The Origins of Dollar Dominance: Lessons from the 1973 Oil Crisis
In 1973, the global financial ecosystem experienced a seismic shift when the price of oil skyrocketed overnight. For Saudi Arabia, the world’s largest oil exporter, the sudden hike in oil prices meant a torrent of US dollars—billions, pouring in virtually overnight. However, few anticipated that these unique circumstances would cement the dollar’s status as the world’s reserve currency for decades to come, an outcome rooted less in political deals and more in the sheer structural advantages of the American financial system.
Unprepared Wealth: Saudi Arabia’s Early Struggles
At the dawn of the oil boom, the Saudi government was not equipped to manage these unprecedented inflows. Rather than physically entering Saudi Arabia, the money made by oil sales ended up sitting in gigantic accounts at premier American banks like Citibank and JPMorgan in New York. Saudi financial authorities, at that time, lacked both the expertise and infrastructure necessary for globally integrated investment, leaving billions idle and unutilized in non-interest-bearing accounts.
Seeking a solution, Saudi Arabia’s central monetary authority, known as the Saudi Arabian Monetary Agency (SAMA), turned to an American banker named David Mulford. His story of navigating the logistical and cultural challenges highlights just how much of the oil windfall was a new and daunting prospect for the Saudis.
Building an Investment Program from Scratch
When Mulford and his team arrived in Jeddah, Saudi Arabia, they found themselves in a fledgling port city, where roads were scarce and houses newly built on desert sand. The basic necessities of modern office life—telephones, televisions, mail, and even trash removal—were absent. Uncollected rubbish became feed for wandering Bedouin goats, and the makeshift office consisted of little more than bare desks and chairs in a dilapidated building. Investment transactions were processed via telex—an early typing-telegraph hybrid that was ill-suited to moving hundreds of millions of dollars per day.
Despite these challenges, Mulford’s small team was charged with the formidable task of investing an average of $500 million every day, simply to keep pace with the ever-growing pool of oil revenue. Each transaction required dozens of telex messages and often took weeks to finalize. The working conditions were rudimentary at best; for example, the only shared toilet in the office was flushed just once a day.
Dispelling the Myths: Why Treasurys Became the Default
Mulford’s nine-year tenure at SAMA provided a front-row seat to the realities of reserve currency management. Contrary to the oft-repeated conspiracy that Saudi investments in US Treasurys were part of a secret quid pro quo for American security guarantees, the reality was more straightforward and pragmatic. The Saudis put their oil proceeds into US Treasurys because, simply put, there was no other market deep and liquid enough to absorb such vast sums. At the time, the Saudis were forced to invest about $20 billion a month, and the global landscape offered few alternatives that matched the scale, accessibility, and safety of the US bond market.
SAMA even tried to diversify, tasking Mulford with moving as much as 30% of their holdings out of the US. But outside American markets, even modest trades—in the $5 to $10 million range—could cause significant ripples. International currency and bond markets simply weren’t robust enough to match the scale or stability of the United States. In effect, the allure of US Treasurys rested not in diplomatic deals, but in the unique structural advantages offered by America—depth, liquidity, and legal protection.
The Enduring Pillars of the US Financial System
The experience of the 1970s shows that dollar dominance wasn’t the cunning result of political maneuvering, but a practical outcome based on America’s unique status. Even when the United States grappled with stagflation (simultaneous stagnation and inflation), the Watergate scandal, and the resignation of President Nixon, the American financial system proved so deep, liquid, and rule-bound that it remained the best venue for the world’s growing capital.
In subsequent decades, the US further enhanced its appeal as a global investment destination. Today, foreign investors hold roughly $19 trillion worth of US equities—over twice the amount invested in Treasurys. The diversity and dynamism of the American private sector, coupled with a proven track record at the Federal Reserve (which has managed to maintain anti-inflationary credibility in the face of political pressures), continues to make the US a global financial powerhouse.
Institutional Strengths: Foundations of Dollar Demand
The dominance of the dollar is not merely the result of its utility in trade or historical habit; it’s underpinned by democratic governance and the rule of law. Jerome Powell, the current Federal Reserve Chair, has pointed out that the durability of the dollar’s status as the reserve currency depends on “democratic institutions” and “the rule of law.” These foundations provide reassurances to global capital that assets held in the United States will be safe, accessible, and protected by independent courts and stable governance.
Trust in institutions cannot be manufactured overnight. The events of the past and present show that nations and investors act pragmatically: they place their assets where they have the greatest confidence in both the markets and the legal structures that support them. For now, America stands unmatched on these fronts in comparison to any other single nation or market bloc.
Emerging Threats: Can Dollar Dominance Last?
No nation’s dominance is immune to challenge, and even the dollar is not invincible. Crackling beneath the surface are concerns voiced by prominent economists such as Kenneth Rogoff. He warns that the dollar is “fraying at the edges,” as burgeoning fiscal deficits, unpredictable policymaking, and threats to central bank independence sow doubt in foreign investors’ minds. As anxiety grows over a perceived breakdown of American institutions, and as political gridlock and fiscal uncertainty erode the predictability that global investors depend on, the outsized role of the dollar could—over the long run—begin to wane.
An erosion of faith in the independence of the Federal Reserve, politicization of regulatory bodies, or a drastic departure from the principles of rule of law could reduce foreign appetite for US assets, regardless of America’s economic size. In short, the fabric that upholds dollar dominance is tightly interwoven with the integrity of US institutions—damage those, and confidence could unravel.
The Stablecoin Illusion: Demand Cannot Be Mandated
Some have argued that new financial instruments, like stablecoins, could extend or revive demand for dollars in the digital era. But this narrative reverses the actual dynamic: stablecoins are sought after precisely because the underlying US dollar is so trusted and desirable. Their popularity is a reflection—not a cause—of dollar demand.
Efforts to artificially manufacture international demand for the dollar, whether through policy incentives or innovative technologies, can only succeed insofar as the foundational advantages of the US financial system are preserved. Should the United States voluntarily cede these advantages—through abandonment of central bank independence, political instability, or disregard for the rule of law—no amount of regulatory pushing or technological band-aids will be sufficient to maintain the dollar’s primacy.
The Lessons for the Future: A Cautionary Perspective
The narrative of the dollar’s rise to dominance, from the deserts of 1970s Saudi Arabia to the skyscrapers of Wall Street, is a lesson in pragmatism over policy. Global markets reward stability, depth, transparency, and predictability—not promises or policy machinations. As long as the United States maintains its institutional strengths, the allure of its assets will persist, and the world will continue to demand dollars. But should those strengths falter, the dollar’s era could end far more quickly than many expect.
Ultimately, the message is clear: dollar dominance is not a birthright. It has been earned, decade after decade, through the often unglamorous work of upholding institutional excellence. As history has shown, nations lose their privilege as the world’s banker not when their economies falter, but when global investors lose faith in the durability of their systems. The United States would do well to heed this lesson if it wishes to retain its place at the very heart of global finance.
