Dollar Hegemony and the Economics of Unilateralism

In last week’s column, I mentioned the episode of Jacques Chirac and Gerhard Schröder trying, at the end of 2002, to restrain George W. Bush from invading Iraq. Their effort failed not only because the neoconservatives in Washington were determined to launch their war at any cost, but also because the French president and the German Chancellor were lacking a long-term strategy. The story is told by two French journalists, Henri Vernet and Thomas Cantaloube, who, in 2004, published a detailed account of what really happened between Washington and Paris between September 2002 and March 2003: Chirac contre Bush: l’autre guerre (Editions JC Lattès). [Chirac Against Bush: The Other War].  

Sounds good to me. However, upon reading this account, one is struck by the waffling of Paris and Berlin.  

For instance, in their eagerness to prevent the launching of an American-led assault on Iraq, the two European leaders had elaborated a detailed alternative plan. They suggested putting more UN inspectors in Iraq and they were ready to provide them with still more sophisticated technology and to have them protected by European troops with a clear UN mandate.  

Chirac and Schröder were certainly right to think that the absence of material proofs about Saddam’s weapons of mass destruction was the Bush administration’s real weakness and that underlining that through the spectacular announcement of an alternative agenda would be the only efficient way of preventing the war. But they weren’t ready with the ultimate version of their peace plan when the annual Security Conference took place in Munich on February 8-9, 2003. Adding to this mishap, their plan was leaked by the German magazine Der Spiegel, in the middle of the conference, depriving them of the advantage of surprise. Donald Rumsfeld got so angry about the news that he left the conference.  

The Franco-German conspirators suddenly got cold feet at the prospect of American retaliation, whether political, economic, or both. We can speculate that the Euro-rebels never took it far enough to have a real confrontation with Washington. Anyway, the rebelled that never jelled was a huge missed opportunity, and the peoples of Europe could only conclude from this incident that Chirac and Schröder had not been serious when — seizing the opportunity of the 40th anniversary of the Treaty between Charles de Gaulle and Konrad Adenauer — they solemnly renewed Franco-German cooperation on January 23, 2003.  The de Gaulle-Adenauer pact, the so-called "Treaty of L’Elysée,” had so angered President John F. Kennedy that his administration put intense pressure on the German parliament, which voted to add a reference to NATO in the treaty preamble.

Let us look now at the second missed opportunity in a decade. Nicolas Sarkozy and Angela Merkel have just missed a new opportunity for letting Europe contribute to the reshaping of the world order. Two weeks before the G20 summit in London, the Chinese government brought into the debate the only essential topic that should have been discussed in London on April 2: the question of the international currency system. There would have been no American unilateralism during the last decades without the dollar standard and the apparently unlimited financing of American deficits by the rest of the world. China itself has been buying American Treasury bonds for years and the government in Beijing is getting very nervous at the prospect of the dollar collapsing. This is the reason why the Chinese wanted a real discussion of the currency question in London. They were supported by Moscow in this — but not by Paris and Berlin.

France and Germany could have played, together, the key role in London, had they sided with China and Russia on the currency matter. The euro is the second reserve currency of the world. Neither the Japanese nor the Russians nor the Chinese can impose a new international currency system without support from the Euro zone. And France and Germany are still the leading countries inside the European Union. Yet they never dared to tell the American administration that the old international dollar-based financial system has failed. Instead of contributing to the launching of a debate on the roots of the current crisis, they preferred addressing the symptoms of it, suggesting more financial regulation.

But there would be no need for more regulation of financial transactions if capitalism was resting on a sound currency system. (I belong to the supporters of a reintroduction of the Gold standard — or better the Gold and Silver standard that existed before 1820, the only system that makes the self-regulation of the economy advocated by Adam Smith possible; see my book with Norman Palma, La capitalisme malade de sa monnaie, F.-X de Guibert, Paris, 2009). There would be no tax evasion if our economies were not based on fiat currencies. 

The lack of confidence one is currently observing is only the result of fraudulent currency management since 1971, the year that Richard Nixon cut the last link between dollar and gold — a decision supported by Britain, France, Germany and Japan at the time. For years the United States has been defying the laws of economic reality because the world community bought dollars or, better, American T-bonds. But now this system is on the verge of a total collapse because nobody believes it can be sustained any longer.

Russia and China experienced in the 20th century the total destruction of their respective currencies — and of their economic system — through Communism. And they seem to be the only countries to which the terrible 20th century — with its World Wars and its Cold War financed by fiat currencies — is a lesson. Yet France — and Germany, too — are no strangers to the tragedy of monetary disorder.

Germany experienced a terrible inflation at the beginning of the 1920’s, which destroyed the middle class and left the Weimar Republic defenseless against Hitler. France was the second financial power in the world on the eve of World War I, second to Britain, and an important part of French foreign investments was in Russia — which disappeared with the Bolshevik revolution.  

French economic recovery after World War II was more robust even than West Germany’s (the latter had inherited an important part of the plundering of continental Europe through Nazi Germany during the war) and the reconstitution of the Banque de France’s gold reserves reflected this reality. However, after the destruction of the Gold Exchange Standard, in 1971, France saw its currency — and then its economy — profoundly weakened.

When millions of people, in Europe and elsewhere, were demonstrating against an American attack on Iraq at the beginning of 2003, they only forgot to denounce the key element of American unilateralism: the dollar standard. End the privileging of the American dollar as the reserve currency of the world and the United States government will have to abide by the rules of economics. They will not be able to draw 75% of the world’s savings to them anymore, a reality that enabled them to build up the greatest military power in history without reducing their deficits.

Jacques Chirac and Gerhard Schröder never denounced this phenomenon — or perhaps they never saw the link between the dollar standard and American military power. But now, in the middle of an economic crisis which has been caused by the dollar standard and the apparently unlimited credit it allowed, France and Germany should be able to tell the world: "The Russians and the Chinese are right. Let us imagine a new international currency stability that will guarantee the future of global economy." And of peace, they could have added. Is it not striking that Barack Obama’s next destination after London was Strasbourg, where he has been chairing the NATO-summit, trying to convince his allies they should send more troops to Afghanistan? The dollar standard had not been challenged in London and President Obama was able to reassert his role as military leader of the Western world a few hours later. The European leaders who had not dared to question the "exorbitant privilege" (as Charles de Gaulle described the dollar standard on 2.4.1965) confirmed Washington’s claim to hegemony in the city which happens to host the European parliament every month! What a sad symbol!

Author: Edouard Husson

Edouard Husson is a specialist in 20th-century German and European history at the Sorbonne.