Why the Dollar Goes to War: Understanding Today's Conflicts

Most people remember the 1970s as a decade of bell-bottoms, gas lines, and disco. Underneath, something far more consequential was happening: the United States was rebuilding the entire architecture of global finance after the system it had designed at Bretton Woods collapsed under the weight of the Vietnam War.

To understand why the United States is bombing Iran in 2026, why it has just captured the president of Venezuela, and why Congress passed a law in 2025 forcing dollar-backed cryptocurrencies to buy U.S. Treasury bonds — you have to start in the 1940s and walk forward.

The thread that connects all of it is the same: how does the United States make the world keep using dollars?

How America became the banker of the world

The story begins not in 1944 but in the years just before. When World War II broke out in Europe in September 1939, the United States was officially neutral. American factories, however, were not.

Under the "cash and carry" provision of the Neutrality Acts, Britain and France could buy American weapons, food, raw materials, and machinery — but only if they paid in cash and transported the goods themselves. They did, and they paid in gold. By December 1940, Britain had nearly exhausted its currency and gold reserves. Prime Minister Winston Churchill wrote to President Roosevelt that "the moment approaches when we shall no longer be able to pay cash for shipping and other supplies."

Roosevelt's response was the Lend-Lease program, signed in March 1941, which extended American war supplies on flexible credit terms to Britain, the Soviet Union, and other Allied nations. The total value would reach approximately $50 billion — equivalent to over $1.1 trillion today.

The strategic effect was extraordinary. While European economies were being bombed into rubble and Soviet industry was being relocated east of the Urals to escape the Wehrmacht, American factories ran at full tilt without a single bomb falling on them. By the time the United States formally entered the war in December 1941 after Pearl Harbor, its industrial base had already been transformed into the workshop of the Allied cause.

By 1945, the result was an economic position no nation has held before or since. The United States manufactured more than half of all goods produced in the world. It controlled roughly two-thirds of the world's gold reserves. American exports made up over a third of global trade.

This was the context in which delegates from 44 nations met at the Mount Washington Hotel in New Hampshire in July 1944 to design the postwar financial system. Bretton Woods was not a negotiation among equals. It was a recognition of an economic reality that already existed: the United States was the world's only intact industrial power, and the rest of the world needed dollars to rebuild.

Bretton Woods: an empire built on gold

The deal struck at Bretton Woods was simple. The U.S. dollar would be pegged to gold at $35 per ounce. Every other major currency would be pegged to the dollar. Foreign central banks could exchange their dollars for gold at any time.

This was possible because the United States held the gold to back it. The dollar wasn't just a currency — it was a claim ticket on real metal sitting in Fort Knox.

But the system contained a hidden contradiction. In 1960, an economist named Robert Triffin testified before the U.S. Congress that the system was destined to fail. His argument, now called the Triffin dilemma, went like this: for the world to grow and trade, it needed an ever-expanding supply of dollars. The only way the U.S. could supply those dollars was by running persistent deficits — pushing more currency abroad than it took in. But the more dollars accumulated overseas, the more they would exceed the gold reserves backing them. Eventually, foreign governments would lose faith and demand their gold.

By the late 1960s, there were already four times as many dollars circulating internationally as there were dollars worth of gold in U.S. reserves.

The system was a slow-motion bank run waiting to happen. All it needed was a trigger.

Vietnam: the war that broke the budget

The trigger was Vietnam — but not in the way you might expect. The Vietnam War's origins were not economic. They were ideological, shaped by the Cold War doctrine of containment and its more vivid version, the domino theory.

In a 1954 press conference, President Eisenhower described the theory simply: knock over one domino in Asia, and the rest fall to communism. That logic justified U.S. support for the French in Indochina, then for the South Vietnamese government, and eventually for direct American military involvement.

Under President Lyndon Johnson, the war exploded. Troop levels rose from a few thousand advisors in 1961 to over 500,000 by 1968. Johnson chose to fund both the war and his Great Society domestic programs without raising taxes — paying for it instead through deficit spending and money-printing.

This is the critical hinge. War spending financed by a printing press flooded the world with dollars the United States could no longer back with gold.

By 1965, France's Charles de Gaulle was openly criticizing what his finance minister Valéry Giscard d'Estaing called America's "exorbitant privilege" — the ability to pay for foreign goods simply by creating more dollars. France began aggressively redeeming its dollars for gold. West Germany followed. In August 1971, Britain demanded $3 billion of gold be transferred from Fort Knox.

It was a slow run on America's gold vault. The math no longer worked.

August 15, 1971: the Nixon Shock

On a Friday afternoon in August 1971, President Richard Nixon convened his top economic advisors at Camp David. By Sunday evening, he had made a decision that would redefine global finance.

In a televised address, Nixon announced what he called the "New Economic Policy": a 90-day freeze on wages and prices, a 10% tariff on imports, and — most consequentially — the suspension of the dollar's convertibility into gold. The gold window was closed. Foreign governments could no longer present dollars to the Federal Reserve and receive gold in return.

The Bretton Woods system, which had governed world finance for 27 years, was dead.

For the first time in modern history, the world's reserve currency was backed by nothing tangible. The dollar became a "fiat" currency — its value resting purely on trust in the U.S. government.

This created an immense geopolitical problem. If dollars couldn't be redeemed for anything, why would the world keep using them?

Nixon and his Secretary of State, Henry Kissinger, needed a new anchor. They found it in oil.

The 1973 oil crisis and the petrodollar deal

In October 1973, Egypt and Syria attacked Israel on the Jewish holy day of Yom Kippur. The United States resupplied Israel with weapons. Arab members of OPEC retaliated with an oil embargo against the U.S. and its allies, and quadrupled the price of oil from roughly $3 to $12 per barrel.

The shock caused gas lines, recessions, and a new economic phenomenon called "stagflation" — high inflation combined with stagnant growth.

But here is where the story takes a counter-intuitive turn. Declassified documents and decades of historical research show that U.S. officials did not entirely oppose high oil prices. American diplomats reportedly told Saudi Arabia and other Arab countries that they could charge whatever they wanted for oil — but that the U.S. would treat it as an act of war if those proceeds weren't kept in dollar assets.

In 1974, Treasury Secretary William Simon traveled secretly to Saudi Arabia. The deal he negotiated had three pillars:

1. Saudi Arabia would price all oil exclusively in U.S. dollars.
2. Saudi oil revenues would be reinvested in U.S. Treasury bonds.
3. The United States would provide military protection and weapons to the Saudi monarchy.

This arrangement is now known as the petrodollar system. By 1975, all OPEC nations had followed the Saudi lead. Between 1974 and 1976, Saudi Arabia alone purchased enough U.S. Treasuries to cover 12% of the federal deficit.

The genius of this arrangement was that it created artificial global demand for dollars. Every country that needed oil — which is to say, every country — needed dollars first. The dollar's reserve status, which had previously rested on gold, now rested on oil.

The system was reinforced in 1979 when the Iranian Revolution overthrew the U.S.-backed Shah, sending oil prices to nearly $40 per barrel and triggering a second oil shock. Federal Reserve Chairman Paul Volcker raised interest rates to 20% to crush inflation, attracting yet more foreign capital into U.S. Treasuries. The dollar's dominance was secured.

Israel: the strategic anchor

To understand how the petrodollar system has been defended for fifty years, one more piece is essential: the U.S.-Israel relationship.

The closeness of that relationship is often discussed in cultural, religious, and historical terms — and those factors are real. But there is also a hard strategic logic at work, and it became dramatically more important after 1973.

Before the Six-Day War of 1967, U.S. support for Israel was substantial but not exceptional. After 1967, when Israel defeated Soviet-armed Arab states in six days, American policymakers began viewing Israel as a regional asset of unmatched value. Following the 1973 Yom Kippur War, President Nixon dramatically increased military and economic aid to Israel. That aid has continued ever since: U.S. assistance to Israel since World War II totals approximately $318 billion, currently running at roughly $3.8 billion per year.

Why? Because Israel performs three functions for the United States that no other regional partner can.

First, military projection. Israel maintains a "qualitative military edge" guaranteed by U.S. law — meaning the United States is statutorily committed to ensuring Israel's military capabilities exceed those of any combination of regional adversaries. This gives Washington a forward military platform in the heart of the world's most important oil-producing region without having to station American troops in Arab capitals.

Second, intelligence and covert operations. Israeli intelligence services — Mossad, Shin Bet, Aman — operate in places and with methods that American agencies cannot. The 2024 Hezbollah pager operation, the assassinations of Iranian nuclear scientists, the cyberattacks on Iranian centrifuges — these are operations conducted by Israel that serve U.S. strategic interests without requiring direct American involvement or accountability.

Third, regional pressure. The mere existence of a militarily dominant Israel forces Arab states into a strategic calculation: align with Washington and benefit from regional stability, or align against Washington and risk Israeli action. The 2020 Abraham Accords, in which the United Arab Emirates, Bahrain, and others normalized relations with Israel, are the clearest example of this dynamic at work. Saudi Arabia's discreet security coordination with Israel and the U.S. against Iran is another.

This is why the petrodollar system and the U.S.-Israel relationship reinforce one another. The petrodollar requires Gulf monarchies to keep selling oil for dollars and recycling those dollars into Treasuries. Those monarchies stay aligned with Washington partly because the United States — and by extension Israel — provides them with security guarantees against larger threats, particularly Iran. Iran, not coincidentally, is the one major oil producer that has consistently tried to operate outside the dollar system, and the one country Israel has been most actively working to weaken.

It is not the only reason for the U.S.-Israel relationship. But it is a reason — and an essential one for understanding why that relationship has remained ironclad through fifty years of changing administrations, regional wars, and diplomatic crises.

Fast-forward to today: the system under stress

For fifty years, the system Kissinger and Simon built has worked remarkably well for the United States. It has allowed Washington to run permanent deficits, finance wars without raising taxes, and maintain global military supremacy — all underwritten by foreign demand for dollars and Treasury bonds.

But the system is showing serious cracks.

The numbers tell the story. The U.S. national debt crossed $39 trillion in March 2026. Interest payments on that debt are now the fastest-growing line item in the federal budget. The dollar's share of global foreign exchange reserves has fallen to 56.9% — the lowest level since 1995, down from a peak of 72% in 2001. All three major credit rating agencies have downgraded U.S. government debt: S&P in 2011, Fitch in 2023, and Moody's in May 2025.

BRICS is building an alternative. The bloc — Brazil, Russia, India, China, South Africa, plus new members including Iran — now represents roughly 45% of the global population and 41% of global GDP. Russia and China settle around 90% of their bilateral trade in rubles and yuan. China's CIPS payment system connects 4,800 banks across 185 countries, providing an alternative to the U.S.-dominated SWIFT network. The mBridge cross-border payment platform, run jointly by central banks, processed over $55 billion by late 2025. A proposed BRICS Unit settlement currency, reportedly backed 40% by gold and 60% by member currencies, is moving from concept toward reality.

Saudi Arabia hedges its bets. In June 2024, the original 1974 petrodollar agreement reportedly expired without formal renewal. Saudi Arabia has joined mBridge as a partner. China is now the kingdom's largest trading partner, and Beijing has been pushing for oil trade in yuan.

This is the context for understanding what's happening right now.

Venezuela: oil under American control

On January 3, 2026, U.S. Special Forces conducted a military operation in Caracas that captured Venezuelan President Nicolás Maduro and his wife. They were flown to New York to face federal charges. Trump declared on the same day that the United States would "run" Venezuela "until such time as we can do a safe, proper and judicious transition."

Venezuela holds an estimated 303 billion barrels of proven oil reserves — the largest in the world, 17% of the global total, more than Saudi Arabia. Trump explicitly stated that the operation was about access to those reserves, that revenue from Venezuelan oil would reimburse the U.S. for the operation, and that U.S. oil companies would take over the country's nationalized oil industry, PDVSA.

Energy Secretary Chris Wright stated that the U.S. intended to oversee Venezuelan oil sales "indefinitely." Secretary of State Marco Rubio said the administration was about to execute "a deal to take all the oil."

This is, in a literal sense, the petrodollar logic of 1974 inverted. Where Kissinger negotiated for Saudi cooperation, Trump simply seized the oil.

Iran: the war over the dollar's last anchor

On February 28, 2026, joint U.S.-Israeli airstrikes began an operation codenamed "Operation Epic Fury." A decapitation strike killed Iranian Supreme Leader Ali Khamenei. Iran retaliated, ultimately closing the Strait of Hormuz, through which roughly 80% of Asia's oil imports transit.

The official justification is Iran's nuclear program. The deeper context is harder to ignore.

Iran joined BRICS in 2024 and had been at the forefront of efforts to settle oil trade outside the dollar system. Its "shadow fleet" of aging tankers had been moving Iranian crude to China at discounted prices, paid for in yuan, evading U.S. sanctions through alternative payment rails.

The war is now costing the United States between $1 billion and $2 billion per day. The 30-year Treasury yield has climbed to nearly 4.90% as bond markets price in higher deficits and war-driven inflation. Europe is facing a second energy crisis. Global food prices are surging due to disruptions in fertilizer supply chains. The IEA has called it "the greatest global energy security challenge in history."

In financial markets, the war has produced a paradox. Short-term, the dollar is benefiting — energy crises increase global demand for dollars to buy oil. But the long-term effect may be the opposite. Each U.S. military action against a country trying to leave the dollar system is a lesson to others about why building alternatives matters.

The GENIUS Act: dollarization through the back door

Recognizing that the petrodollar system can no longer be defended through oil alone, Washington has opened a new front: digital dollars.

On July 18, 2025, President Trump signed the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act into law. It is the first comprehensive U.S. regulatory framework for dollar-pegged stablecoins — cryptocurrencies like USDT (Tether) and USDC (Circle) that are designed to maintain a 1:1 peg to the U.S. dollar.

The mechanics matter. The Act requires every issuer of a payment stablecoin to back every dollar in circulation with $1 of reserves, and those reserves are restricted almost entirely to:

• U.S. Treasury bills with maturities of 93 days or less
• Repurchase agreements backed by such Treasuries
• Money market funds invested in those assets
• Deposits at U.S. banks

The implications are profound. Every time a person in Argentina, Nigeria, Vietnam, or anywhere else buys a USDT or USDC stablecoin to escape a weak local currency, the issuer must purchase U.S. Treasuries to back it. Tether alone already holds approximately $100 billion in U.S. Treasury securities. The stablecoin market is currently around $250 billion — the GENIUS Act is designed to grow it dramatically while ensuring those flows are channeled into U.S. government debt.

The Act also explicitly preserves Treasury authority to "block, restrict, or limit transactions" involving dollar stablecoins. Foreign issuers wishing to operate in the U.S. market must demonstrate they can comply with American "lawful orders" — including asset freezes, seizures, and sanctions. In practical terms, every dollar-denominated stablecoin in the world becomes an instrument the U.S. Treasury can freeze with a court order.

This is a remarkable strategic move. Faced with a relative decline in foreign central bank demand for U.S. Treasuries, Washington has effectively conscripted the global retail crypto market — every individual buying digital dollars to escape inflation in their home country — into financing U.S. debt. And in exchange for that financing, the U.S. extends its sanctions enforcement power to every blockchain wallet in the world.

It is the petrodollar system, rebuilt for the digital age. Where Saudi Arabia once recycled oil revenues into Treasuries, Tether now recycles retail demand for digital dollars into the same Treasuries. Where the U.S. Navy guaranteed oil flows through the Strait of Hormuz, the Treasury now guarantees the integrity of stablecoin redemption — and the ability to cut off anyone it chooses.

The pattern beneath the headlines

Step back, and the connections become clear.

The Bretton Woods system collapsed because the United States printed money to fight a war it would not pay for through taxes. The petrodollar system replaced it by tying the dollar to the global oil trade. That system is now eroding because the U.S. has spent fifty years repeating the same pattern — financing wars, deficits, and global commitments through borrowing rather than taxation.

The countries pushing back against the dollar system today are not simply ideological adversaries. They are countries that have watched the United States use dollar dominance as a weapon — through sanctions, asset freezes, and exclusion from SWIFT — and have decided to build alternatives. Russia after 2022, Iran for decades, Venezuela, China, increasingly the broader BRICS bloc.

The U.S. response has three prongs.

The first is military: take the oil before others can monetize it outside the dollar system. Venezuela in January 2026, Iran in February 2026.

The second is legal and technological: build a new dollar infrastructure on the blockchain through the GENIUS Act, capturing global retail demand and channeling it into Treasury bonds while extending sanctions enforcement to digital wallets.

The third is what it has always been: a wager that there is no real alternative. The dollar is still 57% of global reserves. The euro has structural problems. The yuan is too tightly controlled to function as a true reserve currency. Gold is rising — central banks are buying it at record rates — but it cannot easily replace the dollar in transactions.

The honest answer is that the system Kissinger and Simon built in 1974 is not collapsing in 2026. It is gradually eroding, and the United States is responding the way declining empires usually do: by reaching for harder tools to enforce a softer position.

What it means for ordinary people

The 1970s teach us that monetary regimes do not change because central bankers decide they should. They change because a war, a crisis, or a contradiction makes the old system impossible to maintain — and what replaces it is whatever the strongest player can construct in the chaos.

We are living through that kind of transition right now. The signs are not in headline events but in the underlying numbers. A national debt growing faster than the economy. A reserve currency share at a 30-year low. Wars financed at $2 billion per day. New laws that turn cryptocurrency into Treasury bond-buying machines.

For people watching this from outside the policy class, a few things follow.

First, understand what money actually is. Every monetary system in history has been a political arrangement — a bargain between those who issue currency and those who accept it. When that bargain breaks, the currency follows. The dollar is no exception. It has been backed by gold, then by oil, and now increasingly by the threat of military and financial coercion. None of these are permanent arrangements.

Second, diversify thoughtfully. The 1970s taught savers that holding only dollars meant losing purchasing power. The 2020s and 2030s may teach the same lesson to a new generation. Gold is up roughly 130-fold from its 1971 price of $35 per ounce. Central banks themselves are buying gold at the fastest pace in modern history. This is not a coincidence.

Third, recognize that the global order is being rewired in real time. The post-1945 American-led order was built on specific institutions — Bretton Woods, the IMF, the World Bank, NATO, SWIFT. Those institutions are not disappearing, but they are increasingly being paralleled by alternatives built in Beijing, Moscow, Brasília, and elsewhere. The world is moving from a unipolar system to something messier and more contested.

Fourth, and perhaps most importantly, build resilience locally. When monetary regimes shift, the people who suffer least are those who depend least on the financial system to meet their basic needs. Food, water, energy, shelter, community, skills, and tools that work without the grid — these are not romantic ideas about the past. They are practical responses to a global financial architecture that is visibly under strain.

The 1970s ended with stagflation, gas lines, and a transformed world order. The 2020s may end the same way. The question is not whether change is coming. It is whether you understand the forces driving it well enough to make sensible decisions for your own life.

History does not repeat. But, as Mark Twain reportedly said, it does rhyme. The melody we are hearing right now started playing in August 1971.