OPEC Should Return to a Hard Currency Standard and Drop the U.S. Dollar

OPEC had a problem. They were selling their oil and getting dollars in return. However, the dollar was losing value quickly. They worried that, in the future, the dollar might not be worth very much at all. They would have sold their irreplaceable natural resources for a paper promise from a country that didn’t keep its promises.

The year was 1971. On August 15 of that year, president Richard Nixon officially ended the dollar’s link to gold, which had been the policy of the U.S. government since 1789. At the time, the dollar was worth 1/35th of an ounce of gold, as it had been for the previous 38 years. When OPEC sold its oil, it was, in a sense, receiving gold in return. That was the idea, anyway.

In September of 1971, only a month after Nixon pulled the rug from under them, OPEC gathered to decide what to do about the dollar’s declining real value. In Resolution XXV.140, they decided that: “[OPEC] Member Countries shall take necessary action … to offset any adverse effects on the per barrel real income of Member Countries resulting from the international monetary developments of 15 August 1971.” Eventually, this took the form of higher prices, as it took more and more depreciating dollars to buy a barrel of oil.

Today, OPEC is faced with a similar problem. They take dollars for their oil, and these dollars often end up buying Treasury bonds. Also, their own domestic currencies are linked to the dollar, which is causing domestic inflation.

OPEC should go back to its original plan. Sell oil, and take gold in return – or a hard currency linked to gold. In practice, taking payment in metal is impractical, so a gold-linked currency — like the dollar was — is a more appropriate choice for today’s financial world.

Gold-linked currency? There aren’t any more of those. So why not make one? Today, there are discussions about depegging regional currencies like the United Arab Emirates’ dirham from the unreliable dollar, and perhaps repegging to a currency basket. But is a currency basket, of many fiat currencies, much better than a single fiat currency? “Some [OPEC members] said producing countries should designate a single hard currency aside from the U.S. dollar … to form the basis of our oil trade,” Iranian president Mahmoud Ahmadinejad said recently.

Ah, there’s the rub. There are no hard currencies. Only varying degrees of softness. No central bank today wants its currency to rise further against the dollar. During the 1970s, all the fiat currencies in the world got dragged down with the dollar, because of the trade implications of allowing the dollar to fall too far against their currencies. The pound, deutschemark and yen were no escape. Inflation roared throughout the world.

Instead of pegging to the euro or yen, both just as unreliable as the dollar in the long run, the UAE could peg the dirham to gold – even if the government owns no gold at all. The important thing is not to stockpile bullion, but to properly adjust the supply of dirhams to meet demand, the exact same process now used by the existing currency board. The UAE would have, in effect, a currency board linked to gold.

This would not be anything new for the dirham. The dirham coin used to be worth 3.207 grams of gold, and circulated alongside another popular Islamic currency, the dinar, which was worth 4.25 grams of gold. The gold dinar coin was reintroduced in 2006 by the Malaysian state of Kelantan.

Middle East oil – traded on the Dubai Mercantile Exchange for example — could then be priced in gold-linked dirhams. The world would finally have a hard currency again, as the dollar was before 1971. The dirham would immediately become an international currency, because everyone would need it to buy Middle East oil. The UAE would get into the currency business, which can be very lucrative. The Federal Reserve makes a profit of about $40 billion a year on its roughly $800 billion of U.S. Treasury bond holdings.

Eventually, if people wanted access to Middle East capital, they could issue bonds denominated in dirhams. No more dollar bonds. This would be very attractive, because the interest rate on dirham bonds would sink to very low levels. When the British pound was pegged to gold from 1823 to 1914, a ninety-one year stretch, the average interest rate on Consols – government bonds of infinite maturity – was 3.14%. It never rose above 4.0%. In the past century, no central bank has ever managed such a record of success. After four decades of experimentation with floating currencies, nothing has ever come close to the performance of a gold standard in action.

The world is transitioning to a new monetary order. Ideally, it will be better than what preceded. The dollar-centric monetary order arose in the 1930s and 1940s because the dollar remained a hard currency – pegged to gold – while all the currencies of Europe and Japan were devalued during the Depression and two world wars.

Perhaps it is time for the oil-exporting countries to stop playing by the rules of the oil importers, and start setting their own rules. The first rule is that they get paid for their oil in a “hard currency,” which, over six thousand years, has only meant one thing: a currency linked to gold.


Nathan Lewis
for Markets and Money

Nathan Lewis
Nathan Lewis is the author of Gold: the Once and Future Money, published by Agora Publishing and J. Wiley. He runs an investment fund in Westport, Connecticut.

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8 Comments on "OPEC Should Return to a Hard Currency Standard and Drop the U.S. Dollar"

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What stops USD recipients from immediately, or within a short time, sellig their USD and purchasing a range of other currencies or commodities and eventually assets, that are less prone to devaluation? While one can accept that the USD and others may be on the slippery slope down, it appears most are not tanking overnight, or even within a week or two.

Alex James

I think there is an understanding that if OPEC tries to not recycle much of its earnings into US TBILLS and instead tries to spend it, taking a quote from the Godfather, they could be put on ice!


as oil is consumed in the engine of my car…..it is released out the tail-pipe as exhaust…..so bankers recycle that exhaust when they create fresh new loans “out of thin air”…with which new oil can be afforded……yesterday’s consumed oil does not compete with today’s available oil to drive the prices down at the pumps…….SO WHY SHOULD…….. yesterday’s money spent at the gas station hang around to compete with today’s money to buy the same amount of gas at the station…..

Terje Petersen

This article was making so much sense that I was a little shocked. Then I saw who the author was and everything became clear. Nathan Lewis knows his stuff.

Donald Swenson
The key requirement for any currency is flexibility as production of goods and services increase over time. A currency that is linked to a physical commodity reduces this flexibility and hinders the growth in goods and services. What is money? Money is really a “tool” to help with the growth in the economic pie. Anything can be money if people have confidence and trust in the concept of money used. Gold is helpful when a money system is collapsing and when people are losing confidence in the symbol. But, gold is not the answer for our current global economic system.… Read more »


You don’t have to have your money supply increase at the same rate as your goods and services, you would then simply see your goods and services get cheaper in terms of the currency over time.

However, one must also take into account the affects of fractional reserve banking on the money supply, which does mostly offset the expansion in goods and services, as it moves in the same direction. Generally, credit is only issued to purchase other assets, so as more assets become available in an economy, the money supply automatically adjusts through additional credits and deposits.

Sajid Mahmood

Oops! are we heading for another war. I have been given to understand that Iran (like Iraq did at one stage) is willing to sell their oil in currencies other than the US Dollar.

If OPEC countries start selling in other currencies, their economies will become stronger, but this will happen at the expense of the American economy which is the largest in the world.

We will see a great depression or a war – both terrible for us.

Alex James

I think OPEC members know that if they try to spend much of their dollars earned from oil sales instead of recycling them into US$TBILLS, they could be put on ice (as in the Godfather).

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