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| The End of Dollar Hegemony
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I rarely report on someone else’s work,
but the speech given by the Hon. Ron Paul on February 15,
2006 before the U.S. House of Representatives deserves to
be circulated to as wide an audience as possible. Some of
you may already have read it.
Congressman Ron Paul of Texas is important,
to me at least, because he is an advocate of liberty --
something that is unfortunately very rare in Washington
these days. It is ironic that in a country built on the
principle of liberty there are so few who even know what
it means. If you don’t know who Ron Paul is, I suggest
you visit his website at http://www.house.gov/paul/
Honorary Ron Paul of Texas, Before the U.S. House of Representatives
February 15, 2006
The End of Dollar Hegemony
A hundred years ago it was called “dollar
diplomacy.” After World War II, and especially after
the fall of the Soviet Union in 1989, that policy evolved
into “dollar hegemony.” But after all these
many years of great success, our dollar dominance is coming
to an end.
It has been said, rightly, that he who holds
the gold makes the rules. In earlier times it was readily
accepted that fair and honest trade required an exchange
for something of real value.
First it was simply barter of goods. Then
it was discovered that gold held a universal attraction,
and was a convenient substitute for more cumbersome barter
transactions. Not only did gold facilitate exchange of goods
and services, it served as a store of value for those who
wanted to save for a rainy day.
Though money developed naturally in the marketplace,
as governments grew in power they assumed monopoly control
over money. Sometimes governments succeeded in guaranteeing
the quality and purity of gold, but in time governments
learned to outspend their revenues. New or higher taxes
always incurred the disapproval of the people, so it wasn’t
long before Kings and Caesars learned how to inflate their
currencies by reducing the amount of gold in each coin--
always hoping their subjects wouldn’t discover the
fraud. But the people always did, and they strenuously objected.
This helped pressure leaders to seek more
gold by conquering other nations. The people became accustomed
to living beyond their means, and enjoyed the circuses and
bread. Financing extravagances by conquering foreign lands
seemed a logical alternative to working harder and producing
more. Besides, conquering nations not only brought home
gold, they brought home slaves as well. Taxing the people
in conquered territories also provided an incentive to build
empires. This system of government worked well for a while,
but the moral decline of the people led to an unwillingness
to produce for themselves. There was a limit to the number
of countries that could be sacked for their wealth, and
this always brought empires to an end. When gold no longer
could be obtained, their military might crumbled. In those
days those who held the gold truly wrote the rules and lived
well.
That general rule has held fast throughout
the ages. When gold was used, and the rules protected honest
commerce, productive nations thrived. Whenever wealthy nations--
those with powerful armies and gold-- strived only for empire
and easy fortunes to support welfare at home, those nations
failed.
Today the principles are the same, but the
process is quite different. Gold no longer is the currency
of the realm; paper is. The truth now is: “He who
prints the money makes the rules”-- at least for the
time being. Although gold is not used, the goals are the
same: compel foreign countries to produce and subsidize
the country with military superiority and control over the
monetary printing presses.
Since printing paper money is nothing short
of counterfeiting, the issuer of the international currency
must always be the country with the military might to guarantee
control over the system. This magnificent scheme seems the
perfect system for obtaining perpetual wealth for the country
that issues the de facto world currency. The one problem,
however, is that such a system destroys the character of
the counterfeiting nation’s people-- just as was the
case when gold was the currency and it was obtained by conquering
other nations. And this destroys the incentive to save and
produce, while encouraging debt and runaway welfare.
The pressure at home to inflate the currency
comes from the corporate welfare recipients, as well as
those who demand handouts as compensation for their needs
and perceived injuries by others. In both cases personal
responsibility for one’s actions is rejected.
When paper money is rejected, or when gold
runs out, wealth and political stability are lost. The country
then must go from living beyond its means to living beneath
its means, until the economic and political systems adjust
to the new rules-- rules no longer written by those who
ran the now defunct printing press.
“Dollar Diplomacy,” a policy instituted
by William Howard Taft and his Secretary of State Philander
C. Knox, was designed to enhance U.S. commercial investments
in Latin America and the Far East. McKinley concocted a
war against Spain in 1898, and (Teddy) Roosevelt’s
corollary to the Monroe Doctrine preceded Taft’s aggressive
approach to using the U.S. dollar and diplomatic influence
to secure U.S. investments abroad. This earned the popular
title of “Dollar Diplomacy.” The significance
of Roosevelt’s change was that our intervention now
could be justified by the mere “appearance”
that a country of interest to us was politically or fiscally
vulnerable to European control. Not only did we claim a
right, but even an official U.S. government “obligation”
to protect our commercial interests from Europeans.
This new policy came on the heels of the
“gunboat” diplomacy of the late 19th century,
and it meant we could buy influence before resorting to
the threat of force. By the time the “dollar diplomacy”
of William Howard Taft was clearly articulated, the seeds
of American empire were planted. And they were destined
to grow in the fertile political soil of a country that
lost its love and respect for the republic bequeathed to
us by the authors of the Constitution. And indeed they did.
It wasn’t too long before dollar “diplomacy”
became dollar “hegemony” in the second half
of the 20th century.
This transition only could have occurred
with a dramatic change in monetary policy and the nature
of the dollar itself.
Congress created the Federal Reserve System
in 1913. Between then and 1971 the principle of sound money
was systematically undermined. Between 1913 and 1971, the
Federal Reserve found it much easier to expand the money
supply at will for financing war or manipulating the economy
with little resistance from Congress-- while benefiting
the special interests that influence government.
Dollar dominance got a huge boost after World
War II. We were spared the destruction that so many other
nations suffered, and our coffers were filled with the world’s
gold. But the world chose not to return to the discipline
of the gold standard, and the politicians applauded. Printing
money to pay the bills was a lot more popular than taxing
or restraining unnecessary spending. In spite of the short-term
benefits, imbalances were institutionalized for decades
to come.
The 1944 Bretton Woods agreement solidified
the dollar as the preeminent world reserve currency, replacing
the British pound. Due to our political and military muscle,
and because we had a huge amount of physical gold, the world
readily accepted our dollar (defined as 1/35th of an ounce
of gold) as the world’s reserve currency. The dollar
was said to be “as good as gold,” and convertible
to all foreign central banks at that rate. For American
citizens, however, it remained illegal to own. This was
a gold-exchange standard that from inception was doomed
to fail.
The U.S. did exactly what many predicted
she would do. She printed more dollars for which there was
no gold backing. But the world was content to accept those
dollars for more than 25 years with little question-- until
the French and others in the late 1960s demanded we fulfill
our promise to pay one ounce of gold for each $35 they delivered
to the U.S. Treasury. This resulted in a huge gold drain
that brought an end to a very poorly devised pseudo-gold
standard.
It all ended on August 15, 1971, when Nixon
closed the gold window and refused to pay out any of our
remaining 280 million ounces of gold. In essence, we declared
our insolvency and everyone recognized some other monetary
system had to be devised in order to bring stability to
the markets.
Amazingly, a new system was devised which
allowed the U.S. to operate the printing presses for the
world reserve currency with no restraints placed on it--
not even a pretense of gold convertibility, none whatsoever!
Though the new policy was even more deeply flawed, it nevertheless
opened the door for dollar hegemony to spread.
Realizing the world was embarking on something
new and mind boggling, elite money managers, with especially
strong support from U.S. authorities, struck an agreement
with OPEC to price oil in U.S. dollars exclusively for all
worldwide transactions. This gave the dollar a special place
among world currencies and in essence “backed”
the dollar with oil. In return, the U.S. promised to protect
the various oil-rich kingdoms in the Persian Gulf against
threat of invasion or domestic coup. This arrangement helped
ignite the radical Islamic movement among those who resented
our influence in the region. The arrangement gave the dollar
artificial strength, with tremendous financial benefits
for the United States. It allowed us to export our monetary
inflation by buying oil and other goods at a great discount
as dollar influence flourished.
This post-Bretton Woods system was much more
fragile than the system that existed between 1945 and 1971.
Though the dollar/oil arrangement was helpful, it was not
nearly as stable as the pseudo gold standard under Bretton
Woods. It certainly was less stable than the gold standard
of the late 19th century.
During the 1970s the dollar nearly collapsed,
as oil prices surged and gold skyrocketed to $800 an ounce.
By 1979 interest rates of 21% were required to rescue the
system. The pressure on the dollar in the 1970s, in spite
of the benefits accrued to it, reflected reckless budget
deficits and monetary inflation during the 1960s. The markets
were not fooled by LBJ’s claim that we could afford
both “guns and butter.”
Once again the dollar was rescued, and this ushered in the
age of true dollar hegemony lasting from the early 1980s
to the present. With tremendous cooperation coming from
the central banks and international commercial banks, the
dollar was accepted as if it were gold.
Fed Chair Alan Greenspan, on several occasions
before the House Banking Committee, answered my challenges
to him about his previously held favorable views on gold
by claiming that he and other central bankers had gotten
paper money-- i.e. the dollar system-- to respond as if
it were gold. Each time I strongly disagreed, and pointed
out that if they had achieved such a feat they would have
defied centuries of economic history regarding the need
for money to be something of real value. He smugly and confidently
concurred with this.
In recent years central banks and various
financial institutions, all with vested interests in maintaining
a workable fiat dollar standard, were not secretive about
selling and loaning large amounts of gold to the market
even while decreasing gold prices raised serious questions
about the wisdom of such a policy. They never admitted to
gold price fixing, but the evidence is abundant that they
believed if the gold price fell it would convey a sense
of confidence to the market, confidence that they indeed
had achieved amazing success in turning paper into gold.
Increasing gold prices historically are viewed
as an indicator of distrust in paper currency. This recent
effort was not a whole lot different than the U.S. Treasury
selling gold at $35 an ounce in the 1960s, in an attempt
to convince the world the dollar was sound and as good as
gold. Even during the Depression, one of Roosevelt’s
first acts was to remove free market gold pricing as an
indication of a flawed monetary system by making it illegal
for American citizens to own gold. Economic law eventually
limited that effort, as it did in the early 1970s when our
Treasury and the IMF tried to fix the price of gold by dumping
tons into the market to dampen the enthusiasm of those seeking
a safe haven for a falling dollar after gold ownership was
re-legalized.
Once again the effort between 1980 and 2000
to fool the market as to the true value of the dollar proved
unsuccessful. In the past 5 years the dollar has been devalued
in terms of gold by more than 50%. You just can’t
fool all the people all the time, even with the power of
the mighty printing press and money creating system of the
Federal Reserve.
Even with all the shortcomings of the fiat
monetary system, dollar influence thrived. The results seemed
beneficial, but gross distortions built into the system
remained. And true to form, Washington politicians are only
too anxious to solve the problems cropping up with window
dressing, while failing to understand and deal with the
underlying flawed policy. Protectionism, fixing exchange
rates, punitive tariffs, politically motivated sanctions,
corporate subsidies, international trade management, price
controls, interest rate and wage controls, super-nationalist
sentiments, threats of force, and even war are resorted
to—all to solve the problems artificially created
by deeply flawed monetary and economic systems.
In the short run, the issuer of a fiat reserve
currency can accrue great economic benefits. In the long
run, it poses a threat to the country issuing the world
currency. In this case that’s the United States. As
long as foreign countries take our dollars in return for
real goods, we come out ahead. This is a benefit many in
Congress fail to recognize, as they bash China for maintaining
a positive trade balance with us. But this leads to a loss
of manufacturing jobs to overseas markets, as we become
more dependent on others and less self-sufficient. Foreign
countries accumulate our dollars due to their high savings
rates, and graciously loan them back to us at low interest
rates to finance our excessive consumption.
It sounds like a great deal for everyone,
except the time will come when our dollars-- due to their
depreciation-- will be received less enthusiastically or
even be rejected by foreign countries. That could create
a whole new ballgame and force us to pay a price for living
beyond our means and our production. The shift in sentiment
regarding the dollar has already started, but the worst
is yet to come.
The agreement with OPEC in the 1970s to price
oil in dollars has provided tremendous artificial strength
to the dollar as the preeminent reserve currency. This has
created a universal demand for the dollar, and soaks up
the huge number of new dollars generated each year. Last
year alone M3 increased over $700 billion.
The artificial demand for our dollar, along
with our military might, places us in the unique position
to “rule” the world without productive work
or savings, and without limits on consumer spending or deficits.
The problem is, it can’t last.
Price inflation is raising its ugly head,
and the NASDAQ bubble-- generated by easy money-- has burst.
The housing bubble likewise created is deflating. Gold prices
have doubled, and federal spending is out of sight with
zero political will to rein it in. The trade deficit last
year was over $728 billion. A $2 trillion war is raging,
and plans are being laid to expand the war into Iran and
possibly Syria. The only restraining force will be the world’s
rejection of the dollar. It’s bound to come and create
conditions worse than 1979-1980, which required 21% interest
rates to correct. But everything possible will be done to
protect the dollar in the meantime. We have a shared interest
with those who hold our dollars to keep the whole charade
going.
Greenspan, in his first speech after leaving
the Fed, said that gold prices were up because of concern
about terrorism, and not because of monetary concerns or
because he created too many dollars during his tenure. Gold
has to be discredited and the dollar propped up. Even when
the dollar comes under serious attack by market forces,
the central banks and the IMF surely will do everything
conceivable to soak up the dollars in hope of restoring
stability. Eventually they will fail.
Most importantly, the dollar/oil relationship
has to be maintained to keep the dollar as a preeminent
currency. Any attack on this relationship will be forcefully
challenged—as it already has been.
In November 2000 Saddam Hussein demanded
Euros for his oil. His arrogance was a threat to the dollar;
his lack of any military might was never a threat. At the
first cabinet meeting with the new administration in 2001,
as reported by Treasury Secretary Paul O’Neill, the
major topic was how we would get rid of Saddam Hussein--
though there was no evidence whatsoever he posed a threat
to us. This deep concern for Saddam Hussein surprised and
shocked O’Neill.
It now is common knowledge that the immediate
reaction of the administration after 9/11 revolved around
how they could connect Saddam Hussein to the attacks, to
justify an invasion and overthrow of his government. Even
with no evidence of any connection to 9/11, or evidence
of weapons of mass destruction, public and congressional
support was generated through distortions and flat out misrepresentation
of the facts to justify overthrowing Saddam Hussein.
There was no public talk of removing Saddam
Hussein because of his attack on the integrity of the dollar
as a reserve currency by selling oil in Euros. Many believe
this was the real reason for our obsession with Iraq. I
doubt it was the only reason, but it may well have played
a significant role in our motivation to wage war. Within
a very short period after the military victory, all Iraqi
oil sales were carried out in dollars. The Euro was abandoned.
In 2001, Venezuela’s ambassador to
Russia spoke of Venezuela switching to the Euro for all
their oil sales. Within a year there was a coup attempt
against Chavez, reportedly with assistance from our CIA.
After these attempts to nudge the Euro toward
replacing the dollar as the world’s reserve currency
were met with resistance, the sharp fall of the dollar against
the Euro was reversed. These events may well have played
a significant role in maintaining dollar dominance.
It’s become clear the U.S. administration
was sympathetic to those who plotted the overthrow of Chavez,
and was embarrassed by its failure. The fact that Chavez
was democratically elected had little influence on which
side we supported.
Now, a new attempt is being made against
the petrodollar system. Iran, another member of the “axis
of evil,” has announced her plans to initiate an oil
bourse in March of this year. Guess what, the oil sales
will be priced Euros, not dollars.
Most Americans forget how our policies have
systematically and needlessly antagonized the Iranians over
the years. In 1953 the CIA helped overthrow a democratically
elected president, Mohammed Mossadeqh, and install the authoritarian
Shah, who was friendly to the U.S. The Iranians were still
fuming over this when the hostages were seized in 1979.
Our alliance with Saddam Hussein in his invasion of Iran
in the early 1980s did not help matters, and obviously did
not do much for our relationship with Saddam Hussein. The
administration announcement in 2001 that Iran was part of
the axis of evil didn’t do much to improve the diplomatic
relationship between our two countries. Recent threats over
nuclear power, while ignoring the fact that they are surrounded
by countries with nuclear weapons, doesn’t seem to
register with those who continue to provoke Iran. With what
most Muslims perceive as our war against Islam, and this
recent history, there’s little wonder why Iran might
choose to harm America by undermining the dollar. Iran,
like Iraq, has zero capability to attack us. But that didn’t
stop us from turning Saddam Hussein into a modern day Hitler
ready to take over the world. Now Iran, especially since
she’s made plans for pricing oil in Euros, has been
on the receiving end of a propaganda war not unlike that
waged against Iraq before our invasion.
It’s not likely that maintaining dollar
supremacy was the only motivating factor for the war against
Iraq, nor for agitating against Iran. Though the real reasons
for going to war are complex, we now know the reasons given
before the war started, like the presence of weapons of
mass destruction and Saddam Hussein’s connection to
9/11, were false. The dollar’s importance is obvious,
but this does not diminish the influence of the distinct
plans laid out years ago by the neo-conservatives to remake
the Middle East. Israel’s influence, as well as that
of the Christian Zionists, likewise played a role in prosecuting
this war. Protecting “our” oil supplies has
influenced our Middle East policy for decades.
But the truth is that paying the bills for
this aggressive intervention is impossible the old fashioned
way, with more taxes, more savings, and more production
by the American people. Much of the expense of the Persian
Gulf War in 1991 was shouldered by many of our willing allies.
That’s not so today. Now, more than ever, the dollar
hegemony-- it’s dominance as the world reserve currency--
is required to finance our huge war expenditures. This $2
trillion never-ending war must be paid for, one way or another.
Dollar hegemony provides the vehicle to do just that.
For the most part the true victims aren’t
aware of how they pay the bills. The license to create money
out of thin air allows the bills to be paid through price
inflation. American citizens, as well as average citizens
of Japan, China, and other countries suffer from price inflation,
which represents the “tax” that pays the bills
for our military adventures. That is until the fraud is
discovered, and the foreign producers decide not to take
dollars nor hold them very long in payment for their goods.
Everything possible is done to prevent the fraud of the
monetary system from being exposed to the masses who suffer
from it. If oil markets replace dollars with Euros, it would
in time curtail our ability to continue to print, without
restraint, the world’s reserve currency.
It is an unbelievable benefit to us to import
valuable goods and export depreciating dollars. The exporting
countries have become addicted to our purchases for their
economic growth. This dependency makes them allies in continuing
the fraud, and their participation keeps the dollar’s
value artificially high. If this system were workable long
term, American citizens would never have to work again.
We too could enjoy “bread and circuses” just
as the Romans did, but their gold finally ran out and the
inability of Rome to continue to plunder conquered nations
brought an end to her empire.
The same thing will happen to us if we don’t
change our ways. Though we don’t occupy foreign countries
to directly plunder, we nevertheless have spread our troops
across 130 nations of the world. Our intense effort to spread
our power in the oil-rich Middle East is not a coincidence.
But unlike the old days, we don’t declare direct ownership
of the natural resources-- we just insist that we can buy
what we want and pay for it with our paper money. Any country
that challenges our authority does so at great risk.
Once again Congress has bought into the war
propaganda against Iran, just as it did against Iraq. Arguments
are now made for attacking Iran economically, and militarily
if necessary. These arguments are all based on the same
false reasons given for the ill-fated and costly occupation
of Iraq.
Our whole economic system depends on continuing
the current monetary arrangement, which means recycling
the dollar is crucial. Currently, we borrow over $700 billion
every year from our gracious benefactors, who work hard
and take our paper for their goods. Then we borrow all the
money we need to secure the empire (DOD budget $450 billion)
plus more. The military might we enjoy becomes the “backing”
of our currency. There are no other countries that can challenge
our military superiority, and therefore they have little
choice but to accept the dollars we declare are today’s
“gold.” This is why countries that challenge
the system-- like Iraq, Iran and Venezuela-- become targets
of our plans for regime change.
Ironically, dollar superiority depends on
our strong military, and our strong military depends on
the dollar. As long as foreign recipients take our dollars
for real goods and are willing to finance our extravagant
consumption and militarism, the status quo will continue
regardless of how huge our foreign debt and current account
deficit become.
But real threats come from our political
adversaries who are incapable of confronting us militarily,
yet are not bashful about confronting us economically. That’s
why we see the new challenge from Iran being taken so seriously.
The urgent arguments about Iran posing a military threat
to the security of the United States are no more plausible
than the false charges levied against Iraq. Yet there is
no effort to resist this march to confrontation by those
who grandstand for political reasons against the Iraq war.It
seems that the people and Congress are easily persuaded
by the jingoism of the preemptive war promoters. It’s
only after the cost in human life and dollars are tallied
up that the people object to unwise militarism.
The strange thing is that the failure in
Iraq is now apparent to a large majority of American people,
yet they and Congress are acquiescing to the call for a
needless and dangerous confrontation with Iran.
But then again, our failure to find Osama
bin Laden and destroy his network did not dissuade us from
taking on the Iraqis in a war totally unrelated to 9/11.
Concern for pricing oil only in dollars helps
explain our willingness to drop everything and teach Saddam
Hussein a lesson for his defiance in demanding Euros for
oil.
And once again there’s this urgent
call for sanctions and threats of force against Iran at
the precise time Iran is opening a new oil exchange with
all transactions in Euros.
Using force to compel people to accept money
without real value can only work in the short run. It ultimately
leads to economic dislocation, both domestic and international,
and always ends with a price to be paid.
The economic law that honest exchange demands
only things of real value as currency cannot be repealed.
The chaos that one day will ensue from our 35-year experiment
with worldwide fiat money will require a return to money
of real value. We will know that day is approaching when
oil-producing countries demand gold, or its equivalent,
for their oil rather than dollars or Euros. The sooner the
better.
******
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