The End of Dollar Hegemony (Domination)
Before the US House of Representatives, February 15, 2006
by Ron Paul
Congressman-Representative Texas 14th Congressional district
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 an end.
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 failed.
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
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 dollar itself.
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
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
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 influence flourished.
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
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
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
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 consumption.
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
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
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
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 we supported.
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 currency.
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
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 change.
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
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
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
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 in Euros.
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
Dr. Ron Paul is a Republican member of Congress from Texas.