Museletter # 149 / August 2004: The Endangered US Dollar
To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude.
- Thomas Jefferson
For decades the US dollar has served as the world's default currency. The phrase "sound as a dollar" has expressed the faith and confidence of generations, not only of Americans, but people worldwide.
That situation is coming to end, and the consequences will be far-reaching.
On March 9, 1933, at the deepest point of the Great Depression, Franklin Roosevelt issued Executive Orders 6073, 6102, 6111, and 6260,effectively declaring the US bankrupt. On April 5, 1933, Roosevelt declared a National Emergency that made it unlawful for any citizen of the United States to own gold, and ordered all gold coins, gold bullion, and gold certificates turned in to Federal Reserve banks by May 1 under the threat of imprisonment and fines. On June 5, 1933, Congress enacted a joint resolution outlawing all gold clauses in contracts.
Henceforth, for the next forty years, a dual monetary system would prevail which denied gold redeemability to Americans, while retaining it for foreigners.
The Dollar Triumphant
This brings us to the story of the dollar's rise to international prominence.
Prior to World War II the British pound sterling came close to being a globally accepted standard currency, largely as a result of the fact that it was issued by an Empire upon which the sun never set. However, neither the Empire nor the British economy survived the War intact. The US economy, meanwhile, though having been hammered by the Depression, emerged from the Second World War more robust than ever.
A post-War economic and geopolitical regime gradually emerged during the years 1944 to 1948. Postwar geopolitics would consist of a long political Cold War (which was also an economic war between the US and the USSR, itself a major oil producer and goods exporter within its sphere); meanwhile, the non-Soviet-dominated global economy would be shaped in agreements settled upon at international meetings in held Bretton Woods, New Hampshire. The Bretton Woods meetings of 1944 led to the establishment of the International Bank of Reconstruction and Development (which later became the World Bank) and the International Monetary Fund. The chief feature of the Bretton Woods system consisted of the obligation for each country to maintain the exchange rate of its currency within a fixed range - plus or minus one percent - in terms of gold. This well suited the United States, which at the time happened to have the largest gold reserves of any nation.
The arrangement worked reasonably for all concerned, as long as America remained the world's foremost energy producer and goods exporter - which permitted it in turn to maintain its gold reserves. The US extended dollar credits by way of the Marshall Plan to finance the rebuilding of post-war Europe, while American oil companies (and the Texas Railroad Commission) maintained stable prices for petroleum globally.
During this period US foreign and domestic policy were characterized by liberalism: at home, economic inequality was at the lowest point in modern American history; while abroad the United States maintained minimal trade barriers between itself and Western Europe, Japan, and South Korea. It could easily afford to absorb exports from these nations in return for their commitment of support for the duration of the Cold War.
The US exercised leadership by consensus - again, because it could easily afford to do so. This consensus evolved through both GATT trade negotiations and geostrategic Bilderberg meetings, in which the main Western powers conspired to effectively control the economies and political destinies of most of the rest of the world's nations.
However, this first relatively benign phase of what Henry Luce called the "American Century" came to an end as a result of the confluence of three factors: the decline of US oil production, spiraling national debt brought on by the Vietnam War, and increasing European and Japanese economic strength.
1973-1999: The Petrodollar Era
The members of the US-dominated consensus, while agreeing to cooperate, still had their own interests at heart, and sought advantages wherever possible. F. William Engdahl, in an essay in Current Concerns titled "Iraq and the Hidden Euro-Dollar Wars", describes the subsequent unraveling
All during the 1960s, France's de Gaulle began to take . . . dollar export earnings and demand gold from the U.S. Federal Reserve, legal under Bretton Woods at that time. By November 1967 the drain of gold from U.S. and Bank of England vaults had become critical. The weak link in the Bretton Woods Gold Exchange arrangement was Britain, the "sick man of Europe." The link broke as Sterling was devalued in 1967.That merely accelerated the pressure on the U.S. dollar, as French and other central banks increased their call for U.S. gold in exchange for their dollar reserves. They calculated that, with the soaring war deficits from Vietnam, it was only a matter of months before the United States itself would be forced to devalue against gold, so better to get their gold out at a high price.
By May 1971 even the Bank of England was demanding gold for dollars, and the drain on US reserves had become intolerable. Nixon did the only thing he could under the circumstances: he abandoned the Gold Exchange program altogether, and in August of that year a system of floating currencies was instituted. Engdahl again:
The break with gold opened the door to an entirely new phase of the American Century. In this new phase, control over monetary policy was, in effect, privatized, with large international banks such as Citibank, Chase Manhattan or Barclays Bank assuming the role that central banks had in a gold system, but entirely without gold. "Market forces" now could determine the dollar. And they did with a vengeance.
In 1973, with the dollar now floating freely, the Arab nations of OPEC embargoed oil exports to the US in retaliation for American support for Israel in the Ramadan/Yom Kippur War. By this time it was clear that US oil production had peaked and was in permanent decline, and that America would become ever more dependent upon petroleum imports. As oil prices soared 400%, the US economy took a nose-dive.
In any case, the oil shock created enormously increased demand for the floating dollar. Oil importing countries, including Germany and Japan, were faced with the problem of how to earn or borrow dollars with which to pay their ballooning fuel bills. Meanwhile, OPEC oil countries were inundated with oil dollars. Many of these oil dollars ended up in accounts in London and New York banks, where a new process - which Henry Kissinger dubbed "recycling petrodollars" - was instituted.
The process worked like this. OPEC countries were receiving billions of dollars they could not immediately use. When American and British banks took these dollars in deposit, they were thereby presented with the opportunity for writing more loans (banks make their profits primarily from loans, but they can only write loans if they have deposits to cover a certain percentage of the loan-usually 10% to 15%, depending on the current fractional reserve requirements issued by the Fed or Bank of England). Since the economies of industrialized nations were in no position to take on much new debt, the banks were faced with a problem: to whom could they loan a boatload of new petrodollar-based money? Kissinger, an advisor to David Rockefeller of Chase Manhattan Bank, suggested the bankers use OPEC dollars as a reserve base upon which to aggressively "sell" bonds or loans, not to US or British corporations and investors, but to Third World countries desperate to borrow dollars with which to pay for oil imports. By the late 1970s these petrodollar debts had laid the basis for the Third World debt crisis of the 1980s (after interest rates exploded). Most of that debt is still in place and is still strangling many of the poorer nations. Hundreds of billions of dollars were recycled in this fashion. (Incidentally, the borrowed money usually found its way back to Western corporations or banks in any event, either by way of contracts with Western construction companies or simple theft on the part of indigenous officials with foreign bank accounts.)
Also during the 1970s and '80s, the Saudis began using their petrodollar surpluses to buy huge inventories of unusable weaponry from US arms manufacturers. This was a hidden subsidy to the US economy, and especially to the so-called Defense Department.
As Engdahl points out, the petrodollar era was characterized by the US attempt to slow its geopolitical decline (arising from imperial over-extension abroad and resource depletion at home) by making the dollar a hegemonic currency The IMF "Washington Consensus" was developed to enforce draconian debt collection on Third World countries, to force them to repay dollar debts, prevent any economic independence from the nations of the South, and keep the U.S. banks and the dollar afloat. The Trilateral Commission was created by David Rockefeller and others in 1973 in order to take account of the recent emergence of Japan as an industrial giant and try to bring Japan into the system. Japan, as a major industrial nation, was a major importer of oil. Japanese trade surpluses from export of cars and other goods were used to buy oil in dollars. The remaining surplus was invested in U.S. Treasury bonds to earn interest. The G-7 was founded to keep Japan and Western Europe inside the U.S. dollar system. From time to time into the 1980s various voices in Japan would call for three currencies - dollar, German mark and yen - to share the world reserve role. It never happened. The dollar remained dominant.
During the petrodollar era, American foreign economic policy and military policy continued to be dominated by the voices of the traditional liberal consensus, which required that the US acted in concert with its allies. But this was about to change.
1999-Present: Hegemonic Decline, Imperial Hubris
As the Cold War ended, Europe was in the process of forging political and economic unity. Today the European Union and the euro - an entirely new pan-European currency - present a subtle but serious threat to continued American monetary hegemony. This challenge has developed slowly over the past 15 years, but its effects are cascading into view. In the US-British invasion and occupation of Iraq we see the dynamics of this new challenge at play, including the American response to it. The Washington neoconservatives have a term for this response: "democratic imperialism."
As Jeremy Rifkin documents in his new book, European Dream: How Europe's Vision of the Future is Quietly Eclipsing the American Dream, Europe is ever less a collection of squabbling nations and ever more a cohesive economic superpower -one that exceeds the US in GDP, population, and productivity. Europe shares America's dependency on depleting foreign sources of oil and gas, and will likely be hit hard by the effects of global climate change. Thus, over the long term, Europe's prospects are dim-though no dimmer necessarily than those of any other region.
However, in the short term Europeans will enjoy some advantages over their American counterparts, including much greater energy efficiency (Europeans use energy at one-half the per-capita rate as Americans) and much less debt, resulting partly from much smaller military budgets. Moreover, Europe sits next to Russia, which still has considerable quantities of exportable oil and gas and stockpiles of nuclear and conventional weapons. A Eurasian alliance between Russia, Germany, and France would be a geopolitical nightmare for Washington -and such an alliance is beginning quietly and tentatively to emerge. Europe is also geographically closer to the oil and gas reserves of the Middle East and Central Asia, which are increasingly accessible to it by pipeline (the US must rely on tankers).
The development of this Eurasian challenge comes at a bad time for Washington, which is in no position to offer the kinds of trade concessions it did in earlier decades in order to maintain the G-7 consensus. America's only remaining strong suit is raw military power, and thus its only options are either to decline gracefully from its position as sole superpower, or use its military to enforce global dominance.
Engdahl suggests that the neo-conservatives gained influence in Washington because a majority in the U.S. power establishment finds their views useful to advance a new aggressive U.S. role in the world. Rather than work out areas of agreement with European partners, Washington increasingly sees Euroland as the major strategic threat to American hegemony, especially "Old Europe" of Germany and France. Just as Britain in decline after 1870 resorted to increasingly desperate imperial wars in South Africa and elsewhere, so the United States is using its military might to try to advance what it no longer can by economic means. Here the dollar is the Achilles heel.
To understand why the dollar is America's Achilles heel, a metaphor is useful. Imagine being able to write checks and then convince the people you give them to not to cash them. Perhaps they find the checks themselves comforting to hold onto; or maybe you have a friend who agrees to sell groceries or gasoline for your checks only, and then happily stockpiles and re-circulates them. In either case, you may be tempted to write checks for much more than you have in your bank account. As long as the checks themselves are regarded as valuable and not cashed, you get a free ride. But if people stop finding your checks comforting to hold onto, or if your friend starts selling groceries for other people's checks or for gold or silver, then the game is up. It will be revealed that your account is overdrawn and you will be in trouble.
The metaphor is not perfect. In fact, every nation in the world is attempting to write checks beyond its means. But the US has managed to do by far a better job of it than any other nation. The checks we are not talking about are not just hoarded paper dollars (though there are billions of these stuffed in mattresses around the world) but dollar-denominated investments and securities, including T-bills, stocks, and mortgages. Currently the US is running a $700 billion per year trade deficit, this on top of trillions in government debt and trillions more in consumer debt. No other nation in the world comes remotely close to this level of bad-check writing, on either a total or a per-capita basis.
If a run on the US dollar were to occur, then the only financial solution would be to create even more dollars (presumably through government borrowing), which of course wouldn't actually solve the problem and would in the long run make matters worse. The currency would become almost worthless, and in the process real wealth (land, factories, and natural resources) would be confiscated and turned over to creditors.
What could cause this to happen? A decision by OPEC to openly sell oil for euros could be a trigger. Some oil is already quietly being sold for euros, and several countries including Iran and Saudi Arabia have floated the possibility of valuing oil against a basket of currencies (meaning, effectively, dollars and euros). The Arab OPEC states have also toyed with an idea that must be equally worrisome to Brussels and Washington: to sell oil for gold (the gold dinar). If and when this happens, the full wrath of America will descend upon the Arab Middle East - and that's why it hasn't happened yet.
The other likely trigger would be a collapse of the US economy from within resulting from a bursting of the mortgage bubble. The recent US economic "recovery" arose almost entirely from low mortgage rates (set ultimately by the Fed), which allowed families to refinance their homes, cash out some of their equity, and use the money for immediate consumption. With oil prices soaring, the Fed will eventually have to raise interest rates steeply in order to contain inflation. But this may cause millions of homeowners to default on their currently low-interest adjustable-rate mortgages. In that event, property values would plummet, and with them would go the stock market and the economy as a whole.
If the Fed's real owners are confident in the present Washington leadership, they will do everything in their power to delay the inevitable until after the election (and this is what they seem to be doing). If they think it is time for a regime change, we may see the great unraveling begin even before November.
In either case, the response of US political leaders may be merely to seek foreign scapegoats. As Stan Goff writes in his recent essay, "Persian Peril" (www.fromthewilderness.com), it appears as if Iran is currently being set up as the next domino in the neocons' crusade for democracy in the Middle East. With Iranian and Russian cooperative energy agreements blooming, a US attack on Iran could be the trigger for another all-out conflict on the order of the World Wars of the 20th century. On the other hand, it is possible that the disastrous outcome of the Iraq invasion has sunk deep enough into the awareness of Washington elites that further similar adventures (however desperately sought by the neocons) will be headed off by cooler minds.
When everything seems like the movies
Yeah you BLOG bleed just to know you'r alive
Museletter # 149 / August 2004: The Endangered US Dollar