The two World Wars in the 20th century depleted the gold stocks of European governments and made a return to the (UK Sterling based) gold standard impossible. This led to the Bretton Woods conference of 1944, where leaders of the world came together to find an alternative, non-gold-based, global trading system. John Maynard Keynes brought a proposal for a symmetric trading system, but it was rejected in favor of the dollar standard, which transferred global hegemony from the UK to the USA. The US had enough gold reserves to guarantee convertibility of the USD into gold at $35 per ounce, and this system worked fairly well until the Vietnam War led to excessive expenditures of dollars and an insufficiency of gold to redeem them.
In 1971, President Nixon renounced the Bretton Woods agreement and de-linked dollars from gold, leading to a world of unbacked currencies with floating exchange rates. The Nixon shock created massive uncertainty about how the world would function with fiat currencies. The Hunt brothers thought the system would collapse, leading to a return to gold and silver. They nearly succeeded in buying up most of the silver in the world – see Speculative Financial Attacks. The US was aware that loss of confidence in unbacked dollars could lead to financial disaster. To prevent this, they engineered a deal with Saudi Arabia to ensure that petroleum would always be sold in dollars, effectively replacing gold backing with petroleum and creating the Petro-Dollar.
This system is hugely favorable to the US, as it can print paper and buy real goods from around the world. All other countries must export to earn dollars and participate in global trade. This effectively creates a financial colonization of the world where all countries must pay tributes to the US in the form of goods. The IMF is there to help countries that fall behind in their payments, but this often leads to deeper debt enslavement. The current global trading system results in immense disparities between American levels of consumption and the rest of the world.
With the decline of US power for many different reasons, many different proposals for a more equitable trading system are now being discussed on international fora. A genuinely fair and symmetric system would balances exports and imports and place the burden of adjustment on the countries which are financially stronger, in contrast to current system. This is unlikely to happen, but a multipolar system which distributes power among the major financial powers in global trade is likely to emerge in the near future.
References: This is a slightly revised and edited version of Demise of the Dollar?. See also the version on LinkedIn: Dollar-Centered Trade: Causes and Consequences. For the Hunt Brothers episode, see “Silver Thursday“. For a more detailed discussion of the rise and fall of the gold standard in the 20th century, see On the Vital Importance of Understanding International Financial Architecture and International Financial Architecture: Part II. For a collection of articles analyzing different aspects of current financial crisis in Pakistan (and similar crises around the world) see: Economic Crisis in Pakistan: Analysis and Solutions.