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Source link: http://archive.mises.org/6206/dollars-and-politics/

Dollars and Politics

January 31, 2007 by

The performance of the US economy in the 20th century owes much to the predominant role of the US dollar in the international monetary system, and a large part of attaining this role was the result of the political and military supremacy that the United States had gained after World War I. However, in a world where the economic strength of the United States is diminishing relative to other countries and regions, there will be less and less of a place for US dollar privilege. FULL ARTICLE

{ 27 comments }

Alex MacMillan January 31, 2007 at 10:30 am

Well, this article stands in sharp contrast to Murphy’s recent one. In my opinion, Mueller’s analysis is bang on.

David C January 31, 2007 at 10:33 am

I think it’s too early to call for the decline of the US “empire” just yet – because there is no outlet for new foundation building. While there is China, India, and Brazil, a quick look at the economic freedom rankings will show that all these countries have fundamental problems. If say, Brazil or India was competitive on the economic freedom front, then I would say the US “empire” was finished. But because they aren’t, that means that there is no frontier for those wishing to expand their economic liberties to complete the push away.

Also, China has increased their economic freedoms enough to be a strategic counterbalance to the US, but given their behavior I don’t think the Chinese powers that be have any intent of pursuing a true free market economy.

The US will probably go thru something like a great depression/Confederate money collapse which will force a return to the gold standard and cause a US economic boom bigger than all the previous ones combined. IMHO, the US is going thru the birthing pains of the information age. The era of the FCC, copyrights, and lying to people about the value of their money (information controls/manipulation) is over.

IMHO, I think the next frontier will be out in the ocean. Literally nations or allegiances that float on the sea. Once the economic base becomes big enough, then there will be an outlet and the US empire will fall like the British one.

Vicente Barriatos January 31, 2007 at 10:44 am

Hi Mr. Mueller,

I have some reservation about your assertion about entrepreneurs being predominantly future thinking individuals and it befits me to have some austrian economist, such as Professor Reisman and Bohm-Bawerk, supporting this claim:

http://www.freemarketnews.com/Analysis/158/5800/australian.asp?wid=158&nid=5800.

I don’t want to rehash what’s been said in this article, but please take a read….and see what you think of it.

-Vince

Vicente Barriatos January 31, 2007 at 10:48 am

WHOOPS, my apologies this was the wrong comment for the wrong blog. please disregard the aforementioned comment

mike January 31, 2007 at 11:18 am

The resurgence of the dollar during the Reagan term was less due to the final phases of the Cold War than to the tight money policies of the Volcker Fed. It seems to stretch the Imperialism argument to procrustean levels to disregard that.

billwald January 31, 2007 at 11:21 am

I propose we drop the dollar and use the euro as our national currency. If nothing else, it will take the money changers out of the loop.

David White January 31, 2007 at 11:35 am

“While other countries have to export in order to pay for their imports, the sovereign who emits a global currency is exempt from adhering to the most fundamental law of economic exchange.”

Thus do deficits matter (Robert Murphy), as a country cannot remain be exempt from this law indefinitely.

Or as Ayn Rand would say, “We can evade reality, but we cannot evade the consequences of evading reality.”

Paul Marks January 31, 2007 at 1:25 pm

Oh no, not Paul Kennedy style “burden of empire” stuff again.

What is undermining the United States is not the 3.5% (or so) of G.D.P. that is spent on the military (as opposed to the 11% or so that was spent under J.F.K. – before the Vietnam war was an important factor). What is undermining the United States is the WELFARE STATE – Social Security, Medicare, Medicaid, the increasing centralized government education system (bigger school board areas, increasing State rather than local finace, and also Federal finance and control), and so on.

There is not an “American Empire” anyway. If any democratically elected government, of any nation, asked for American forces to be pulled out THEY WOULD BE. What sort of “empire” is that?

President Bush has his faults (very many of them), but he does not want an “American Empire” in Iraq or anywhere else. He really does believe in this President Wilson style war for democracy (however wrong headed it is).

If Ludwig Von Mises was alive (with both his regard for truth and his short temper) he would not tolerate all this “American Empire” stuff.

Look (as Murry Rothbard and Karl Hess should have worked out back in the 1960′s) the left will hate us free market folk WHATEVER WE DO.

Saying “we also oppose the evil American Empire” will not make them think we are “cool” or “hip”.

They will just think we are stupid for helping the institutions they control (such as the mainstream media and the education system of various countries) do the work of undermining what is remains of the West.

There are worse things than George Walker Bush out there.

Alex S January 31, 2007 at 1:55 pm

Paul Marks,

What sort of “empire” is that?
“New sort of empire” according to Francis Fukuyama and Newt Gingrich. I heard them saying that on NPR.

Respect for the private property (including honest money) and freedom – that is what defined The West.
Fiat currency and Patriot Act – that is what undermining The West.

John Bigelow January 31, 2007 at 1:57 pm

I have read that while employment in American manufacturing is declining, the value of the goods manufactured is not. I believe this is analagous to what happened with agriculture. Does anyone have a link to actual statistics to support the “deindustrialization” stipulation?

RogerM January 31, 2007 at 2:12 pm

The author refers several times to what he calls a declining manufacturing base in the US. However, a brief visit to the Bureau of Economic Analysis will reassure anyone that this is not true. The real dollar value of American manufacturing is at an all-time high. It occupies a smaller portion of the total economy only because services have grown faster. The US is still the largest manufacturing nation in the world, with our manufacturing sector alone being almost the size of China’s entire economy.

For a far better analysis of trade and deficits, I recommend RPM’s earlier article and this one from FEE: “The Trade Deficit Is Debt? It Just Aint So!” By Donald J. Boudreaux at http:// http://www.fee.org/publications/the-freeman/article.asp?aid=6215

Jack Maturin January 31, 2007 at 2:21 pm

It’s probably just a scurrilous rumour, but I’ve not seen it written anywhere else. The rumour is that what did for Saddam Hussein was a private threat to the United States government that if they didn’t back off, he would start selling Iraqi oil in Euros rather than dollars, on the world market. This convinced the neocons that they had to go into Iraq immediately, to shut this threat down, because if Hussein had managed to swing the world around to buying oil in Euros, the game would have finally been up for the paper dollar and those printing machine handle-turners at the Fed’s Bureau of Engraving. Well, it’s just a rumour, and no doubt 500 people will immediately send me links of where they’ve already read this hilarious piece of disinformation! :-)

David White January 31, 2007 at 2:48 pm

Paul Marks,

“There is not an ‘American Empire’ anyway.”

No, of course not:

“As a continuation of my own analytical odyssey, I then began doing research on the network of 737 American military bases we maintained around the world (according to the Pentagon’s own 2005 official inventory). Not including the Iraq and Afghanistan conflicts, we now station over half a million U.S. troops, spies, contractors, dependents, and others on military bases located in more than 130 countries, many of them presided over by dictatorial regimes that have given their citizens no say in the decision to let us in.”

http://www.commondreams.org/views07/0131-27.htm

David White January 31, 2007 at 2:52 pm

Jack Maturin,

It’s anything but a rumor:

“Candidly stated, ‘Operation Iraqi Freedom’ was a war designed to install a pro-U.S. government in Iraq, establish multiple U.S military bases before the onset of global Peak Oil, and to reconvert Iraq back to petrodollars while hoping to thwart further OPEC momentum towards the euro as an alternative oil transaction currency (i.e. “petroeuro”).”

http://www.energybulletin.net/7707.html

Matt January 31, 2007 at 4:19 pm

How does Iraq (or Iran or Russia) switching to Euros provide justification for war, when at the time (and still!) the Bush administration is trying to devalue the dollar? If Iraq switched it would greatly help the U.S. in Bush’s eyes because it would hurt European exports and help American exports. If you like conspiracies, it would also raise the price of oil in dollars, thus helping American oil companies.

Paul is right on about the “empire”. What’s destroying liberty at home is the welfare and regulatory state. If we eliminated the military completely, all that money would be spent on welfare and the government could hire 500,000 new bureaucrats.

When the Iraq war is over (probably a year or two from now) military spending is going to decline a lot, just as it did after the Cold War. The real question is: how does the U.S. maintain a global military for only 3-4% of GDP?

I don’t disagree that the military is too large, or that there are too many overseas bases. But even if the military were just the right size, it would probably consume 1.5-2% of GDP. So you could achieve a reduction of 2% of GDP. Now what about the 8-9% of GDP that just goes for SS, Medicare, and Medicaid? What about the law and regulations that impose invisible costs on everyone? The rhetoric of empire assures the victory of those who would expand government, not reduce it.

David White January 31, 2007 at 4:35 pm

Matt,

To quote from this essay — http://energybulletin.net/12125.html:

Economically, the American Empire was born with Bretton Woods in 1945. The U.S. dollar was not fully convertible to gold, but was made convertible to gold only to foreign governments. This established the dollar as the reserve currency of the world. It was possible, because during WWII, the United States had supplied its allies with provisions, demanding gold as payment, thus accumulating significant portion of the world’s gold. An Empire would not have been possible if, following the Bretton Woods arrangement, the dollar supply was kept limited and within the availability of gold, so as to fully exchange back dollars for gold. However, the guns-and-butter policy of the 1960′s was an imperial one: the dollar supply was relentlessly increased to finance Vietnam and LBJ’s Great Society. Most of those dollars were handed over to foreigners in exchange for economic goods, without the prospect of buying them back at the same value. The increase in dollar holdings of foreigners via persistent U.S. trade deficits was tantamount to a tax—the classical inflation tax that a country imposes on its own citizens, this time around an inflation tax that U.S. imposed on rest of the world.

When in 1970-1971 foreigners demanded payment for their dollars in gold, The U.S. Government defaulted on its payment on August 15, 1971. While the popular spin told the story of “severing the link between the dollar and gold”, in reality the denial to pay back in gold was an act of bankruptcy by the U.S. Government. Essentially, the U.S. declared itself an Empire. It had extracted an enormous amount of economic goods from the rest of the world, with no intention or ability to return those goods, and the world was powerless to respond— the world was taxed and it could not do anything about it.

From that point on, to sustain the American Empire and to continue to tax the rest of the world, the United States had to force the world to continue to accept ever-depreciating dollars in exchange for economic goods and to have the world hold more and more of those depreciating dollars. It had to give the world an economic reason to hold them, and that reason was oil.

Mark January 31, 2007 at 6:04 pm

It had to give the world an economic reason to hold them, and that reason was oil.

At least to aquire them. Which would make oil the new Gold Standard or the Rock on the Island of Yak, as Milton Friedman cited in “Money Mischief”

Thus a symbotic relationship that frequently occurs in the natural world has come to fore.

Why spend money on a military when you can rent one?

Jack Maturin January 31, 2007 at 6:09 pm

http://www.energybulletin.net/7707.html

Thanks David. My attempts at scurrilous rumour-mongering are well and truly scotched.

Crikey! If Murray Rothbard was writing a history of this, I imagine he’d be cackling right now at the state’s protestations of ‘world justice’ yet again masking their own deliberately-induced coercive inflationary bubble to help make the incredibly wealthy tax-parasite ruling class of the US even wealthier again. And all at the expense of the security and wealth of everyone else in the world. I mean, just how many lard-filled doughnuts can these Georgetown people eat? :-)

Juan Garofalo January 31, 2007 at 11:45 pm

Paul Marks,

While it is probably true that the ‘welfare’ portion of the American state destroys more resources than the ‘warfare’ part does, rest assured that the biggest threat to freedom is still the military.

It’s not simply a matter of $$$. It is well known that standing armies were not and are not liked by libertarians. Why ?

Notice also that the police state in Amerika is the direct result of a military scam – the so called ‘war’ on terror.

David White February 1, 2007 at 9:39 am

Juan Garofalo,

I’m with Jefferson:

“I sincerely believe that banking establishments are more dangerous than standing armies, and that the principles of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”

RogerM February 1, 2007 at 9:57 am

Don Boudreaux had another excellent take on the dollar and China today at Cafe Hayek.

Reactionary February 1, 2007 at 12:17 pm

Following up on Juan’s comments, the standing army is what enables the welfare state. If the US had no standing army, its tax receipts would decline to the point that the welfare state would collapse.

The conservative ideal is a robust federal military and no welfare state. In practice, it seems you do not get one without the other.

David White February 1, 2007 at 2:28 pm

Reactionary,

I’m with Sir Alan (back when he was a lowly principled commoner) in saying the what enables the welfare state isn’t a standing army but a certain “shabby secret”

http://www.usagold.com/gildedopinion/Greenspan.html

Juan Garofalo February 1, 2007 at 6:38 pm

David,

I think your quotation from Mr. Jefferson does him no justice.

Private banking is one thing. A totally different thing is government debt.

You must be well aware that in a real free market banks pose no threat to freedom.

Besides, he’s not talking about the welfare state…

I’m with Herbert Spencer, who pointed out that two kind of societies are possible. Military societies and comercial/industrial societies. They don’t mix well…

I’m with Reactionary as well. You David are perhaps not considering that if you tried not to pay taxes(welfare money) you’d be shoot by the military.

I’ll check greenspan’s piece but I have no problem admiting that I’m prejudiced against him. I mean, what kind of respect does the biggest counterfeiter on earth deserve ?

Juan Garofalo February 1, 2007 at 7:06 pm

Ah, that article about gold…I don’t exactly see what the article has to do with welfare vs. warfare ?

I agree that gold puts a limit to deficit spending…for both welfare and warfare. The fundamental issue is not paper vs. gold, but militarisim vs. property rights.

AND, the military is the state. That’s a very old libertarian insight. The welfare state is a mere extension of the militarist state.

As a side note, greenspan makes it sound as if the ‘credit expansion’ done by private banks is not a fraud. But it is, regardless of a gold standard being in place or not.

Greenspan : A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits,

‘extend’ credit ?? create currency ?? create deposits ?? No wonder he’s got a job at the Fed…

David White February 1, 2007 at 7:08 pm

Juan Garofalo,

The point is that Jefferson well knew how banking could be corrupted and that private banking could do so, as in fact it has, no matter that it has been done under the guise of government:

http://www.the7thfire.com/Politics%20and%20History/Federal-Reserve.html.

So while in a truly free market, banks would pose no threat to freedom (and would in fact enhance it), the fact is that ours is not a free market. Hence, the massive fraud that daily robs the American people of their produce.

As for getting shot for not paying taxes, this is purely a numbers game, as any government is helpless (think the former Soviet Union) when enough of its subjects had enough of being subject to it.

Lastly, Sir Alan deserves no respect; only his earlier life as a lowly but principled commoner does.

Adam Christian February 18, 2007 at 3:39 pm

I still don’t really see how the whole Saddam was going to start demanding euros for oil instead of dollars and so we had to remove him is true. I think the argument is a little hollow. Saddam is not the only member of OPEC that dislikes the US. There are others like Venezuela and Iran that would love to do damage to the US economy. I just don’t see how Saddam all of a sudden stumbled upon something that would seriously threaten the US economy but Iran and Venezuela are somehow too stupid to use this against us. If this is such an eminent threat to the US, why doesn’t Iran and Venezuela demand euros?

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