The year was 1971 and the claims against dollar-based debt were pouring in from every country. The rumor was that the US did not really have the gold to pay. Foreign holders of US assets decided to test the promise, just in case.

Sure enough, Nixon panicked and shut the gold window, in effect defaulting on the terms of the deal, as did his predecessor FDR back in 1933. Nixon too was panicking over the draining of gold from the US Treasury. His intention was to protect the US dollar. 

Briefly, the US attempted a fixed-rate regime without settlement but failed. Two years later, the US announced a new system, one that they claimed would be better than ever. Henceforth, the US would be backed by nothing but confidence. But all would be well, we were told. All countries in the world would be in the same position, paper vs paper. And there would be a big market for arbitrage between them. Lots of profit opportunities. 

Indeed it was true. Today the global foreign exchange market has an average daily trading volume of up to $7.5 trillion, though it depends on the volatility. In any case, currency speculation is a huge industry that specializes in earning big bucks off small change. 

This market was a new one: whereas money for the previous several hundred years had been rooted in something more fundamental, now it would forever float based on the credibility of governments and their promises to pay with paper.. 

Of this there has been no doubt since 1973: the US paper dollar is king of the world, the global reserve currency in which most all accounts between countries are settled. Since that time, the US economy has experienced dramatic inflation: dollar purchasing power in 1973 has been reduced to 13.5 cents. Debt (government, industry, and household) has exploded. The industrial distortions at home have been legion. The upheaval in household finance from inflation created he necessity of two incomes per household to keep up.

In international trade, the dollar and petrodollar became the new gold. But whereas gold was a non-state asset shared by nearly all countries, an independent mediator of all enterprises and nations. The US dollar was different. It was attached to a state, one that presumed to run the world, an empire the likes of which history had never seen. 

This became undeniably true by the end of the Cold War, when the planet became unipolar and the US extended its ambitions without check to all parts of the world, an economic and military empire without precedent. 

Every empire in history meets its match at some point and in some way. In the case of the US, the surprise came in the form of economics. If the US dollar would become the new gold, other countries could hold it as collateral. Those other countries had a secret weapon: low production costs for manufacturing, backed by wages for labor that were a tiny fraction of the US. 

In times past, such disparities were not really an issue. Under the theory of David Hume (1711–1776), which held true for centuries from the time he advanced it, accounts between nations would settle in ways that would provide no permanent competitive advantage to any single........

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