The End of Dollar Hegemony
I rarely report on someone else’s work,
but the speech given by the Hon. Ron Paul on February 15,
2006 before the U.S. House of Representatives deserves to
be circulated to as wide an audience as possible. Some of
you may already have read it.
Congressman Ron Paul of Texas is important,
to me at least, because he is an advocate of liberty -- something
that is unfortunately very rare in Washington these days.
It is ironic that in a country built on the principle of liberty
there are so few who even know what it means. If you don’t
know who Ron Paul is, I suggest you visit his website at http://www.house.gov/paul/
Honorary Ron Paul of Texas, Before the U.S. House of Representatives
February 15, 2006
The End of Dollar Hegemony
A hundred years ago it was called “dollar
diplomacy.” After World War II, and especially after
the fall of the Soviet Union in 1989, that policy evolved
into “dollar hegemony.” But after all these many
years of great success, our dollar dominance is coming to
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
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
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
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
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
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
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
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
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
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
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
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.
This letter/article is not intended to meet your specific
individual investment needs and it is not tailored to your
personal financial situation. Nothing contained herein constitutes,
is intended, or deemed to be -- either implied or otherwise
-- investment advice. This letter/article reflects the personal
views and opinions of Paul van Eeden and that is all it purports
to be. While the information herein is believed to be accurate
and reliable it is not guaranteed or implied to be so. The
information herein may not be complete or correct; it is provided
in good faith but without any legal responsibility or obligation
to provide future updates. Neither Paul van Eeden, nor anyone
else, accepts any responsibility, or assumes any liability,
whatsoever, for any direct, indirect or consequential loss
arising from the use of the information in this letter/article.
The information contained herein is subject to change without
notice, may become outdated and will not be updated. Paul
van Eeden, entities that he controls, family, friends, employees,
associates, and others may have positions in securities mentioned,
or discussed, in this letter/article. While every attempt
is made to avoid conflicts of interest, such conflicts do
arise from time to time. Whenever a conflict of interest arises,
every attempt is made to resolve such conflict in the best
possible interest of all parties, but you should not assume
that your interest would be placed ahead of anyone else’s
interest in the event of a conflict of interest. No part of
this letter/article may be reproduced, copied, emailed, faxed,
or distributed (in any form) without the express written permission
of Paul van Eeden. Everything contained herein is subject
to international copyright protection.