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The Invasion of Iraq: Dollar vs. Euro
Re-denominating Iraqi oil in U. S. dollars, instead of the Euro
by Sohan Sharma, Sue Tracy, and Surinder Kumar, February, 2004
 What
prompted the U.S. attack on Iraq, a country under sanctions for 12 years
(1991-2003), struggling to obtain clean water and basic medicines? A little
discussed factor responsible for the invasion was the desire to preserve "dollar
imperialism" as this hegemony began to be challenged by the euro.
After
World War II, most of Europe and Japan lay economically prostrate, their
industries in shambles and production, in general, at a minimum level. The U.S.
was the only major power to escape the destruction of war, its industries
thriving with a high level of productivity. In addition, prior to and during
WWII, due to extreme political and economic upheaval, a considerable amount of
gold from European countries was transferred to the U.S. Thus, after WWII the
U.S. had accumulated 80 percent of the world's gold and 40 percent of the
world's production. At the founding of the World Bank (WB) and the International
Monetary Fund (IMF) in 1944-45, U.S. predominance was absolute. A fixed exchange
currency was established based on gold, the gold-dollar standard, wherein the
value of the dollar was pegged to the price of gold-U.S. $35 per ounce of gold.
Because gold was combined with U.S. bank notes, the dollar note and gold became
equivalent, which then became the international reserve currency.
Initially,
the U.S. had $30 billion in gold reserves. But the United States spent more than
$500 billion on the Vietnam War alone, from 1967-1972. During these years, the
U.S. had over 110 military bases across the globe, each costing hundreds of
millions of dollars a year. These expenses were paid in paper dollars and the
total number given out far exceeded the gold reserve of the U.S treasury. By
then (1971-72), the U.S. Treasury was running out of gold and had only $10
billion in gold left. On August 17, 1971, Nixon suspended the U.S. dollar
conversion into gold. Thus, the dollar was "floated" in the international
monetary market.
Also in
the early 1970s, U.S. oil production peaked and its energy resources began to
deplete. Its own oil production could not keep pace with growing home
consumption. Since then, U.S. demand for oil continually increased, and by
2002-2003 the U.S. imported approximately 60 percent of its oil-OPEC (primarily
Saudi Arabia) being the main exporter. The U.S. sought to protect its dollar
strength and hegemony by ensuring that Saudi Arabia price its oil only in
dollars. To achieve this, the U.S. made a deal, some say a secret one, that it
would protect the Saudi regime in exchange for their selling oil only in
dollars.
 Throughout
the late 1950s and 1960s the Arab world was in ferment over an emerging Nasser
brand of Arab nationalism and the Saudi monarchy began to fear for its own
stability. In Iraq, the revolutionary officers corps had taken power with a
socialist program. In Libya, military officers with an Islamic socialist
ideology took power in 1969 and closed the U.S. Wheelus Air base; in 1971, Libya
nationalized the holdings of British Petroleum. There were proposals for uniting
several Arab states-Syria, Egypt, and Libya. During 1963-1967, a civil war
developed in Yemen between Republicans (anti-monarchy) and Royalist forces along
almost the entire southern border of Saudi Arabia. Egyptian forces entered Yemen
in support of republican forces, while the Saudis supported the royalist forces
to shield its own monarchy. Eventually, the Saudi government-a medieval, Islamic
fundamentalist, dynastic monarchy with absolute power-survived the nationalistic
upheavals.
Saudi
Arabia, the largest oil producer with the largest known oil reserves, is the
leader of OPEC. It is the only member of the OPEC cartel that does not have an
allotted production quota. It is the "swing producer," i.e., it can increase or
decrease oil production to bring oil draught or glut in the world market. This
enables it more or less to determine prices.
Oil can be
bought from OPEC only if you have dollars. Non-oil producing countries, such as
most underdeveloped countries and Japan, first have to sell their goods to earn
dollars with which they can purchase oil. If they cannot earn enough dollars,
then they have to borrow dollars from the WB/IMF, which have to be paid back,
with interest, in dollars. This creates a great demand for dollars outside the
U.S. In contrast, the U.S. only has to print dollar bills in exchange for goods.
Even for its own oil imports, the U.S. can print dollar bills without exporting
or selling its goods. For instance, in 2003 the current U.S. account deficit and
external debt has been running at more than $500 billion. Put in simple terms,
the U.S. will receive $500 billion more in goods and services from other
countries than it will provide them. The imported goods are paid by printing
dollar bills, i.e., "fiat" dollars.
Fiat money
or currency (usually paper money) is a type of currency whose only value is that
a government made a "fiat" (decree) that the money is a legal method of
exchange. Unlike commodity money, or representative money, it is not based in
any other commodity such as gold or silver and is not covered by a special
reserve. Fiat money is a promise to pay by the usurer and does not necessarily
have any intrinsic value. Its value lies in the issuer's financial means and
creditworthiness.
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