U.S. Monetary Imperialism and the War on Iraq

The following article, written in late April 2003 shortly after the fall of Baghdad to U.S. forces, remains a valuable guide to the underlying causes of the current American offensive against world order. Dr. Makhijani is one of many voices, seldom heard in American media, calling for broad discussion of the new arrangements that are necessary to ensure “a more just world.”

“No war for oil” was one of the more common slogans of the anti-war movement in the months before the Bush administration launched its war on Iraq on March 20, 2003. Oil is a many-faceted thing, however, and one aspect of it – the oil pricing policy of the Organization of Petroleum Exporting Countries (OPEC) – has not had much exposure to the light of public discussion, though it can be found in the interstices of cyberspace, if one looks hard enough.

Military dominance is not enough to establish imperialist control and economic dominance. A monetary and financial system that goes with military control is necessary for that. In fact, the degree and geographic extent of the acceptance of the money of an imperialist state are a good indication of how far its writ extends. Not too many people outside the Soviet Union particularly wanted to hold rubles, so the economic power of the Soviet Union was weak even over Eastern Europe, which it controlled militarily and politically. That was one of the central differences between the Soviet Union and the United States at the end of World War II.

Despite all appearances, and despite the overwhelming military might of the United States, the position of the U.S. dollar in the world is precarious. Trying to preserve the monetary basis of unchallenged U.S. imperialism may have been one of the central reasons for the United States to want to conquer Iraq and to dominate its oilfields. To understand the basis for that statement, a brief history of the evolution post-World War II monetary order is essential.

In 1945, all major powers, victors and vanquished alike, except the United States, were in various states of destruction and debt. They were exhausted by war and in need of external assistance to rebuild. Britain and France were also under pressure from independence movements in the colonies. Only the United States came out of the war richer and stronger. It possessed a monopoly of nuclear weapons. It was the world’s largest creditor and had half the world’s economic output. It exported both oil and capital. It had three-quarters of all the central bank gold in the world.

Looking to the post-war world, the major capitalist powers among the Allies agreed, during a 1944 conference at Bretton Woods, New Hampshire, to a U.S. plan to make the U.S. dollar the anchor of the world’s post-war monetary system. The basis of this plan was that U.S. dollars would be, literally, as good as gold. The United States promised to exchange them at a fixed rate of $35 per ounce of gold. The promise was based on a large store of gold at Fort Knox, Kentucky, and the immense financial strength of the United States. In return, the United States got the right to print the global reserve money. The world was willing to hold dollars because they represented gold at a constant price and because they were issued by the world’s wealthiest and most powerful country.

As Western Europe rose from the ashes of war, with U.S. capital and a copious supply of nearly free Middle Eastern oil (relative to final price) in the two decades after 1945, the currencies of European countries regained local stability. At about the same time, in 1964, the U.S. Congress passed the Gulf of Tonkin resolution that led to a large-scale war in Vietnam. President Johnson’s “guns and butter” policy during that war set off serious global inflation – because inflation in the U.S. currency also created inflation in global prices. This undermined confidence in the dollar and Europeans began to turn in their dollars for gold at faster rates.

It soon became unsustainable. Between 1971 and early 1973 President Nixon completely de-linked the dollar from gold, abandoning the promise of convertibility made in 1944, and inaugurating the present era of floating currency exchange rates. Then came the October 1973 Arab-Israeli war, the Arab oil embargo, and the steep rise in oil prices. This coupled energy insecurities to financial ones.

Despite its de-linking from gold, the dollar continued to reign as the supreme global currency for a number of reasons, including the unequalled size of the U.S. economy and the lack of an alternative global currency. But the readiness of the world to hold dollars in increasing amounts also had another reason, which is a principal source of the U.S. monetary vulnerability in the Persian Gulf today. The Organization of Petroleum Exporting Countries (OPEC), whose leaders were Iran, Saudi Arabia, and Venezuela, decided to maintain its policy of pricing oil in U.S. dollars. That, in effect, made the oil under the sands of the Persian Gulf countries, which have two-thirds of the world’s proven oil reserves, the new Fort Knox of the dollar.

So long as there was no currency to challenge it, and the oil-dollar link was maintained, most global trade would be in dollars. Countries and corporations would tend to hold most of their foreign currency reserves in dollars. Simply put, the United States could incur debt in its own currency, dollars, and import goods. For most other countries, matters were far more complex. For instance, Brazilian holders of their own currency, reals, or Indian holders of rupees had no effective purchasing power in the Persian Gulf, if their countries did not export something and earn U.S. dollars, or, alternatively, borrow them.

The Shah of Iran was the United States’ chosen guardian of this new Fort Knox; he proved to be a shaky one. With no possibility of countering the Shah’s repression of dissent but in the mosques, the Iranian people angrily overthrew the Shah in 1979, in an Islamic revolution directed as much against the United States as against him. Oil prices soared to $40 a barrel. Gold rose in parallel to more than $800 per troy ounce. The dollar sank to post-war lows against West European currencies. Only draconian increases in interest rates imposed by Federal Reserve chairman Paul Volcker, President Carter’s emergency appointee to that post, saved the dollar.

The price was high. Unemployment and inflation rose in the United States, sending the sum of the two – picturesquely dubbed as the “misery index” by then-presidential candidate Ronald Reagan – to post-war highs. Abroad, interest payments on many foreign debts increased in step with U.S. interest rates, precipitating a debt crisis across the developing world, starting with Mexico in 1982, which could have caused the collapse of major U.S. banks. Excessive borrowing, partly caused by global inflation, was another contributory factor.

A full-blown debt crisis began in 1982, with a near-default by Mexico, an oil exporter. Only a wave of restructurings dictated by the International Monetary Fund, in close coordination with the U.S. Treasury Department saved the exposed multinational banks. But mechanical application of IMF “prescriptions” has left the working people of many debt-ridden nations much worse off – with high unemployment, lower real wages, and tattered social safety nets. Third World debt has increased almost five fold (in current dollars) since 1982.

The problems of the dollar were obscured by a number of factors in the 1980s and 1990s. Falling oil prices, the collapse of the Soviet Union, the apparent establishment of unchallenged U.S. military supremacy, the willingness of foreigners to invest large sums of money in the United States, the unfolding of the Oslo peace process in Israel/Palestine and spectacular increases in stock prices in the 1990s put the United States on top of the world. But the vulnerabilities were accumulating nonetheless. They are now acute, and, in many ways, the situation is more precarious than in 1979: