The End of Dollar Hegemony

On Feburary 15, 2006 Rep. Ron Paul of Texas delivered a speech before the U.S. House of Representatives called "The End of Dollar Hegemony." Lew Rockwell published it on his web site a few days later. I consider it one of the finest speeches I have ever read, and rank it among the top intellectual products of 2006. Ron Paul shows how the government's fiat money, backed by the world's mightiest military, is bringing us to ruin -- politically, economically, and morally.

Paul begins with a few basics about money:

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.

Then government stepped in and asserted monopoly control over money. They discovered how to inflate their currencies by reducing the amount of gold in each coin, enabling them to outspend the taxes they collected. It was an early form of inflation, but too crude to fool their subjects for very long.

Governments figured if they couldn't get away with diluting their coins, why not conquer other nations and steal their gold? So the strong ones did. In addition to stealing the conguered people's gold, the invaders enslaved the people or forced them to pay tributes to help support the invader's growing empire. As Paul notes:

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.

With gold no longer used for money, the political truth has become: "'He who prints the money makes the rules' -- at least for the time being." The goals, Paul says, 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.

First there was "gunboat diplomacy" of the late 19th century, followed by "Dollar Diplomacy" of the early 20th century, both expressions of the U.S. government's "'obligation' to protect our commercial interests from Europeans." The switch from dollar "diplomacy" to dollar "hegemony" came after government created the Federal Reserve System in 1913. Between the Fed's inception and 1971, the U.S. central bank

. . . 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.

Where has this brought us today? According to Paul,

Currently, we borrow over $700 billion every year from our gracious benefactors, who work hard and take our paper for their goods. Then we borrow all the money we need to secure the empire (DOD budget $450 billion) plus more. The military might we enjoy becomes the “backing” of our currency. There are no other countries that can challenge our military superiority, and therefore they have little choice but to accept the dollars we declare are today’s “gold.” This is why countries that challenge the system – like Iraq, Iran and Venezuela – become targets of our plans for regime change . . .

Using force to compel people to accept money without real value can only work in the short run. It ultimately leads to economic dislocation, both domestic and international, and always ends with a price to be paid.

The economic law that honest exchange demands only things of real value as currency cannot be repealed. The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or Euros. The sooner the better.