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The End of Dollar Hegemony
Before the U.S. House of Representatives 02/15/06
By Ron Paul
02/16/06 "ICH" -- -- 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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