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The Endangered US Dollar
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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.


A Brief History of Money
In order to understand why this sea change is about to occur, and what
is at stake, it is necessary to begin by examining in the briefest terms
the history of money, banking, and the dollar.

Hunter-gatherer societies typically enjoyed a gift economy in which
trade and barter occurred only with people external to the tribe or
band. Everyone within the band was treated as family: whatever was
available was shared without expectation of reciprocal exchange. The
story of the rise of social complexity is also the story of the gradual
shriveling of the gift economy and the expansion of the scope of trade -
a story that culminates in our situation today, in which the market
mediates nearly all categories of transactions between and among humans,
sometimes even within families.

Even many relatively complex societies of the past (such as the ancient
Egyptian and Inca civilizations) managed to do without money. However,
this new tool, wherever it appeared, served to facilitate and accelerate
trade. Its effects are predictable; French Historian Fernand Braudel,
writing of Europe in the Middle Ages, described them as "steep
variations in prices of essential foodstuffs; incomprehensible
relationships in which man no longer recognized either himself, his
customs, or his ancient values." The individual caught up in medieval
Europe's monetization process found, again in Braudel's words, that "his
work became a commodity, himself a 'thing.'"

The kinds of money people have used are almost endless; however, in
societies that have adopted the widespread use of money, coins made of
precious metals long ago became favored over other options (including
shells, beads, cattle, and, in China, paper) due to their relative
durability, portability, and rarity. Since money serves several possible
functions-a store of value, a measure of value, a medium of exchange,
and a standard of deferred payment - in some cases individual societies
have used two or more forms of money simultaneously.

Monetary history took a decisive turn with the emergence of banking in
Europe during the Middle Ages. Since traveling traders were frequently
robbed of their coins or metal ingots, they took to depositing their
metallic currency in the strongboxes of silversmiths and goldsmiths, and
carried redeemable receipts instead. Gradually these receipts came to be
regarded as being equivalent to the metal itself. This was the first
paper money. Meanwhile, gold- and silversmiths discovered that it was
possible to issue receipts for metal coins which they did not actually
possess, a practice that would eventually give rise to fiat currencies
and fractional reserve banking.

Fiat currencies did not appear in the West in any significant quantity
until the 19th century, when governments and national banks began
issuing notes not backed by any precious metal coinage whatever.

Fractional reserve banking emerged at about the same time as a system
whereby banks were legally permitted to loan more money than they
retained in deposits (regardless of whether those deposits were in the
form of gold or fiat money). This process seems mysterious and perhaps
even a tad unethical to most people when they initially learn of it.
However, it has become the foundation of modern banking and currency
systems. In effect, when a commercial bank makes a loan, it creates
money from nothing; when the loan is repaid and is stricken from the
books, that money effectively disappears. Since it has been loaned into
existence, virtually all fiat currency in modern money economies is tied
to debt, which requires the payment of interest. The regulation of the
money supply therefore depends on someone's ability to set interest
rates and thus encourage or discourage the seeking of more loans.


Early Life of the US Dollar
From this point on, we will focus our attention on a particular
currency - the US dollar.

During the Revolutionary War the provisional authorities issued paper
money, which led to counterfeiting by the British and various other
forms of fraud.

The 1792 US Coinage Act provided for a national Mint where silver
dollars were to be produced along with gold coins, beginning in 1794.
The Act states: "The Dollar or Unit shall be of the value of a Spanish
milled dollar as the same is now current, to wit, three hundred and
seventy-one and one-quarter grains of silver." The Act also prescribed
the death penalty for anyone debasing the national currency.

The framers of the American Constitution were divided on the question of
whether their new nation should have a national bank. Proponents (who
were themselves bankers or future bankers) argued that a national bank
would be necessary for the proper regulation of a national currency;
opponents argued that such an institution would effectively give a tiny
banking elite control of the nation's economy. The opponents won:
Article I of the US Constitution gave Congress the power to coin money.

However, the proponents of a national bank, led by Alexander Hamilton,
did not give up. At the time, in addition to the fledgling national
currency, other currencies were issued by local banks. The nation needed
a single money and a way of financing the government. All of the
government's financial needs, said the Hamiltonians, should be
underwritten by funds borrowed from the national bank, and repaid by the
government with funds raised by taxation from the people. Thomas
Jefferson led the opposition.

Twice in the 19th century a national bank was established (in 1791 and
1817), and twice abolished (the first in 1811, the second in 1832, both
times on charges that the bank was corrupt and unconstitutional).
Further attempts were made to establish a national bank until the early
years of the 20th century, but were rejected on constitutional grounds.
The nation's money, controlled by the government, was sometimes a fiat
paper currency, and sometimes gold- or silver-backed. Periods of
inflation or deflation led to depressions. Private banks continued to
issue their own bank notes as currency until the end of the Civil War,
during which Lincoln floated millions of dollars in fiat "greenbacks" in
order to finance the army. In 1878, Congress began to redeem greenbacks
into gold, which effectively put the US back on the gold standard until
1933.

In general, the Republicans were married to gold, while Populists,
Democrats, and the "Greenback Party" promoted silver and/or the printing
of lots of paper money. They argued that gold had become concentrated in
the hands of the bankers; if money were to get into the hands of "real
people," the government would have to issue more fiat or silver-backed
paper notes. The monetary question split the nation for decades.
Clearly, gold as money acts as a barrier to the expansion of credit
money. This can be both good and bad: it prevents hyperinflation, but it
can also put a brake on economic activity, leading in the worst
instances to deflation and depression. In 1896, the conflict came to a
head as Populist William Jennings Bryan ran against pro-gold Republican
William McKinley. Though McKinley won, gold's time had passed.

Following the depression of 1907, Congress passed the Owen-Glass Federal
Reserve Act of 1913, which established the national banking cartel that
controls the nation's currency to this day. The Federal Reserve (known
colloquially as the "Fed") is a peculiar hybrid government-private
institution whose chairman is appointed by the US president but whose
stock is entirely owned by member banks. In effect, the Fed is a private
corporation owned by the interests that it nominally regulates on behalf
of the people.

After the Fed's establishment the government quickly recalled its
Treasury Notes and the Fed began issuing Federal Reserve notes with a
promise to redeem them for gold upon demand. Congress also handed the
Fed control of the nation's gold. The Fed then began loaning back the
gold, at interest.

The Fed's tools for controlling the economy are few but powerful. It
sets the rules for member banks for fractional reserve banking (money
creation), and sets the discount rate (the rate of interest charged to
member banks for the privilege of creating money). When the federal
government wishes to take out a loan to pay for a new bomber or highway,
it effectively borrows the money from the Fed (though the debt usually
then gets spread around to various domestic and foreign investors),
which thus controls not only the nation's monetary system but government
credit as well. The benefits issuing from the flow of insider
information that results from that control are unknown but surely
considerable. The Fed's deliberations occur in secret and the
institution has never been audited.

Even after the Fed's creation, several kinds of currency existed from
time to time during the early 20th century, including United States
Notes, Gold Certificates, and Silver Certificates. But, from about 1965
to the present, virtually all US currency has consisted of Federal
Reserve Notes - i.e. money created not by the government (which merely
prints the paper notes themselves, which it sells to the Fed for the
cost of printing), but by Federal Reserve and its member banks.

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.

The US and Saudi Arabia had formed a cooperative partnership in 1945,
following meetings between FDR and King Ibn Saud. US oil companies
(Exxon, Mobil, Chevron, and Texaco) were already controlling Saudi
discovery and production through a partnership with the Kingdom, the
Saudi Arabian Oil Company (Aramco). In 1973, the Saudi Government
increased its partner's share in the company to 25%, and then 60% the
next year. In 1980, the Saudi government retroactively gained full
ownership of Aramco with financial effect as of 1976.

At about the same time this was happening (1975), the Saudis agreed to
export their oil for US dollars exclusively. Soon OPEC as a whole
adopted the rule. Now, as a result, the dollar was backed not by gold
but, in effect, by oil. Had the US permitted the Saudis to nationalize
their oil industry in return for this extraordinary favor? Because the
Saudi royal family and the oil companies are all notoriously
tight-lipped, we may never know.

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.

Simultaneously, during the 1980s the US effectively bankrupted the
Soviet Union by forcing the Soviets to pump their oil reserves at the
maximum rate in order to pay for the escalating arms race with America
and the US-fomented Afghan war, while reducing oil income to the Soviets
by asking the Saudis to keep world oil prices low. As foreseen by the
CIA, Soviet oil production peaked; and, as it declined, the nation's
economy imploded. The Cold War had been won.

The petrodollar era had worked to the American financial elite's
advantage, but at a horrendous cost to the people of the Third World and
to those of the former Soviet Union as well. Living standards declined
in all of these countries as IMF "structural adjustment" policies opened
markets to the predatory process of globalization led by US-based
multinationals seeking cheap labor and raw materials. The people of the
US suffered also, as America's manufacturing base was "hollowed out"
through outsourcing. While a quarter-century previously 60% of the
world's export goods had carried a "Made in USA" label, now American
companies were interested primarily in "branding" products made in China
or Central America. Jobs for US workers were consequently down-sized.

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.




* * *




There is no solution to any of this - in that there is nothing we can do
to make the problems go away. Their origins go far back in time and are
intertwined with the history of money itself, though money per se is not
at the heart of the matter. Access to resources is, as ever, the
ultimate determiner of human destiny, but money has become a tool
universally used by humans to gain and hold access to resources, and as
such it introduces its own set of possibilities and perils.

While there is no solution, there must be responses, and some are better
than others. Relocalization of economies (moving producers and consumers
closer together) and local currencies are good places to start.