by Kei Pritsker and Cale Holmes, Mint Press News:
WASHINGTON — Last Wednesday, U.S. Secretary of State Mike Pompeo gave a disturbing interview to Fox Business Network in which he divulged his plans to form a NATO-type alliance against Iran. The U.S. has long accused Iran of supporting terrorism, accusations that have ramped up under the Trump administration. Pompeo said, without a hint of irony, that Iran’s government was leading the country into wars in Syria, Yemen, Iraq, and Lebanon, against the will of the Iranian people. Furthermore, the absurd accusation that Hezbollah is in Venezuela seemed a crude attempt to link the two countries in order to delegitimize both of their governments at the same time. The announcement foreshadows the potential for an abrupt and extreme escalation of U.S. attacks on Iran, similar to the recent escalation of U.S.-Venezuela relations.
Washington’s playbook for regime change has become more and more obvious as it is used more frequently. In the cases of countries with powerful militaries like Venezuela, Iran, North Korea, or China, outright invasion is unfeasible, as disapproving public opinion would drag morale down. Demonizing the target via some pretext to isolate it from the international community has been the preferred model to deal with larger threats.
The U.S. imposes financial sanctions under the guise of “targeting regime figureheads and their inner circle of cronies,” and sweeping banking restrictions that cut a country’s entire economy off from investment and foreign reserves. As the country deteriorates under the weight of these sanctions, Washington points to the chaos it has created and says — again, without a hint of irony — “This is clearly a consequence of a neglectful and incompetent regime that must be overthrown.” The time period between the present and that unknown future date when the U.S. escalates is a crucial time for Iran to prepare itself for the worst case scenario.
The U.S. is able to dictate these econo-warfare policies through its disproportionate control of the world financial system. Iran has been sounding warnings about this strategy for some time and has been a vocal advocate of creating a new global financial system that will bypass U.S. control of the existing global financial system. Iran, though, is not the only country interested in such an arrangement. Russia, China, and Venezuela have all found themselves facing arbitrary economic penalties levied by the U.S. and have also taken steps to wean the world off the dollar and use alternative currencies to conduct business, a global trend that could seriously impact U.S. dominance over the world economy. But in order to understand where “King Dollar” is going, we have to understand where it came from.
The Birth of the Petrodollar
One of the first lessons we learn in Econ 101 is that money has value only because we believe it does. In a practical sense, this means the currencies that are most used or most needed to purchase things are the most valuable. A reserve currency is simply a widely accepted currency. Most countries have both a domestic currency for domestic use and foreign reserves, which are designated for foreign trade and other international activities. A few powerful countries issue reserve currencies, or widely recognized and accepted currencies, and have an advantage in international trade because they can simply print world reserve currencies instead of exchanging currencies or selling goods to acquire that currency.
Today, the U.S. dollar holds the status of world reserve currency because it is the most recognizable and widely used unit of currency in the world. You can take a dollar to any random country, any market on the side of the street, and show them a greenback and chances are they will accept that funny little paper as payment. If I decide to start a seashell-based currency today, chances are I won’t be able to buy anything with my seashells.
There is nothing inherently more special about our green piece of paper than someone else’s blue paper, red paper, or yellow paper; the dollar is special only because it represents a very special country, the United States of America, a superpower the likes of which the world has never seen. Where American power goes, its money always follows to become the region’s unit of economic measurement. The currency that goods are priced in is very important because if, for example, oil is priced in dollars, you need dollars to buy oil. This creates demand for dollars and not yen or rubles, giving a tremendous advantage to the country that prints dollars at no cost.
Before the international dollar standard, there were other world reserve currencies. The worldwide dominance of the Dutch East India Company made the Dutch guilder the world reserve currency in the 17th and 18th centuries. With the ascendance of the British Empire came the ascendance of the Pound Sterling to world reserve currency status.
As the world’s leading exporter of manufactured goods and services, British banks had accumulated a large amount of gold deposits. The Bank of England issued sterling certificates, paper that could be exchanged for gold, making the sterling as “good as gold.” This gave foreigners confidence that the paper sterling was not just paper but backed up by something of tangible value. British investors chasing higher returns expanded the reach of sterling further by making sterling-denominated long-term investments (read loans) around the world. At its height, over 60 percent of world trade was denominated in pound sterling.
But, as had all empires before it, the British Empire over-expanded and collapsed, unable to militarily control the land it claimed as its own. However, as the British cities were reduced to rubble in the Second World War, the United States, untouched throughout the war, got rich selling weapons to the other allied powers. Through exporting weapons, ammunition, equipment, and food, America’s war economy accumulated 75 percent of the world’s gold, making it the undisputed economic power of the capitalist world. No other country had enough gold to back its currency’s value.
Recognizing this, the leaders of the European capitalist powers agreed to make the dollar the new world reserve currency by pegging the dollar to gold at a fixed exchange rate of 35 dollars per ounce of gold. Other countries could exchange their currency for dollars instead of gold, the logic being the dollar was as good as gold. The International Monetary Fund was set up to ensure the U.S. maintained this exchange rate and the IMF acted as a lender of last resort if a country’s currency value fell too low compared to the dollar.
This was not just a convenient arrangement but a necessary one, as the European capitalist empires had fallen and needed to pass their power on to an heir. It was the recognition that now the United States was the only country powerful enough to organize and enforce worldwide markets. In addition, the use of nuclear weapons to wipe Hiroshima, Nagasaki, and 200,000 Japanese civilians off the map sent a message to the world that the United States was more militarily advanced and ruthless than any other country on the planet. A new global empire was born.
The United States immediately embarked on a series of invasions, mass killings, and covert regime-change operations in places like Korea, Guatemala, Iran, and Vietnam, to expand its spheres of influence. In order to fund these excursions, the United States began printing dollars, a privilege enjoyed solely by the United States. Since a dollar represented 1/35th of an ounce of gold, the United States was essentially printing claim checks for gold, gold that the United States didn’t actually have. A number of countries began to suspect that there were more than 35 dollars per ounce of gold in existence and began to turn in their dollars and ask for gold. French President, Charles De Gaulle famously remarked:
The fact that many countries accept as a principle, dollars as good as gold for the payment of the differences existing to their advantage in the American balance of trade, this very fact, leads Americans, to get into debt and to get into debt for free at the expense of other countries. Because, what the U.S. owes them, it is paid, at least in part, with dollars they are the only ones allowed to emit.
Considering the serious consequences a crisis would have in such a domain, we think that measures must be taken in time to avoid it. We consider necessary that international trade be established — as it was the case, before the great misfortunes of the World — on an indisputable monetary base, and one that does not bear the mark of any particular country. Which base? In truth, no one sees how one could really have any standard criterion other than gold.“
The erosion of confidence in the dollar-gold peg was called the Triffin Dilemma. To understand how quickly the U.S. undermined the exchange rate, consider that from 1790 to 1944, the U.S. accumulated around $200 billion dollars of debt. From 1944 to 1971, the debt doubled to around $400 billion, at least part of which was simply printed. The Nixon administration devalued the dollar a few times before suspending the convertibility of the dollar into gold completely on August 15th, 1971, holding the world’s gold and leaving them with pieces of green paper.
Over the next decade, the price of gold steadily increased to all-time highs. Nixon’s move, a desperate attempt at stopping inflation, failed to do so, as the world rejected the dollar. In order to avoid global loss of confidence in the dollar, the dollar needed to be tied to a new commodity, something equally as universally demanded.
The U.S. found that commodity in 1973 during the Saudi-imposed oil embargo. Saudi Arabia was infuriated by U.S. support for Israel in the Yom Kippur War and imposed an oil embargo on the U.S. as punishment. Henry Kissinger led the diplomatic effort to end the embargo. In 1974, a deal was struck to end the Saudi embargo and bring U.S.-Saudi relations to previously unseen heights. John Perkins, author of Confessions of an Economic Hitman and former economic hitman himself, summarized the deal aptly:
In the early 70s, OPEC didn’t like what we were doing in Israel, same old story. So they cut off our oil supplies. So some of you will remember these long lines at the gas stations and we feared, we were gonna have another depression like the 1929 depression. So the U.S. Treasury Department came to me and other economic hitmen and said, ‘Listen, you know, we can’t allow OPEC to blackmail us anymore. You guys gotta come up with a plan so this doesn’t happen again.’
We knew this plan had to involve Saudi Arabia because it had more oil than anybody else and it also, the House of Saud, was corrupt and corruptible. The long version is explained in the book but the short version of what we did, the deal we finally struck with the House of Saud, was a deal whereby they would return almost all the money they made from selling to the U.S., invest it in U.S. government securities.
The U.S. Treasury Department would use the interest from those securities, which over the years amounted to trillions of dollars, to hire us companies to westernize Saudi Arabia. Build petrochemical complexes, desalination plants, whole cities out of the desert, McDonalds and all the other things that go along with our western culture. The House of Saud would also agree to keep the price of oil within limits acceptable to the oil companies, possibly not acceptable to you and me, but acceptable to the oil companies.
And, this is very very important. They agree that they will never ever sell oil for anything other than U.S. dollars. This happened in the early 70’s right after we had went off the gold standard because we were bankrupt. Because we could not pay our debts to the European countries in gold, Nixon took us off the gold standard. And then we were stuck with the situation ‘why would anyone in the world use U.S. dollars?’ So then we came up with this plan, which in essence, put the dollar on the oil standard.
You cannot buy oil on the world market for anything other than dollars. And that’s very important for corporatocracy. We, our part of the bargain was we agreed to keep the House of Saud in power, in control. It was an amazing deal, the deal of the century. It was history-making, incredibly powerful deal that we struck with Saudi Arabia and it’s held.”
Crude oil is the most traded commodity in the world; every country needs it. The petrodollar system requires every country to have U.S. dollars on hand to buy oil. It keeps demand for the U.S. dollar as high as it was when the dollar was the only currency that could buy gold. If a country needs oil, it will have to manufacture and export a tangible good of value, like a car or a refrigerator, to the United States, while the U.S. can simply print or borrow paper dollars to use as immediate payment.
Even more advantageous to the U.S., OPEC nations take the profits from their oil sales to buy U.S. securities (read: lend America money), a system called petrodollar recycling. The deal with Saudi Arabia allowed the U.S. to continue being the only country able to print the world reserve currency and run massive deficits to become the consumer capital of the world.
The Petrodollar and The Empire
The takeaway from the petrodollar phenomenon is that as long as countries need oil, they will need the dollar. As long as countries demand dollars, the U.S. can continue to go into massive amounts of debt to fund its network of global military bases, Wall Street bailouts, nuclear missiles, and tax cuts for the rich.
But what happens if countries catch on to the scheme and try to break free of the petrodollar system?