Much of the commentary on the Iraq War has assumed that weapons of mass destruction (WMD) were the primary reason for the Bush administration’s decision to go to war against Saddam Hussein. This reason appears problematic as US weapons inspectors prepare to leave Iraq. By now it should be clear that the administration’s claims about Iraq’s reconstituted WMD were more the result of supposition than hard evidence.

An alternative explanation for Washington’s determination to be rid of the Baathist regime may be found in its interest in maintaining dollar hegemony through the continued recycling of petrodollars. According to this theory, the Bush administration aims to maintain dollar hegemony by arresting momentum towards the Organization of the Petroleum Exporting Countries (OPEC) switching to the euro as an oil transaction currency. Such a change in the oil transaction ‘currency of choice’ would have a devastating effect on the US economy.

The first step in this notional strategy would include invading Iraq and reversing Saddam Hussein’s policy of pricing Iraq’s vast oil reserves in euros.  In effect, the Iraqi dictator’s fate was sealed when Saddam decided to convert Iraq’s oil reserves from US dollars to euros in November of 2000, realizing a huge profit as the euro subsequently appreciated dramatically against the US dollar. The events of September 11, 2001 provided the Bush administration with the perfect opportunity to pursue its ‘strong dollar’ policy and reverse any movement by OPEC towards pricing oil in euros.

As President George W. Bush stated during his press conference following the capture of Saddam Hussein in December of 2003, “We have a strong dollar policy. We expect the markets to determine the dollar exchange rate, but we have a strong dollar policy.”  Likewise, US Treasury secretary John Snow has been advocating the same policy since the dollar began its accelerated slide against other major currencies.¹ Currency traders have long viewed Snow’s comments as doublespeak - especially given the dollar’s continued slide vis-à-vis major trading partners. The President, however, was being quite honest about his government’s strong dollar policy. 

By ‘strong dollar’, Mr. Bush was referring to the US dollar as the standard global trade currency. It was also a veiled reference to the currency that OPEC should be using to price its oil transactions. As such, it was likely Mr. Bush’s intention to avoid a potential devaluation of the US dollar while the euro gained global pre-eminence as a standard trade currency.  According to this view, the risk of losing dollar hegemony far outweighed the risk of further upheaval in the Middle East.

While currency traders have viewed ‘strong dollar’ to mean a relative appreciation of the dollar vis-à-vis other currencies, this essay will explore the concept of dollar hegemony as both a policy and as a strategic consideration in the Iraq crisis. Its theoretical underpinnings may be found in an essay by William Clark of Johns Hopkins University entitled, The Real Reason For The Upcoming War In Iraq; A Macroeconomic And Geo-strategic Analysis Of The Unspoken Truth.²   It will also discuss Europe’s interest in the war in Iraq. An assessment on the implication for Canada, as a net exporter of oil, is also provided.

Wealth and Warfare

While it is a coincidence that both The Wealth of Nations and the Declaration Of Independence were published in the same year (1776), it is no surprise that both Adam Smith³ and Alexander Hamilton⁴ were proponents of the mercantilist system of power politics. If the ends of mercantilism were the unification of the nation state with its industrial, commercial, financial and military resources, it follows that, in foreign affairs, its ends must be to increase the power of one nation against other nations. For more than two centuries before Smith’s Wealth of Nations, Europe was governed by the beliefs and practices of mercantilism. The mercantilist state of Smith and Hamilton’s time was protectionist, autarkic, expansionist and militaristic. Indeed, the security of 19^th century Britain was largely dependent on economic ties to its far-flung colonies, the latter being protected by the guns of the Royal Navy. It was a US naval squadron under Commodore Oliver Hazard Perry that compelled feudal Japan to open its doors to trade with the United States.

With wide experience in economics and politics, Friedrich List⁵ later wrote extensively on protectionist and militaristic political economy. President Eisenhower, in one of his farewell speeches in 1961, stressed the importance of the military-industrial complex.⁶ He also took great pain to point out its potential abuses – namely its potential to distort America’s economic and security priorities. From the time of the Declaration of Independence through to the Cold War and today, America’s willingness and ability to wage war has always been tied to its macroeconomic policies (the example having been set by her western European predecessors). Hence, the present-day US administration would readily deploy its military might to advance its economic policies.

The Bush administration has taken great care to justify its war on Iraq. The always stern but media-savvy Defence Secretary Donald Rumsfeld rebuffed any and all doubts as to the dangers posed by Saddam Hussein’s regime in the run-up to the war. Secretary of State Colin Powell presented a seemingly detailed review of Iraq’s WMD program to the United Nations Security Council. Equally gripping were Mr. Rumsfeld’s musings on the loose associations between Al Qaeda and Iraq. 

Was the war in Iraq waged to further US economic policy, and not simply to remove a dangerous dictator and his exotic weapons? One could certainly argue that there were other tyrants to confront at the time the US moved against Saddam.  Mr. Clark posits in his essay that President Bush had failed to provide a rational explanation as to why Iraq’s dormant WMD program poses a more imminent threat than North Korea’s active nuclear weapons program.  He points out that shortly after the congressional resolution on Iraq, it became clear that Kim Jong-Il was processing uranium (a clear violation of the Non-Proliferation Treaty and the 1995 Agreed Framework) that would give the North Koreans a nuclear weapons capability by late 2003.  In a recent book entitled, The Price of Loyalty, former Bush administration Treasury Secretary Paul O’Neil implies that Mr. Bush was directing his cabinet to find a way to effect regime change in Iraq soon after taking office.

Mr. Clark published his essay in January of 2003. In it he drew attention to the UN’s inability to find a reconstituted WMD program in Iraq, despite over 400 unencumbered inspections. Further weakening the administration’s claims was the intelligence community’s belief that Al Qaeda was more likely to acquire WMD from the fledgling states of the former Soviet Union, or even acquire them from a destabilizing or destabilized Pakistan.

Mr. Clark’s essay discusses at some length the “macroeconomics of petrodollars and the unpublicized but real threat to the US economic hegemony from the euro as an alternative oil transaction currency.” While he employs published reports (largely European and Asian) to support his arguments, he draws attention to the fact that the US media had not taken up the story.

Critics of President Bush’s foreign policy typically view his administration as a cabal of aggressive, neo-conservative hawks recklessly advocating global military intervention to topple real and imagined enemies of the United States. While this might indeed be the case, one should not discount the possibility that this invasion was planned and carried out in an attempt to maintain a strong dollar policy – a policy that was vital for the economic security of the United States.

Protect the Dollar – At All Costs

Why would US dollar hegemony be important enough to justify regime change through the use of military force? Mr. Clark posits that ever since Richard Nixon took the dollar off the gold standard in 1971, it has been the currency of choice for global oil transactions. Hence the term ‘petrodollars’. The US Federal Reserve Bank prints hundreds of billions of fiat dollars, which US consumers then provide to other nations in return for import purchases. Invariably, foreign nations purchase commodities with these dollars - most notably oil from OPEC producers. Finally, these ‘petrodollars’ are re-cycled when OPEC producers – Saudi Arabia, in particular - purchase US Treasury Bills with their surplus oil sale proceeds. The end result is to increase the US dollar’s international liquidity value.⁷   

According to Clark, “This unique geo-political agreement with Saudi Arabia in 1974 has worked to our favour for the past 30 years, as [it] has eliminated our currency risk for oil, raised the entire asset value of all dollar-denominated assets/properties, and allowed the Federal Reserve to create a truly massive debt and credit expansion (or ‘credit bubble’ in the view of some economists).” Incidentally, this policy has also had the convenient effect of exporting US-created inflation abroad.

In addition, international trade is no longer a game where countries compete for comparative advantage. Countries now compete in exports to acquire the US dollars needed to repay their dollar-denominated external debt.⁸   The central banks of these countries must acquire enough dollar reserves to fight speculative attacks by currency traders, and to maintain corresponding dollar balances in the event of a depreciation in their local currency. In other words, the more their local currency depreciates, the more dollars their central banks must buy and hold.

The austerity requirements laid down by the International Monetary Fund (IMF) and the World Bank also go a long way to ensuring that developing nations continue to be dollar-dependent.  Moreover, these dollar reserves must be invested in US assets, thus creating a capital account surplus for the US economy. The capital account surplus invariably finances the massive US trade deficit. Indeed, the oil embargo and long line-ups at gas stations during the mid-1970s simply represented the initial adjustment period of dollar hegemony to the United States.

Foreign policy undertakings are not without their risks and, as such, the US has built up a number of structural imbalances over the past 30 years. Primary among them are the massive trade deficit, the national debt and the budget deficit facing the US economy. Given these deficits, Clark outlines what would occur if OPEC were to make a sudden shift to the euro:

[O]il-consuming nations would have to flush dollars out of their (central bank) reserve funds and replace these with euros. The dollar would crash anywhere from 20-40% in value and the consequences would be those one could expect from any currency collapse and massive inflation (think Argentina’s currency crisis, for example). You'd have foreign funds stream out of the US stock markets and dollar-denominated assets, there'd surely be a run on the banks much like the 1930s, the current account deficit would become unserviceable, the budget deficit would go into default, and so on. [It would be] your basic Third World economic crisis scenario.

The United States economy is intimately tied to the dollar's role as reserve currency. This doesn't mean that the US couldn't function otherwise, but that the transition would have to be gradual to avoid such dislocations (and the ultimate result of this would probably be the US and the EU switching roles in the global economy).

But even Clark admits that the above scenario is problematic because OPEC is unlikely to make a sudden shift to euros. Any shift would likely be gradual. But there are conditions that could ultimately lead to a switch.  Bush’s “Axis of Evil” countries have already started this switching process. Iraq switched to the euro in November of 2000.⁹ Iran has converted the majority of the reserve funds in it central bank into euros.¹⁰ And in December of 2002, North Korea also switched to the euro for trade.¹¹ While the North Korean switch would have a negligible effect on the US dollar, the Iraqi and Iranian switch would have major implications for Middle East policy, especially if the euro continues to appreciate against the dollar. Clark identifies two scenarios that would have to remain in place in order for the US to sustain its trade imbalances and deficits. First, nations continue to demand and purchase oil for their energy survival needs. Secondly, the world’s reserve/monopoly currency for global oil transactions remains the US dollar

These two conditions essentially characterize Bush’s ‘strong dollar’ policy.

Whither Europe?

And what of the Europeans in all of this? Europe would undoubtedly prefer oil to be priced in euros. Indeed, the introduction of the euro in January of 1999 was a significant new factor in the geo-political arena. Having perfected mercantilism, the Europeans would hardly be expected to support a currency war on Iraq by the US that further undermines the euro’s competitive position. Indeed, the euro was created to compete with the US dollar as a global trading currency. Germany and France, in particular, objected to the US invasion of Iraq. Now that the US has re-valued the Iraqi oil reserves back to dollars¹², and is in the process of tendering billions of dollars in re-construction projects, the Europeans are being left out in the cold.

However, by May of 2004, Europe will expand to 450 million people with the addition of ten new member-states. The EU’s aggregate Gross Domestic Product (GDP) will expand from $7-trillion to $9.6-trillion, and it will be purchasing over half of OPEC’s crude oil. This will undoubtedly contribute to OPEC moving towards the euro. Of course, all bets are off if the US decides to use it military presence in Iraq to institute regime change in Iran, Saudi Arabia or any other country contemplating a switch to the euro. It is noteworthy that the US has not articulated a complete exit strategy from Iraq, and that it has pressed for a transitional assembly to take the reigns of government from the current Iraqi Governing Council. Washington would dearly like the new assembly to be US-friendly. In any case, US control over the Iraqi oil patch will have a mitigating effect on any immediate plans by OPEC to switch to the euro.

And what of British Prime Minister Tony Blair and his strong support for US foreign policy towards Iraq? Is he simply an unwitting accomplice to US policy? Hardly. Despite walking a domestic political tightrope, Mr. Blair has put on a virtual seminar on triangular power politics. Recall that the ‘euro zone’ does not currently include the UK and Norway - two large producers of crude oil. One the one hand, the UK gets to participate in the lucrative re-construction of Iraq. On the other hand, Mr. Blair continues to lobby heavily for euro adoption. If the UK and Norway adopt the euro in the near future (and this is a virtual certainty) OPEC will have further economic incentive to switch to euros. This would represent a win-win situation for the Brits, and Mr. Blair would have proven to be a shrewd foreign policy strategist.

Whither Canada?

Regrettably, Canada remains reactive to any plausible outcome of a potential OPEC switch to euros. If OPEC switches to the euro, Canadian exporters will suffer because the US will no longer be able to sustain its large trade deficits. On the positive side, Canada will be permitted to bid on Iraqi reconstruction (though not until the first $5-billion is allocated to coalition members). In addition, many of the lost exports to the US could be shifted to the EU. But that will depend on Europe’s import demands. To their credit, the Bank of Canada along with several other central banks have increased their euro reserves relative to dollars over the past two years.¹³ It will be interesting to see if the Bank of Canada reverses its trend of increasing euro reserves as a condition of being permitted to bid on Iraqi reconstruction.

The table below shows the Bank of Canada’s currency reserve positions. The ‘Other Currencies’ column represents approximately 90 percent euros. It clearly shows an increase in euro reserves at the expense of the US dollar and gold. It should be noted, however, that a portion of the increase is due to revaluation as the euro appreciates vis-à-vis the US dollar. But there can be little doubt that the Bank of Canada had partially recognized the euro as a currency with the potential to gain global dominance - particularly as it applies to oil pricing.

	US		Other	Gold	SDRs	IMF	Total
	Dollars		Currencies			Position
	(Millions of US dollars)
31-Dec-03	15,576		15,961	45	838	3,848	36,268
30-Nov-03	15,879		15,365	69	812	3,968	36,093
31-Oct-03	16,145		14,902	67	795	3,947	35,856
30-Sep-03	16,382		15,464	67	794	3,971	36,678
31-Aug-03	16,134		14,541	65	765	3,785	35,290
31-Jul-03	15,967		14,831	110	761	4,096	35,765
30-Jun-03	16,207		15,469	107	766	4,150	36,699
31-May-03	16,652		16,044	153	777	3,797	37,423
30-Apr-03	16,587		15,045	142	745	3,744	36,263
31-Mar-03	16,501		14,754	170	739	3,762	35,926
28-Feb-03	16,188		15,238	177	738	3,560	35,901
31-Jan-03	17,885		15,211	220	728	3,591	37,635
31-Dec-02	17,946		14,739	205	712	3,567	37,169
Dec. 31, 2001	19,748		10,736	291	614	2,859	34,248
Dec. 31, 2000	21,692		7,327	323	574	2,508	32,424
Dec. 31, 1999	18,838		5,594	524	526	3,164	28,646
Source: Bank of Canada

Conclusion

In politics and in war, very few policy objectives are realized without unintended consequences. In the wake of the war on Iraq, the currency dynamic may receive more attention from the US media. Indeed, if it is proven that the Bush administration had any prior knowledge about the 9/11 attacks, or if public inquiries reveal that the case for war was deliberately manufactured, unconventional explanations for the decision to embark on an assertive foreign policy will be given greater weight. If Mr. Bush’s ‘strong dollar’ policy can be seen as a continuation of the Nixon policies of the 1970s, then perhaps we shall see a ‘Currencygate’ soon after the 2004 presidential election. Stay tuned.

Anthony Haynes is an investment analyst specializing in foreign currency. He may be reached at anthony.haynes@sympatico.ca

Notes & References  

¹The US dollar began its depreciation against major currencies in 2001.

²Clark, William, The Real Reason For The Upcoming War In Iraq; A   Macroeconomic And Geo-strategic Analysis Of The Unspoken Truth (January 2003)  http://www.ratical.org/ratville/CAH/RRiraqWar.html.

³Smith, Adam, Wealth of Nations.

⁴Culbertson, W.S., Alexander Hamilton.

⁵Notz, William, Friedrich List in America.

⁶Eisenhower, Dwight. D, Military Industrial Complex speech (1961) http://coursesa.matrix.msu.edu/~hst306/documents/indust.html.

⁷Spiro, David E., The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets, Cornell University Press (1999).

⁸Liu, Henry C K, "US dollar hegemony has got to go," Asia Times (April 11, 2002)
http://www.atimes.com/global-econ/DD11Dj01.html.

⁹Recknagel, Charles, "Iraq: Baghdad Moves to Euro," Radio Free Europe (November 1, 2000) http://www.rferl.org/nca/features/2000/11/01112000160846.asp.

¹⁰"Economics Drive Iran Euro Oil Plan, Politics Also Key," IranExpert (August 23, 2002)
http://www.iranexpert.com/2002/economicsdriveiraneurooil23august.htm.

¹¹Gluck, Caroline, "North Korea embraces the euro," BBC News (December 1, 2002)
http://news.bbc.co.uk/1/hi/world/asia-pacific/2531833.stm.

¹²Hoyos, Carol & Morrison, Kevin, ‘Iraq returns to international oil market,’ Financial Times, (June 5, 2003) http://www.thedossier.ukonline.co.uk/Web%20Pages/FINANCIAL%20TIMES_Iraq% 20returns%20to%20international%20oil%20market.htm.

¹³"Euro continues to extend its global influence" (January 7, 2002) http://www.europartnership.com/news/02jan07.htm; Garnaut, John, “US Dollar Losing Its Position As Asia's Reserve Currency,” (July 17, 2002) http://www.rense.com/general27/rec.htm; ‘Canada sells gold, keeps shift into euro reserves,’ Forbes (January 6, 2003) http://www.forbes.com/newswire/2003/01/06/rtr838251.html.

Copyright CISS 2004

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