THE END OF DOLLAR HEGEMONY, PART I

by Hon. Ron Paul of Texas

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 printing presses.

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 from Europeans.

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 to come.

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 spread.

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 gold.

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 re-legalized.

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 Federal Reserve.

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.

Regards,

Congressman Ron Paul
for The Daily Reckoning

Don't Blame the Market for Housing Bubble by Ron Paul

March 19, 2007

The U.S. housing market, long considered vulnerable by many economists, is now on the verge of suffering a serious collapse in many regions. Commodities guru and hedge fund manager Jim Rogers warns that real estate in expensive bubble areas will drop 40 or 50%. Mainstream media outlets like the New York Times are reporting breathlessly about the possibility of widespread defaults on subprime mortgages.

When the bubble finally bursts completely, millions of Americans will be looking for someone to blame. Look for Congress to hold hearings into subprime lending practices and “predatory” mortgages. We’ll hear a lot of grandstanding about how unscrupulous lenders took advantage of poor people, and how rampant speculation caused real estate markets around the country to overheat. It will be reminiscent of the Enron hearings, and the message will be explicitly or implicitly the same: free-market capitalism, left unchecked, leads to greed, fraud, and unethical if not illegal business practices.

But capitalism is not to blame for the housing bubble, the Federal Reserve is. Specifically, Fed intervention in the economy-- through the manipulation of interest rates and the creation of money-- caused the artificial boom in mortgage lending.

The Fed has roughly tripled the amount of dollars and credit in circulation just since 1990. Housing prices have risen dramatically not because of simple supply and demand, but because the Fed literally created demand by making the cost of borrowing money artificially cheap. When credit is cheap, individuals tend to borrow too much and spend recklessly.

This is not to say that all banks, lenders, and Wall Street firms are blameless. Many of them are politically connected, and benefited directly from the Fed’s easy money policies. And some lenders did make fraudulent or unethical loans. But every cent they loaned was first created by the Fed.

The actions of lenders are directly attributable to the policies of the Fed: when credit is cheap, why not loan money more recklessly to individuals who normally would not qualify? Even with higher default rates, lenders could make huge profits simply through volume. Subprime lending is a symptom of the housing bubble, not the cause of it.

Fed credit also distorts mortgage lending through Fannie Mae and Freddie Mac, two government schemes created by Congress supposedly to help poor people. Fannie and Freddie enjoy an implicit guarantee of a bailout by the federal government if their loans default, and thus are insulated from market forces. This insulation spurred investors to make funds available to Fannie and Freddie that otherwise would have been invested in other securities or more productive endeavors, thereby fueling the housing boom.

The Federal Reserve provides the mother’s milk for the booms and busts wrongly associated with a mythical “business cycle.” Imagine a Brinks truck driving down a busy street with the doors wide open, and money flying out everywhere, and you’ll have a pretty good analogy for Fed policies over the last two decades. Unless and until we get the Federal Reserve out of the business of creating money at will and setting interest rates, we will remain vulnerable to market bubbles and painful corrections. If housing prices plummet and millions of Americans find themselves owing more than their homes are worth, the blame lies squarely with Alan Greenspan and Ben Bernanke.

-Ron Paul

Ron Paul on foreign aid

Former President Carter’s new book about the ongoing conflict between Israel and Palestine has raised the ire of Americans on two sides of the debate. I say “two sides” rather than “both sides,” because there is another perspective that is never discussed in American politics. That perspective is the perspective of our founding fathers, namely that America should not intervene in the internal affairs of other nations.

Everyone assumes America must play the leading role in crafting some settlement or compromise between the Israelis and the Palestinians. But Jefferson, Madison, and Washington explicitly warned against involving ourselves in foreign conflicts.

The conflict in Gaza and the West Bank is almost like a schoolyard fight: when America and the world stand watching, neither side will give an inch for fear of appearing weak. But deep down, the people who actually have to live there desperately want an end to the violence. They don’t need solutions imposed by outsiders. It’s easy to sit here safe in America and talk tough, but we’re not the ones suffering.

Practically speaking, our meddling in the Middle East has only intensified strife and conflict. American tax dollars have militarized the entire region. We give Israel about $3 billion each year, but we also give Egypt $2 billion. Most other Middle East countries get money too, some of which ends up in the hands of Palestinian terrorists. Both sides have far more military weapons as a result. Talk about adding fuel to the fire! Our foolish and unconstitutional foreign aid has produced more violence, not less.

Congress and each successive administration pledge their political, financial, and military support for Israel. Yet while we call ourselves a strong ally of the Israeli people, we send billions in foreign aid every year to some Muslim states that many Israelis regard as enemies. From the Israeli point of view, many of the same Islamic nations we fund with our tax dollars want to destroy the Jewish state. Many average Israelis and American Jews see America as hypocritically hedging its bets.

This illustrates perfectly the inherent problem with foreign aid: once we give money to one country, we have to give it to all the rest or risk making enemies. This is especially true in the Middle East and other strife-torn regions, where our financial support for one side is seen as an act of aggression by the other. Just as our money never makes Israel secure, it doesn’t buy us any true friends elsewhere in the region. On the contrary, millions of Muslims hate the United States.

It is time to challenge the notion that it is our job to broker peace in the Middle East and every other troubled region across the globe. America can and should use every diplomatic means at our disposal to end the violence in the West Bank, but we should draw the line at any further entanglement. Third-party outsiders cannot impose political solutions in Palestine or anywhere else. Peace can be achieved only when self-determination operates freely in all nations. “Peace plans” imposed by outsiders or the UN cause resentment and seldom produce lasting peace.

The simple truth is that we cannot resolve every human conflict across the globe, and there will always be violence somewhere on earth. The fatal conceit lies in believing America can impose geopolitical solutions wherever it chooses.

Ron Paul on Iraq

Before the US House of Representatives, January 11, 2007

Mr. Speaker, A military victory in Iraq is unattainable, just as it was in the Vietnam war.

At the close of the Vietnam war in 1975, a telling conversation took place between an NVA Colonel named Tu and an American Colonel named Harry Summers. Colonel Summers reportedly said, “You never beat us on the battlefield.” Tu replied, “That may be so, but it is also irrelevant.” It is likewise irrelevant to seek military victory in Iraq.

As conditions deteriorate in Iraq, the American people are told more blood must be spilled to achieve just such a military victory. 20,000 additional troops and another $100 billion are needed for a “surge.” Yet the people remain rightfully skeptical.

Though we’ve been in Iraq nearly four years, the meager goal today simply is to secure Baghdad. This hardly shows that the mission is even partly accomplished.

Astonishingly, American taxpayers now will be forced to finance a multi-billion dollar jobs program in Iraq. Suddenly the war is about jobs! We export our manufacturing jobs to Asia, and now we plan to export our welfare jobs to Iraq – all at the expense of the poor and middle class here at home.

Plans are being made to become more ruthless in achieving stability in Iraq. It appears Muqtada al Sadr will be on the receiving end of our military efforts, despite his overwhelming support among large segments of the Iraqi people.

It’s interesting to note that one excuse given for our failure is leveled at the Iraqis themselves. They have not done enough, we’re told, and are difficult to train.

Yet no one complains that Mahdi or Kurdish militias or the Badr Brigade (the real Iraq government, not our appointed government) are not well trained. Our problems obviously have nothing to do with training Iraqis to fight, but instead with loyalties and motivations.

We claim to be spreading democracy in Iraq, but al Sadr has far more democratic support with the majority Shiites than our troops enjoy. The problem is not a lack of democratic consensus; it is the antipathy toward our presence among most Iraqis.

In real estate the three important considerations are location, location, location. In Iraq the three conditions are occupation, occupation, occupation. Nothing can improve in Iraq until we understand that our occupation is the primary source of the chaos and killing. We are a foreign occupying force, strongly resented by the majority of Iraq’s citizens.

Our inability to adapt to the tactics of 4th-generation warfare compounds our military failure. Unless we understand this, even doubling our troop strength will not solve the problems created by our occupation.

The talk of a troop surge and jobs program in Iraq only distracts Americans from the very real possibility of an attack on Iran. Our growing naval presence in the region and our harsh rhetoric toward Iran are unsettling. Securing the Horn of Africa and sending Ethiopian troops into Somalia do not bode well for world peace. Yet these developments are almost totally ignored by Congress.

Rumors are flying about when, not if, Iran will be bombed by either Israel or the U.S. – possibly with nuclear weapons. Our CIA says Iran is ten years away from producing a nuclear bomb and has no delivery system, but this does not impede our plans to keep “everything on the table” when dealing with Iran.

We should remember that Iran, like Iraq, is a third-world nation without a significant military. Nothing in history hints that she is likely to invade a neighboring country, let alone do anything to America or Israel. I am concerned, however, that a contrived Gulf of Tonkin–type incident may occur to gain popular support for an attack on Iran.

Even if such an attack is carried out by Israel over U.S. objections, we will be politically and morally culpable since we provided the weapons and dollars to make it possible.

Mr. Speaker, let’s hope I’m wrong about this one.