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December 2003 • Vol 3, No. 11 •
Gold, the Dollar, Oil and the Economy
By Nat Weinstein
The New York Times featured a front-page article in its business section titled, “These Days, It’s Good to Be Gold” (November 28). The article by Jonathan Fuerbringer, reported that a declining dollar, and what he described as “tense times,” is contributing to the dollar’s decline and the rising price of gold.
The world monetary system, of course, is no longer based on gold. That is, trading nations no longer settle the difference between the value of goods exported and imported by transferring a quantity of gold from one nation’s account to the other to make up the difference. Today, nation’s make up the difference simply by “borrowing dollars or their equivalent from Peter to pay Paul.” It works quite effectively so long as uneven exchanges between nations balance out, more or less, over time.
The price of gold has been zig-zagging upward for the last several months—reflecting the rising U.S. balance of trade deficit, the budget deficit and the weak economy. For the moment, the gold price is hovering around $400 an ounce, its highest price since 1980. In 1971, when President Richard M. Nixon officially ended the convertibility of the dollar into gold, speculators caused its price to balloon to an all-time high of $800 an ounce. It subsequently began a steep decline, settling down to float above or below an average price of $325 an ounce until early this year.
From the end of the Second World War to the beginning of the 1970s, gold was still valued by the U.S. government at $35 an ounce. When Nixon, in effect, established the dollar as the international medium of exchange—in place of gold—the value of gold has since then been determined by its market price, like any other commodity. Thus, because gold was stripped of its historic function as the money commodity par excellence—that is, all commodities expressing their value in a quantity of gold—the demand for gold was reduced. Consequently, its normal average price has been diminished, except when measured against specific currencies, in which case, it’s like comparing the relative value of any two commodities.
Fuerbringer’s report reflects the growing uneasiness on Wall Street over the impact on the economy of the deepening political, financial and military crises confronting the U.S. as the undisputed leader of world capitalism. The author gives substance to this growing threat by quoting Ian C. MacDonald, manager for precious metals at the New York branch of Commerzbank, who expressed his concern over the weakening dollar and rising price of gold: “The scary thing,” MacDonald said, “is we don’t know how high this price can go.”
So long as nations are able to maintain interest payments on their debts, however, their creditors are happy to let debts increase for years, and even decades, without necessarily insisting that they pay down the principal. But when a debtor nation is unable to meet its obligations on time, the value of its currency declines, the interest rate they must pay is increased, and the relative value of the beleaguered nation’s currency is threatened with collapse—in the most extreme cases, to the point of becoming worthless.
The world’s advanced industrial countries, of course, have been the chief beneficiaries of the Keynesian monetary system. By freeing the global capitalist economy from the dictatorship of gold, the system introduced by the British economist John Maynard Keynes allowed an exponential expansion of credit. It has resulted in an unprecedented half-century of relative prosperity without a major crisis of overproduction—albeit one highly one-sided in favor of the rich at the expense of the poor.
The Times reporter also noted that speculators, who have recently been betting heavily that the value of the dollar relative to all other currencies will go down, have been instrumental in driving up the price of gold—that is, relative to the dollar. But while speculators are motivated purely by the opportunity to make a quick and easy profit, they nevertheless serve as the indispensable mechanism by which the relative values of the currencies of nations are tested against each other and their relative worth kept close to their real values.
So long as the shifting values of the currencies of nations remain moderate, however, a fall in the relative worth of a nation’s currency may under certain conditions be to a given nation’s advantage, since its products—all things being equal—would become more competitive in the world marketplace, to the point of outweighing its negative consequences. But the collapse of any nation’s currency is always catastrophic for that nation.
That’s why, for instance, the creditor countries of the world did not rejoice when the 1997-98 financial crisis of debtor nations spread across the globe from what was then known as the “tiger” economies of Southeast Asia, to Latin America and Russia. On the contrary, fearing it would destabilize the world’s richest as well as poorest nations, the great powers in Europe, Japan and America moved swiftly toward bailing out the crisis-ridden poorer nations to avoid a generalized collapse of the global monetary and economic system.
The world’s imperialist nations succeeded in nipping that threatening global monetary crisis in the bud, but what nation or combination of nations could bail out the world’s richest country if the dollar goes the way of the baht, peso, rial, rupiah, ringgat and ruble in future crises?
Think of what the effect of a sharp fall in the value of one of the world’s major currencies would be like? It’s hard to imagine it not setting in motion a cascade of falling currency values, paradoxically hitting the world’s largest, richest and strongest economies hardest.
‘Tense times’ at home and abroad
Meanwhile, behind the glowing headlines hyping the “good news” of a reported 8.2 percent rise in Gross Domestic Product. And behind the claimed reduction in the rate of unemployment from 6.1 to 6.0 percent, in the three-months from July through September, the real state of the U.S. economy is far grimmer. Beneath the alleged good news is the continued hemorrhaging of manufacturing jobs from the U.S. economy, while the one-tenth of one percent decline in unemployment is insignificant at best and a statistical fiction at worst. It is beginning to be generally understood that official statistics conceal the real rate of unemployment simply because they are based on the Labor Department’s policy of not counting as unemployed those it claims have ceased looking or could find no work upon first entering the labor force.
In fact, the December 6 Times reports that while the “rate of unemployment” declined another one-tenth of one percent, only 57,000 new jobs were created in November—only a third of the 200,000 new jobs every month it would take to stop the bleeding of jobs from the U.S. economy. Moreover, the same issue of the Times ends an editorial titled, “Too Few Hires, Still” with this gloomy conclusion: “Our debt-ridden society has long lived beyond its means, and gotten away with it, because foreigners are eager to stash their money here. America currently needs roughly $50 billion a month in capital inflows to make ends meet. This situation cannot be sustained forever, and a lack of confidence in Washington’s economic policy making could hasten the day of reckoning.”
A task beyond its power
The author of the article on gold and the dollar did not need to spell out what was meant by his reference to “tense times.” The world’s richest and mightiest nation has taken on a task far beyond its power to carry through to a successful conclusion. President George W. Bush’s declaration of a world war to rid the world of “terrorism” beginning with Afghanistan soon after the tragic events of September 11, 2001, followed by the invasion of Iraq has already had an effect opposite to the one intended.
Moreover, while the Bush administration, backed to the hilt by a bipartisan Congress, accurately predicted its lightning-swift victories over the Taliban and Saddam Hussein, it badly misjudged the response of the peoples of Afghanistan and Iraq. Rather than Bush and company’s prediction that a grateful population would welcome American troops as liberators, our young men and women in uniform have been met by outraged, vengeful and rebellious Afghanis and Iraqis who see the American oppressor as far worse than the tyrannical oppressors they replaced.
Now that no weapons of mass destruction have been found, there are few persons left in the world that believe in the lying pretext for the war on Iraq. Thus, most of the people on this planet, if not persuaded before the invasion began, are now convinced that the U.S. war on Iraq had nothing whatever to do with weapons of mass destruction threatening the United States and other of the world’s “peace-loving nations.”
Moreover, despite repeated protests by the bipartisan U.S. government that “oil is not the reason”—calling to mind the Shakespearian character who protested her virtue “too much”—most now believe that oil was indeed the decisive factor impelling Washington toward the conquest and possible extended occupation of Iraq.
While lucrative profits deriving from gaining control over the country’s huge deposits of oil were certainly a part of capitalist America’s motives, there were also other, even more far-reaching advantages to be gained.
Besides the highly profitable prospect of gaining exclusive control over the second largest proven deposits of oil, the largest proven oil deposits is right next-door in Saudi Arabia. That’s why control over Middle Eastern oil and the 55-year-long occupation of Palestine by the Israeli proxy for American imperialist domination of the region has been a bone of contention among the world’s imperialist powers since the late 19th century.
However, because the industrial capacity of human society has been multiplied, the energy required to power it has increased proportionally. But some of the most authoritative experts estimate that the supply of fossil fuels—which provides the bulk of the available energy in the foreseeable future—will be exhausted in a matter of between 10 and 30 more years! (See article following this one, “The World Is Running Out of Oil.”)
Thus, U.S. military control over Iraqi oil—together with corporate America’s already existing extensive holdings in the Middle East, Russia and other ex-Soviet countries in Southeast Asia as well as in North and South America—would also give Washington strategic control over the world supply of oil, without which the wheels of industry cannot turn, and ships, trains, planes, cars and trucks cannot move.
That is the reason France and Germany led the opposition to UN endorsement of the U.S. war on Iraq. They knew that there was much more at stake in Iraq than merely gaining unilateral control over Iraqi oil profits. An American corner on the world supply of a commodity indispensable to a modern industrial society would give it an added dimension of control over the nations of the world—in addition to its already existing predominant economic and military power.
That’s why, after the U.S. made clear that it had no intention of sharing the spoils of war with its imperialist allies and proceeded to its easy victory over Saddam Hussein, its long-time imperialist allies, with few exceptions, are unwilling (and unable) to take on their share of the human and material costs of winning the war against a people literally up in arms against the U.S. army of occupation.
Iraqi Oilfields Damaged by US Sanctions
Adding to Washington’s problem of repressing the irrepressible masses in Iraq and Afghanistan, the November 30 New York Times reported a no less serious problem that has arisen inside Iraq in a front-page article headlined, “Oil Experts See Long-Term Risk to Iraqi Underground Reserves.”
The opening sentence tells it like it is: “As the Bush administration spends hundreds of millions of dollars to repair the pipes and pumps above ground that carry Iraq’s oil, it has not addressed serious problems with Iraq’s underground oil reservoirs, which American and Iraqi experts say could severely limit the amount of oil those fields produce.”
It turns out that the strategists had not fully evaluated the damage done to the infrastructure of the oil extraction industry by nearly 12 years of U.S. bombings and sanctions limiting Iraq’s production of oil. Barred from exporting enough oil due to U.S. sanctions, Iraq was unable to maintain the physical conditon of its oil reservoirs as well as its pumps, pipelines and other parts essential to the health of its oil extraction industry.
According to the Times report, maintaining the health of the oil reservoirs turns out to be a far more complicated enterprise than might appear to the layperson. Consequently, the industry suffers from various maladies resulting from the 12 years of sanctions. The following extract from this report tells us much more than the author may have intended, however, regarding the antisocial nature of the capitalist mode of production and the irrational character of American imperialism’s foreign policy:
“We didn’t want to give fuel to the fire of debate that was saying the U.S. was just doing this to steal the oil,” an administration official said. Task force participants said there was another potential political factor. The group had secretly decided without soliciting bids, that the contract for fixing Iraq’s oil infrastructure would go to Kellogg, Brown & Root, a unit of Halliburton, which had an existing Pentagon contract related to war planning. Halliburton was previously run by Vice President Dick Cheney.
“Everyone realized the selection of K.B.R. was going to look bad,” said one task force member.
Now, like the greedy farmer who killed the goose that laid golden eggs, the capitalist oil entrepreneurs are realizing that it will be a very costly process—costly in lives and gold—to get any more golden eggs from this particular goose.
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