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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:

1. Economic power is much more diffuse than at the end of World War II. The U.S. share of global product is about 25 percent, half the share it had in 1945.

2. The United States imports about 60 percent of its oil requirements, up from 30 to 40 percent during the 1970s.

3. The U.S. current account deficit (i.e., on trade in goods and services, which I abbreviate here as simply trade deficit) is now immense - well over $400 billion in 2002. It is running at an annual rate of about $500 billion in 2003. In the 1970s, the United States ran both deficits and surpluses, both generally less than about $20 billion per year.  Consistent trade deficits for more than two decades have turned the United States from the largest creditor to the largest debtor country in the world. To gain some perspective on an annual trade deficit rate of $500 billion, this is about equal to the entire annual Gross Domestic Product of India at current exchange rates. In a falling stock market, foreigners are less inclined to finance the huge trade deficits that are part of the continuing U.S. economic binge. The prospects for large inflows of European money to finance the U.S. trade deficit are murky, at best. Foreign investment has been declining, and so has the U.S. dollar. U.S. foreign debt is growing fast.

4. The one long-term bright spot from the 1990s, U.S. budget surpluses that emerged late in that decade, has now disappeared in a sea of red ink. Gross U.S. federal debt is now over $6 trillion, or about 60 percent of GDP, compared to fewer than one trillion dollars and about 33 percent of GDP in 1980. The tax cuts that are in the works in 2003 will very likely compound this problem. A considerable amount of U.S. debt is held by foreigners.

5. Perhaps most important, the euro has now emerged as a credible alternative, and hence a possible competitor, to the dollar. Initial questions about its stability, when it was introduced as a unit of account in 1999 and quickly lost ground to the dollar, have dissipated. The euro rose in value by about 20 percent relative to the dollar in 2002. It was first issued as a currency that people could use in everyday transactions on January 1, 2002. The euro-zone is comparable in economic size to the United States. And while Germany and France, the largest economies in the euro-zone, have had low economic growth, both tend to run current account surpluses so that they do not need capital imports to sustain domestic consumption.

Petroleum resource issues must be seen in the context of this weaker relative U.S. economic position. U.S. physical control over Persian Gulf oil resources, which had been re-established somewhat after the 1991 Gulf War, began eroding significantly in the mid-1990s. The long-term presence of U.S. forces in Saudi Arabia, with the world's largest petroleum reserves, had been challenged violently by Osama bin Laden's al Qaeda. There were two attacks on U.S. forces stationed in Saudi Arabia in the mid-1990s. These occurred in the context of rising popular Saudi antagonism to their presence. The Saudi government refused to collaborate fully with the United States in the investigation of the attacks on U.S. soldiers in Saudi Arabia. Low oil prices created domestic political weakness for the Saudi government, which is widely viewed as corrupt. Yet, the U.S. military presence in Saudi Arabia is dependent on that unpopular government, which espouses Islamic fundamentalism.

The terrorist attacks on the U.S. embassies in Kenya and Tanzania in 1998 raised the insecurity of the U.S. presence in Saudi Arabia to new levels. Saudi Arabia continued funding and supporting the Taliban, which was sheltering Osama bin Laden, who, like Saddam Hussein, was a U.S. ally in the 1980s. Also in the year 1998, the introduction of the euro became a certainty.

The U.S. seems to have decided on the ousting of Saddam Hussein in 1998, independent of the results of the disarmament of Iraq that the United Nations inspectors were achieving. By that time, the physical infrastructure of the Iraqi nuclear weapons program had been destroyed by inspections. But the Clinton administration's response was to say that Saddam Hussein was a dictator and that the United States should work with the Iraqi opposition to get rid of him. Iraq reduced its cooperation with inspectors in the latter half of 1998. The U.S. and Britain escalated their threats of war. Caught in the escalating crisis, the UN inspectors left Iraq in November 1998. The United States and Britain started bombing Iraq in December, claiming they needed no new Security Council authorization to do so.

Disarmament of Iraq was an implausible war aim. As of this writing (late April 2003), U.S. occupation forces had not found any nuclear, chemical or biological weapons. They are refusing to let United Nations inspectors back into Iraq. It is also clear that whatever disarmament of Iraq remained to be accomplished could likely have been accomplished peacefully, possibly with some assistance from a sufficient UN police contingent to protect the inspectors and assist them to get entry to places, in case they were denied.

Moreover, the 1991-1998 as well as the 2002-2003 inspections showed their efficacy at accomplishing disarmament. By contrast, the bombing of vast sections of Iraq since 1998 and four years without inspections created more questions and uncertainties about Iraqi stocks of weapons of mass destruction and no disarmament relating to them. The 2003 war on Iraq has raised the possibility that the war may have precipitated some Iraqi officials to move weapons of mass destruction to other countries. In sum the U.S. linking of war, regime change, and disarmament of Iraq is not persuasive, to say the least. Indeed, during the debate in the United Nations Security Council in 2003, it was demonstrated that a part of the alleged U.S.-British case for war was based on fabrications and misrepresentations.

Three other links of the U.S. regime change policy to other goals are more plausible. The U.S. determination to occupy Iraq may have three main goals related to the control of oil:

1. To control physically the country with the second largest oil reserves in the world – 112.5 billion barrels of proven reserves, and 220 billion barrels in all of probable and possible reserves – in view of the increasing opposition to the U.S. military presence in Saudi Arabia.

2. To establish a long-term military presence in the Persian Gulf region so as to control the principal external source of oil supplies for Western Europe and China (which became an oil importer in the 1990s). This would fit into the U.S. goal of preventing either of them from emerging as global rivals, first suggested in a Pentagon draft document under the first President Bush, when Dick Cheney was Secretary of Defense.

3. To ensure, by physical occupation of the second largest oil reserves in the world and by a military presence in the Persian Gulf region that could enable rapid occupation of Saudi oil fields, that the price of oil would remain denominated in dollars. In other words, one United States goal may be to become a central player in OPEC by controlling Iraq either directly or through a regime that is pliant on the question of oil pricing policy, whatever its other political attributes might be.

The possibility that oil prices might begin to be denominated in euros was demonstrated by Saddam Hussein in the fall of 2000. At that time, he demanded and got permission from the United Nations to be paid for oil in euros. But his grandstanding about the euro had no large practical economic effect because Iraq was not in a position to change OPEC oil pricing policy. But OPEC collectively, Iran, and Russia have all considered pricing oil in euros.

The U.S. occupation of Iraq may provide a temporary reprieve for the dollar because the United States can exercise pressure on OPEC for continued pricing of oil in dollars. That may enable the United States to continue printing money, running up trade deficits, and foreign debts to some extent.

The United States can also restore Iraq's oil export capacity, force a privatization of Iraqi oil production and reserves, and dictate the pace of Iraqi and Kuwaiti oil production. It could stimulate the U.S. economy by forcing oil prices downward in 2004, a time of elections in the United States. Yet, while that would provide vast profits to U.S. oil companies and may be a politically convenient short-term economic lever, the underlying economic problems will likely continue to fester as the United States gets more mired in debt and dependent on trade deficits and capital imports to maintain its level of domestic consumption.

Even with control of Iraqi oil, the dollar's future will depend to a considerable extent on decisions outside the arena of Persian Gulf oil. Flows of capital into the United States to finance the U.S. trade and a part of the budget deficits depend on confidence in the value of the dollar, which has been going down relative to the euro. Decisions by Russia, Iran, and Venezuela to denominate some or all of their oil in euros may also cause a dollar sell-off. These factors could precipitate a downward spiral in which more people and institutions dump dollars for euros, gold, or other assets causing further declines in the value of the dollar and more sales of dollars. It would likely take a sharp increase in interest rates or taxes (or both) in the United States to reverse such a trend. The economic slump that that would precipitate could well be more severe than the one in the early 1980s.

A continuation of U.S. policies to prevent the emergence of the euro as a global rival may also require continued exercise of military muscle through threats, wars, occupations, setting up of client regimes, and vast military expenditures. The consequences of such a course could be devastating for the world, including the United States. It is dependent on everyone obeying the dictates of the United States on most crucial issues ("either you're with us or you're against us"). But in a world bristling with nuclear materials and nuclear weapons, nuclear proliferation may be a more likely outcome than capitulation in at least some cases.

The naming of Iran as part of the "axis of evil" and the war on Iraq has likely strengthened the pro-nuclear-weapons lobby in Iran. A similar strengthening of the pro-nuclear lobby in India occurred when the United States sent a nuclear-armed aircraft carrier to the Bay of Bengal in a "tilt" toward Pakistan during the Pakistan-India-Bangladesh war in 1971. There are increasing indications that Japan is considering acquiring nuclear weapons more seriously. Given the overwhelming superiority of the United States in non-nuclear military strength and the present tendency to make war and ask questions later, other countries would be more likely to seek nuclear weapons.

Neither a lone triumphant imperial dollar nor a confrontation between the dollar and the euro for global monetary domination pose is desirable. Both pose serious dangers for the world. Global trade and investment can be carried on with monetary instruments that are much more equitable. For instance, the exchange rates of currencies can be set on the basis of their underlying value – that is, on the average productivity of their workers as reflected in their purchasing power for locally made goods and services. Such a system would be fairer to workers and put less pressure on migration for economic reasons.

Of course, the establishment of a direction for monetary equity that would encourage fair trade will take an immense struggle because the immense profits that multinational corporations derive from cheap labor and resources would be threatened. But it is also necessary to set forth the monetary arrangements that can accompany a more just world in the same manner as the specifics of fair trade or nuclear disarmament have been widely discussed.

A new global monetary conference, a second Bretton Woods, at which governments and people can discuss how the monetary and financial affairs of the world can be more equitably organized, is now a necessity not only for economic justice but also for peace. The alternative is a dollar imposed on the world by the diplomacy of "shock and awe."

Dr. Arjun Makhijani is President of the Institute for Energy and Environmental Research. This article appeared in the IEER’s newsletter, Science for Democratic Action, in June 2003.  Dr. Makhijani is author of From Global Capitalism to Economic Justice (New York: Apex Press). He can be reached at



January 15, 2004
Issue 73

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