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The Petrodollar Deal of 1974

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Bloomberg Business recently ran a retrospective by Andrea Wong about what she calls the “petrodollar deal” between the US and Saudi Arabia, a deal she says was created in the summer of 1974, when treasury Secretary William Simon and an assistant, Gerry Parsky, went on a diplomatic mission for the Nixon administration.

Simon passed away in 2000. Parsky, though, is still alive, and Wong seems to have been working in large part from Parsky’s recollections.  

Simon “understood how to sell the Saudis on the idea that America was the safest place to park their petrodollars.” A “strikingly simply” barter developed. The US would buy Saudi oil, and would provide the Sauds with military and diplomatic cover.  In return, the Saudis would buy lots of US Treasury bonds, becoming a huge part of the financing of the ballooning US debt.

There was also a diplomatic cable sent from King Faisal to the US Treasury months later, dealing with one small but critical aspect of this deal. It not be acknowledged as a deal at all. Faisal’s cable (this much does not depend on Parsky’s recollection – Bloomberg obtained the cable from the National Archives) says  his government’s Treasury purchases must remain “strictly secret.”  

As a consequence, US bonds were sold to the Kingdom as “add ons,” that is, outside the normal process, where the purchases would have been public information. Gordon Brown, who became an economic officer at the US embassy in Riyadh near the end of the Ford administration, in the employ of the State Department, said he was told be people there that this was the Treasury Depatmenyt’s business, to butt out of itFor forty years, they did.  Indeed, to a large extent the amount of these purchases mat still be a secret, the report says, because although the official books show the Kingdom owns s $117 billion of US debt, it may own twice that, the remainder  masked through offshore financial centers  showing up in the data as the purchases of other countries.

This is worrisome now for two reasons: first, oil prices have been below $50 a barrel now for some time. In 1974 dollars, this is [check] Saudi Arabia cannot count on US purchases of oil to maintain them in the style to which they have become accustomed. The country may start selling other assets, such as its Treasury holdings, on that account. Second, they may see their ability to sell as a political lever, in the face a recent indications that they might be held civilly liable in the US courts to the families of those who dies on September 11, 2001. They may react to that threat with T-bond sales.

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