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Before the US House of Representatives, February 15,
2006:
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.
February 17, 2006
Dr. Ron Paul is a Republican member of Congress from
Texas.
