Was the Iraqi Shift to Euro Currency to “Real” Reason for War?
Several persons have asked the American Monetary Institute to comment on the viewpoint that the “real” reason for the war against Iraq was Sadam Hussein’s decision to price Iraqi oil in the new EURO currency of the European Union rather than in U.S. Dollars. The argument goes that unless the price of oil is denominated only in Dollars, then the U.S. would not be able to continue to run huge balance of payments deficits. The argument is based on the idea that the motivation for other nations to hold accounts and reserves in Dollars is that they can use them to pay for oil.
We do not agree with this viewpoint and here are some of the reasons and background. The Euro and its potential beneficial effect for humanity is discussed in much more detail in chapter 23 of our book The Lost Science of Money: The Mythology of Money – the Story of Power, a 736 page work in 24 chapters, with 119 illustrations; presenting the research results of the American Monetary Institute to date. (see http://www.monetary.org/lostscienceofmoney.html)
Launching the Euro
The planning and preparations for the Euro Currency are at least three decades old. The plans were adjusted in stages as the “Common Market” evolved into the European Community, prior to the currency’s recent inauguration. The official structuring of the Euro was apparently designed to be at par with the U.S. Dollar, at launching in January 1999 – that is 1 $ = 1 Eur. However in the last part of 1998, some European currencies, such as the German Mark rose substantially in speculative foreign exchange trading so that the Euro was launched at about $1.18. That was too high and from that level it had nowhere to go but down. It dropped for 21 months, causing most financial operators to proclaim it dead on arrival.
Our view at the American Monetary Institute was decidedly different: that until the Euro came on the scene, there was only one “world class” currency – the U.S. Dollar. Now there would be two. That represented progress. For quite apart from the ideologies motivating the present Euro monetary managers, even if they, like the Federal Reserve System, were strongly biased towards deflation, it was now structurally possible for the Europeans to get out from under Alan Greenspan’s “Dollar Hammer.” In our view a now developing Asian area currency will also be a good addition to the international monetary order and could have avoided the currency crisis that occurred there in the late 90s – i.e. there would be three “world class” currencies instead of two.
We had for some time concluded that Greenspan’s Fed was engaging in a deflationary monetary policy, under cover of vast substitute money forms being generated in the “Dot Com” and other market bubbles, where stocks were being used as money. For example to pay workers with stock options, or when AOL used its stock to buy Time Warner in the largest merger of all time. In April 2,000 we warned about what would happen “when, not if“ those high Price Earnings ratios would disappear. See the Deflation Studies at this web site.
The Euro thus gave the Europeans the ability to take substantial non-deflationary monetary action independently of the Fed. If in the arcane world of currency machinations, there was ever anything to fight about over the Euro, it was that fact.Thus I wrote (August 2002) in Chapter 23:
“Conflict with Europe? Hard as it is to imagine, there is now a potential for monetary (even military?) warfare between the U.S. and Europe.”
As the value of the Euro plunged down to about $1.07, we pointed to the earlier overpricing at its launch and we predicted that it would continue falling down to 82 cents, from where it would rise to about 109, fall back under 100 and then oscillate around 100 (at “par” where 1 Eur = $1). The reasoning behind our prediction was that the Euro managers had probably done their job well, and “par” was the “correct” value. However once markets are in motion they tend to go too far, up or down. Thus our prediction was that it would over-react down to 82 – as much under par as it had been previously over par.
Well the Euro declined exactly as we predicted, reaching 82 cents in October 2000. Iraq is reported to have shifted $ reserves into Euro around then. The Euro rose to 96, fell back to 83 in July 2001, and has since risen to just over its launching peak at about 119. The point is that the rise from 82 is not so easily attributable to Iraq’s action. It was also predictable from normal market mechanics. Any real trading professional will confirm that. Overshooting our prediction of a rebound back to 109 was due to the weakening of the US Dollar attributable to the Iraq war and America’s unnecessary alienation of its main trading allies.
The Petro Dollar vs the Petro Euro Argument
Now we see arguments that the real reason for the 2nd Iraqi war was Saddam Hussein’s shift to the Euro, and to keep the U.S. Dollar’s dominant position as a reserve currency, enabling the US to continue running deficits by sending Dollars abroad. While Iraq’s switch was perhaps one more factor in the equation, I strongly doubt such an over-arching explanation for the warfare. Indeed, if anything, so far the second Gulf War has served to increase the Euro’s value and weaken the Dollar. Furthermore, this weakness could become more permanent, unless the administration alters its “in your face” attitude which is keeping our traditional allies from helping with the desperately needed policing and rebuilding costs for Iraq.
In addition, there is no hesitancy for foreign countries to continue accepting U.S. Dollars in payment for their goods and services. Most countries are cash starved and require dollars to pay interest and principal on huge Dollar loans. They eagerly seek dollars, since much of the world’s debt, private and public, is denominated in Dollars. Even in Iraq, we found vast amounts of dollars being hoarded in banks and even by Sadaam Hussein himself where over 800 million Dollars in cash were found stashed away in one of his palaces.
Still another problem with the argument is its commodity bias. It is the International Monetary Fund (IMF) with its rule setting procedures that will probably have more to say about the power of currencies, than the OPEC Oil Cartel. Although the Bretton Woods agreement gave a specially privileged position to the Dollar in 1946, as we point out in Chapter 22, since 1975, the Pound Sterling, Japanese Yen, Swiss Franc, German Mark and French Franc were also empowered to serve as reserve currencies by central banks. And superceding some of these currencies, the Euro has that status also (or soon will) – acceptable as a reserve currency under IMF rules. We are not promoting the IMF (see another article on the IMF at this website) as a fairly run institution, but legal factors usually supercede commodity markets in determining the power of currency.
While the process of using other currencies to obtain Dollars to buy oil would provide a demand for Dollars; after the oil is paid for, the same dollars still have to be attractive for the new owner to hold on to them – an owner who presumably does not need the Dollars to pay for oil! And other major oil suppliers exist outside the Middle-East, such as Norway and Russia. Does anyone really believe that Norway with its vast reserves, would withhold sales from the European Community paid for with Euros? Are we contemplating war with Norway?
Consider that the very existence of two world class currencies implies and necessitates that world reserves will to varying degrees be held in both of them.Thus any such “threat” to the dollar would obviously have originated long before Iraq’s decision, in the European community’s long standing plans for its own currency, which are decades old. And yet we find no serious attempts to block the Euro, from any of seven U.S. Administrations – not a one. On the contrary they were encouraged, according to Mr. Prodi, the European Commission President in a recent Charlie Rose Interview. He remarked (in January/February 2003) that we could have stopped their Euro plans, “with just a word.” Yet America did not lift a finger to stop the Euro. So much for the “monetary sky is falling” because of the Euro argument.
I found only two notable attempts to sabotage the Euro, both originating from British elements. The first was “Austrian School” economist F. A. Hayek’s immature essay entitled “The Denationalisation of Money – The Argument Refined” – really a childish attempt to throw a monkey wrench into Euro plans, published by London’s Institute of Economic Affairs in 1976 and 1978. (That book is strongly critiqued in Chapter 16 of The Lost Science of Money). But the only people who took Hayek seriously were American Libertarians and other “Austrian Schoolers.” Then in the mid 90s, Connolly’s Dirty Rotten Heart of Europe, fell flat in its name calling attack on the Euro.
WHATS IN STORE FOR THE MARKETS?
As to what happens next to foreign exchange markets, gold prices and inflation/deflation, welcome to the casino! When the rule of law is attacked in such fundamental ways as has needlessly been done in the pre-emptive strike against Iraq – especially by the U.S. – the country which should be at the forefront of advancing international law; it tends to generate an element of panic in general, which spills over into markets as well. With large amounts of speculative cash sloshing around (and that’s about the only place you’ll find so much liquidity these days), markets and prices can become violent.
A particular danger may exist in the gold futures markets, where violence in that market can easily be mistaken as a monetary “signal” in a way that a similar price disruption in Pork Bellies would not. The existence of a small but vocal group of monetarily illiterate pro-gold Americans egged on by gold mining and investment interests makes this more than a theoretical danger. However, the exchanges do have the power to solve such a problem – if they want to – as was done in the Hunt Brothers corner of the silver market in 1980-81. The Billionaire Hunts had the silver market makers on the hook for six to eight billion dollars, but were then driven to complete ruin and bankruptcy when the Comex Exchange simply altered its trading rules. The Hunts said “You can’t do that!” The exchange lawyers told them they should have read the futures contract fine print, and the courts agreed. The Hunts lost not only the $6-8 billion in profits, but their entire fortune as well.
So at present, foreseeing the future becomes a bit more difficult. You see there is no longer a countervailing media power to keep watch over what various gangs are doing. Bad ideas – even really bad ones – for example tax cuts for the super-rich, which could cause a form of currency debasement combined with economic contraction, and a de-funding of government, do not get reported as poor public policy, or more accurately as insanity, but instead get presented as valid questions for economists to argue over. Obscene Power Grabs are made in broad daylight such as the recent FCC de-regulation of the media – one of the most irresponsibly run industries in the U.S. All this prompted Nobel Laureate in economics (2001) George A. Akerlof to recently remark:
“I think this is the worst government the US has ever had in its more than 200 years of history.
It has engaged in extraordinarily irresponsible policies not only in foreign policy and economics
but also in social and environmental policy.” (SPIEGEL Online interview, thanks to Alanna Hartzok)
What can best be described as the “Ministry of Propaganda,”euphemistically referred to as “talk radio” represents the interests – day in and day out – of only one tiny element in the nation – the owners of the networks – all super-rich. At present there is no democratic (small d or big D) opposition. The way that elections, and communications are financed has demolished both, except for the rare PBS presentations of Hedrick Smith, or Bill Moyers.
As to what the real cause of the war was, I’ll close with this observation:
Watching Hedrick Smith’s recent P.B.S. Frontline documentary on the Worldcom and other financial scandals, the thought struck me that if we had not been distracted by war reporting, museum lootings, library burnings, and daily reports of continuing casualties among our troops, then these financial scandals, would have been center stage for many months. Smith’s condemning evidence reached all the way up to Alan Greenspan; it went beyond personalities, to indict “free market ideology” as well. That is long overdue!
So that “distracting process” could have been a major war motive. (Remember how Richard Nixon tried to scramble the strategic air defense bombers, during the watergate disaster?) Throw in the oil-grab factor; throw in the Neo-Conservatives Middle East agenda shared by the evangelical Christians supporting Israel’s interests. Then too we’ve all been reminded (many times) that S. H. tried to kill Mr. Bushes’ daddy. Add in the Arab League’s now forgotten watershed peace initiative toward Israel last year and the problems that posed for the war parties on both sides, etc, etc, etc. Mix all these factors into an environment of panic over the World Trade Center disaster, and Voilà – Gulf war II.
External policy should not worry about the Euro, but focus on rebuilding respect for international law and co-operation toward justice. That strengthens the U.S. Dollar. That fosters a respect for human life and well being everywhere. That will reduce the level of anger and hatred directed at Americans – yes it reduces the causes of terrorism.
This young, inexperienced President needs to separate himself from older elements in his administration that are against that – the empire promoters. And he must hold fast to formulating and enforcing a viable “roadmap” for peace between Israel and Palestine. Success there would really help erase the recent blemishes on America’s worldwide standing, abroad, and at home. Domestic policy should focus on rebuilding respect for our rights – for privacy, dissent, and due process matters; so that we can get to the crucial issues of monetary reform, so needed to get America off the road to serfdom, which has been paved by the Austrian School and other economists, and back on track toward liberty and justice for all.
Director, American Monetary Institute