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
new arrangements that are necessary to ensure “a more just
"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.
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,
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.
price was high. Unemployment and inflation rose in the United
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
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
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:
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.
United States imports about 60 percent of its oil requirements,
up from 30 to 40 percent during the 1970s.
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.
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.
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.
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
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:
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.
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
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
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.
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.
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
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 firstname.lastname@example.org.