HON. 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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