar became a “floating” currency, the rest of the world’s currencies, which had been previously fixed to the dollar, suddenly became “floating” currencies as well — exposing entire countries’ economies to speculation games with potentially disastrous effects.In this new era of floating currencies, the U.S. Federal Reserve, America’s central bank, had finally freed itself from the constraint of a gold standard.Now, the U.S. dollar could be printed at will — without the fear of not having enough gold reserves to back up new currency production.And while this new-found monetary freedom would alleviate pressure on America’s gold reserves, there were other concerns:Demand for the dollar: with it not being more convertible to gold, would its demand fall? Will the world shift to another standard causing America to lose its hegemony?America’s extravagant spending habits: under the gold standard, foreign nations gladly held U.S. debt securities, as they were denominated in gold-backed U.S. dollars, but what about now, that was backed by anything tangible and trust in the United States was starting to crumble?A solution was needed, and quickly and the United States was not willing to lose their position of power.End of Part 1For updates & the latest news and analysis — follow me on Twitter @FilandroMiCheck out our new platform 👉 https://thecapital.io/https://twitter.com/thecapital_iohttps://medium.com/media/3b6b127891c5c8711ad105e61d6cc81f/hrefThe U.S. dollar tale: from inception to domination, and his potential fall was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.