People's Democracy

THE supremacy of the dollar as the reserve currency of the world as much as military superiority is a contributory factor for the world hegemony wielded by US imperialism. It is clear that it would stop at nothing in order to maintain this hegemony. As early as 1948, George Kennan, head of policy planning in the US State Department, who was regarded as one of the key brains of the evolving strategy in the post Second World War period, wrote without mincing words: "We have about 50 per cent of the world’s wealth, but only 6.3 per cent of its population. In this situation, we cannot fail to be the object of envy and resentment. Our real task in the coming period is to devise a pattern of relationships which will permit us to maintain this position of disparity. To do so, we will have to dispense with all sentimentality and day-dreaming; and our attention will have to be concentrated everywhere on our immediate national objectives. We should cease to talk about vague and unreal objectives such as human rights, the raising of living standards, and democratization. The day is not far off when we are going to have to deal in straight power concepts. The less we are hampered by idealistic slogans, the better." – Emphasis added (George Kennan, Foreign Relations of the United States – Documents, 1948)

Need it be said that these words of advice or policy postulates, were accepted and acted upon, initially with circumspection and later on more and more brazenly. William Blum in his books: "Rogue State" and "Killing Hope" has chronicled decades of subversions, interventions and wars indulged in by the US in pursuit of not just maintaining its pre-eminent status economically and militarily but also to reach the present stage as the only super power on earth. As Kennan advocated, without a semblance of nicety, no sentimentality was allowed to cloud the objective. Successive US administrations did in fact better than what Kennan advocated: even as every foul and heinous act was perpetrated, the requiem for ‘human rights’, ‘raising living standards’ as well as ‘democratisation’ was chanted along with a chorus of hangers on. And what is more, they succeeded in making most Americans and much of the world believe that the US was indeed protecting and furthering the cause of these noble values even as the very opposite was being done.

America’s dominant position as the sole super power rests upon two pillars: One is its incomparable military superiority and the other its control over the global economic system through appropriation of a unique role for its currency, the dollar as the world reserve currency. The military superiority of the US is quite well known and needs little emphasis or elaboration. But the supremacy of the dollar, how did it come about? How did the US dollar manoeuvre itself into the position of the world reserve currency? Is it because the US is the biggest economy, the richest country in the world? We shall attempt to answers these question in the following discussion.

At the end of the Second World War in 1945, the Western allied powers realised the need for not only political and diplomatic stabilisation but also economic stabilisation. The latter requirement resulted in the historically famous Bretton Woods Monetary Conference of 1944-1945 which was guided by the genius of the British economist John Maynard Keynes.

The conference, participated by representatives of 44 countries, decided on the American dollar to be capable of providing monetary stability to the world. By the end of the war, the US gained economic dominance, its industries were untouched by the ravages of war and its security remained intact and even strengthened. In contrast, Europe and Asia were literally destroyed and desperately in need of reconstruction. The Bretton Woods arrangement established the World Bank and the International Monetary Fund to facilitate this important goal. The GATT too was created in order to revive and regulate world trade as well. The conference established the gold standard on the basis that the value of an ounce of gold would be pegged at 35 US dollars. It thereby assigned a pivotal role to the American dollar as well, in this arrangement of monetary stabilisation.

As can be seen, the role of the dollar was directly tied with that of gold. This was only natural so long as America enjoyed the largest gold reserves and its economy was the most productive and efficient. Extension of dollar credits under the Marshall Plan for reconstruction of war ravaged Europe and Asia enhanced its position. All this gave the US enormous prestige and clout among the comity of nations. Despite this dominant position economically and politically, its role was perceived to be relatively benign.

ABANDONING THE DOLLAR-GOLD LINK

This benign appearance and role was to end soon. This became visible during the Korean War and got aggravated by and by as its infamous interventions subversively and militarily in the affairs of other countries became increasingly ugly and brazen. It could be said that Vietnam provided the earliest window to America’s imperialist ambitions and inhumanity.

The escalating cost of Vietnam War coupled with the growing economic strength of Western Europe and of Japan began making inroads into America’s economic strength and pre-eminent position. The entry of the German car Volkswagen into the American auto market followed closely by Japanese automobiles could be said to be the beginning point. Domestic oil production peaked around 1970 and America’s dependence on imported oil substantially increased thereafter. This led to increasing public deficits. The value of the dollar started sliding taxing the confidence of even its European partners. The French president Charles de Gaulle openly called for jettisoning the American dollar as the reserve currency and reverting back to the "virtues of gold standard." France was the first country to claim gold in return for its dollar reserves and export earnings. Other European countries too started redeeming their dollar export earnings for gold from the US Federal Reserve.

By late 1967 itself, the run on US Treasury’s gold reserves started surfacing. Britain, often referred to as the ‘sick country of Europe’, began it all by devaluing its pound sterling, thereby making break with the Bretton Woods monetary bond. By 1971, It joined France and others and started redeeming its reserves in gold. History has it that in August 1971, the British redeemed as much as $3 billion of its dollar reserves for gold at the fixed exchange of $35 an ounce. For the American government under president Richard Nixon, this was the end of the tether. In order to stave off the collapse of its gold reserves thereby risking its credit, Nixon opted for abandoning the dollar-gold link entirely. Before doing that the American government devalued the dollar in order to take out its own gold at a higher price.

With the breaking down of the Bretton Woods monetary system, large international banks such as Citibank, Chase-Manhattan, Bank of America, JP Morgan, Barclays Bank etc. virtually privatized control over monetary policy. These banking behemoths could step into the shoes of Central banks alright but could not redeem dollars for gold. The abandonment of gold standard resulted in the market determining dollar value. The burgeoning public deficits accompanied by breaking of dollar value anchored to gold, led to high inflation. In 1971, Nixon administration responded by clamping wage-price freeze policy which found its echo in several parts of the world.

The cumulative effect of free floating dollar, increasing trade deficits and massive public debt associated with the Vietnam War led to serious volatility resulting in dollar devaluation in the 1970s.

EROSION OF CONFIDENCE IN THE US DOLLAR 

The confidence in the US dollar was eroded to such extent that the OPEC countries started considering pricing of oil in several currencies or a basket of currencies not just the dollar. The Group of 10 nations (G-10) who were members of the Bank for International Settlements (BIS) along with Austria and Switzerland decided to include major world currencies like the German mark, French franc, British pound sterling, Japanese yen, Canadian dollar etc. along with the US dollar in the basket of currencies. In this arrangement, importantly, the Saudi Arabian Monetary Authority (SAMA) was also involved.

Before this arrangement could be put into effect, the US under president Nixon, not wanting the pre-eminent position of the dollar being lost despite the economic slide, used its leverage with Saudi Arabia, whose security it had been underwriting, to jettison this collective arrangement even before it was put into effect. The Saudi’s, contrary to their commitment in the meeting under BIS, unilaterally decided to price oil sales only in US dollars. Simultaneously, agreement was also concluded in 1974 with New York and London banking interests for parking of oil surpluses with them. Thus was initiated an arrangement that continues to this day, that goes by the terminology of ‘petrodollar recycling.’ The same year as if to demonstrate its earnestness, Saudi Arabia invested $2.5 billion of its oil surplus in US Treasury Bills. The then US Treasury Secretary Blumenthal also entered into a secret deal with the Saudi’s to ensure that other OPEC members too followed suit in continuing to price oil only in US dollars. It is not a coincidence either that 70 per cent of all Saudi assets were held in New York federal accounts. One might as well ask where was the so called free market involvement in all this.

Then arose a crisis in the world oil market. The Organisation of Oil Exporting Countries (OPEC) put a spanner in the wheels or so it appeared, by increasing the price of crude per barrel. Their contention on the surface was fair enough. They argued that when the industrial countries were charging higher prices for their manufactured goods, why should they not correspondingly increase oil prices? But the steep price hike hurt the economies of not only the industrial countries but also the developing countries whose economies were getting battered. A solution had to be found and found soon. A division could be engineered in the ranks of the OPEC countries through countries like Saudi Arabia which agreed to increase production in order to enable price reduction.

Already the petroleum surpluses were feeding the resource starved American and British banks to a point of the latter becoming dependant on petroleum surpluses for their survival. The increase in the price of crude oil helped these banks in an unforeseen manner. The oil companies that were already raking in profits were deluged with more. Where could they park them other than in banks in London and New York? These banks were flush with surplus funds, it appeared more than they could handle.

In order to cope with the flush of funds in the form of petrodollars, the banks were over reaching themselves in extending credit creating another danger to the world financial system namely the possibility of default. In fact the American Congress itself became concerned. The Multinationals Sub-Committee of the Senate Foreign Relations Committee under the Chairmanship of Senator Frank Church which was investigating American investments abroad became concerned about the spate of petrodollars pouring into the American banks and the reckless investments they were making as a result. The banks promptly took shelter under secrecy law. They also argued about the danger of business shifting to their rivals in Europe. This was utter nonsense. They knew that eventually these funds would get ploughed back. But Senator Church’s Committee though feeling disturbed about the possibilities of the financial system overstretching and collapsing, glossed over the danger without nailing the root cause of the malaise. After all the compulsions of ‘imperial overstretch’ in which the US was indulging in, required this looseness in the financial structure. Regulatory controls were things to be preached to other countries to conform them to the requirements of American hegemony and not for practice at home. Here was an instance of financial overstretch the consequences of which were imponderable – an instance of imperial overstretch. The petroleum surpluses were concentrated mainly in six of the biggest banks in the US. The position was further aggravated by trading in currency as well.

This was a chimera of anxiety that was projected to outside world, this anxiety over having to handle huge funds that were pouring in. The situation was contrived. The scenario is best illustrated by F. William Engdahl, in his well researched book, ‘A Century of War. He writes: "In May 1973, with the dramatic fall of the dollar still vivid, a group of 84 of the world’s top financial and political insiders met at Saltsjobaden, Sweden, the secluded island resort of the Swedish Wallenberg banking family. The gathering (called the Bilderberg group) heard an American participant, Walter Levy, outline a ‘scenario’ of an imminent 400 per cent increase in OPEC petroleum revenues. The purpose of the secret Saltsjobaden meeting was not to prevent the expected oil price shock, but rather to plan how to manage the about-to-be-created flood of oil dollars, a process US Secretary of State Kissinger later called ‘recycling the petrodollar flows’." (Emphasis added)