In a recent article by Christopher Doran, author of Making the World Safe for Capitalism: How Iraq Threatened the US Economic Empire and had to be Destroyed, the underlying reasons for America’s bellicosity toward Iran are revealed. Threatening the status of the dollar as the world’s reserve currency seems to have resulted in a death sentence for a few countries, most recently Iraq and Libya:
…By accepting and encouraging countries to pay for its oil in currencies other than the U.S. dollar, Iran has deliberately taken the same action that, I argue in Making the World Safe for Capitalism, led directly to the U.S. invasion of Iraq. In September 2000, Saddam Hussein announced that Iraq would no longer accept the “currency of its enemy”, the U.S. dollar, and from that time onwards any country that wanted to purchase oil from Iraq would have to do so in euros. I further argue that the motivation for the United States’ invasion of Iraq was to eliminate the threats a post-U.N. sanctions Iraq posed to the key underpinnings of American economic hegemony, and to install a pro-U.S. client state and permanent American military presence in the region. The book examines how a post-U.N. sanctions Iraq either directly threatened the ongoing success of American economic power, or provided enormous opportunities to extend it.
All the same considerations are in play with Iran, starting with Iran’s direct threat to the dollar as the dominant global reserve currency. But that is just one aspect of the much larger issue: that Iran openly defies U.S. neoliberal hegemony. Like Iraq pre-invasion, Iran is not a member of the WTO, has not had any dealings with the IMF since 1984, and does not have any debt with it or the World Bank. Like Iraq before it, and evidenced by China’s oil development contracts, the U.S. and its oil companies are cut out of any future oil development in Iran. Like a post-sanctions Iraq, Iran has the potential to be the dominant power in the region and to provide development assistance on a vastly different model to that imposed by the WTO, World Bank and IMF, against which so much of the Middle East is rebelling….
The article details how the BRIC countries and many other nations are circumventing the U.S. sanctions with Iran and using gold as well as other commodities to buy Iranian oil. The sanctions have pretty much been rendered worthless because so many countries are defying what was designed to isolate and starve Iran into submission.
He explains how the Petrodollar System works:
In a nutshell, any country that wants to purchase oil from an oil producing country has to do so in U.S. dollars. This is a long standing agreement within all oil exporting nations, aka OPEC, the Organization of Petroleum Exporting Countries. The UK for example, cannot simply buy oil from Saudi Arabia by exchanging British pounds. Instead, the UK must exchange its pounds for U.S. dollars. The major exception at present is, of course, Iran.
This means that every country in the world that imports oil—which is the vast majority of the world’s nations—has to have immense quantities of dollars in reserve. These dollars of course are not hidden under the proverbial national mattress. They are invested. And because they are U.S. dollars, they are invested in U.S. Treasury bills and other interest bearing securities that can be easily converted to purchase dollar-priced commodities like oil. This is what has allowed the U.S. to run up trillions of dollars of debt: the rest of the world simply buys up that debt in the form of U.S. interest bearing securities.
The flip-side of this are the countries that produce and export oil, in particular Saudi Arabia and the other Arab producers. The only way the system can possibly work is if oil producers refuse to accept anything other than U.S. dollars as payment for their oil. This they have done since the Nixon Administration’s manipulation of the OPEC oil crisis in the mid-1970’s, which succeeded in getting Saudi Arabia, traditionally the world’s dominant producer, to agree to accept only dollars for oil. The Saudis used their influence to get the rest of OPEC to agree as well. In return, the U.S. offered to militarily defend not so much Saudi Arabia, but the horrifically repressive monarchy that ruled it.
But there was a kicker: Nixon and his Secretary of State Henry Kissinger also got the Saudis to agree to invest their mega oil profits in the U.S. economy. In addition to buying interest bearing U.S. government securities, the Saudis also invested in New York banks. Because the OPEC oil embargo had quadrupled global oil prices, the Saudis and other Arab producers suddenly had a great deal of money to invest. The money parked in those New York banks then became available to be loaned to the rest of the world, which faced major financial crises due to—yes, you guessed it—the sudden quadrupling of oil prices. By the year 2000 and Iraq’s dramatic switch to selling Iraq’s oil in euros, Saudi Arabia had recycled as much as $1 trillion, primarily in the United States. Kuwait and the United Arab Emirates recycled $200–300 billion.
And because those loans were in U.S. dollars, they had to be paid back in U.S. dollars. When U.S. interest rates skyrocketed to 21 percent in the early 1980’s, interest on the loans also skyrocketed. This in turn precipitated a third world debt crisis, which was mercilessly exploited by Wall Street and the U.S. In this case, the exploitation came in the form of requiring countries to “structurally adjust” their economies along neoliberal lines in return for World Bank and IMF bailout loans. By 2009, the total debt owed on these bailouts and other loans was an astounding $3.7 trillion. In 2008, they paid over $602 billion servicing these debts to rich countries, primarily the United States. From 1980 to 2004, they paid an estimated $4.6 trillion.
The history of how this came about is fascinating, and I discuss it in detail in Making the World Safe for Capitalism. The short version is that from the 1944 Bretton Woods agreement which set up the International Monetary Fund and the precursors to the World Bank and World Trade Organisation, the dollar was accepted as the international currency for all trade. Crucially though, the dollar was backed up by gold, which was fixed at $35 an ounce. This meant the U.S. had to have enough gold on hand to back up any and all dollars it printed.
Faced with escalating costs from the Vietnam War, in the early 1970s Nixon abandoned the gold standard and replaced it with the petrodollar system described above. Almost simultaneously, he abolished the IMF’s international capital constraints on American domestic banks, which in turn allowed Saudi Arabia and other Arab producers to recycle their petrodollars in New York banks.
The petrodollar system, and U.S. ability to manipulate the dollar as the global reserve currency and hence global debt, has been the bedrock of American economic power...
…But as the article explains, since the financial crisis of 2008, the status of the dollar as the reserve currency of the world has been thrown into question and challenged by even formerly staunch U.S. allies. As the lifeblood of a country’s economy, i.e. oil, becomes increasingly hard to come by, the demands of an old ‘friend’, named Uncle Sam, will likely fall on deaf ears, especially when he’s now seen by the rest of the world as a drunken, pickpocketing buffoon swinging at shadows.