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The Daily Wildcat

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The Daily Wildcat

The Daily Wildcat


    Who’s afraid of Ben Franklin?

    The dollar is king, but there are forces working against it. Increasingly, “”rogue states”” are finding chinks in America’s economic armor, seeking to bring down a remarkably self-gratifying international system.

    In 1971, President Richard Nixon took the dollar off the gold standard – in essence, admitting to state bankruptcy and defaulting on America’s foreign debts. Soon thereafter, Nixon’s Secretary of State Henry Kissinger engineered a diplomatic tour de force by pledging U.S. support for Saudi Arabia in exchange for the denomination of OPEC oil sales in U.S. dollars.

    The system was pristine in many ways. Despite no real value backing it up, the dollar was recognized to be the international reserve currency. The U.S. could purchase foreign goods abroad for dollars. It could then print additional dollars, thus devaluing all that excess money, and sell less economic product to other nations for the same dollar amount. The system thrives today and represents an indirect form of taxation on the rest of the world.

    Why would the rest of the world support such an America-centric system? Overwhelming military might and, more importantly, oil. As oil is denominated in dollars, central banks seek to hold dollars for future purchases of oil and to hedge their exchange rate versus the dollar.

    As long as oil is denominated in dollars, and as long as oil remains the most crucial global commodity, other nations will be happy to hoard American currency and purchase Treasury bills to prop up the dollar exchange rate, thus bankrolling the government’s fiscal profligacy.

    On March 20, although the American media conglomerates were conspicuously silent on the matter, Kommersant, a Russian business daily, reported that Iran had begun selling its oil entirely for euros instead of dollars. This is Iran’s second step in the same direction: During the summer of 2003, Iran began selling oil to its European Union customers for euros.

    Not coincidentally, in 2000, Saddam Hussein chose to sell Iraq’s oil for euros through the United Nation’s Oil-for-Food Program. At the time, it was considered a purely political move, meant to irritate the U.S., but it also benefited Iraq economically as the euro climbed in value versus the dollar.

    Iran has plenty of economic reasons for the switch. The EU imports more oil from OPEC countries than does the U.S. And the EU

    The system thrives today and represents an indirect form of taxation on the rest of the world.

    accounts for well over half of the Middle East’s imports. While the dollar declines in value relative to the euro, carrying out oil transactions purely in euros is greatly beneficial to OPEC countries like Iran.

    In light of America’s disquiet over Iran’s nuclear intentions, Iran is also trying to develop an oil exchange, based in Tehran, that would conduct business in euros only, establishing a euro-denominated oil pricing standard, which would be the first in history.

    Such an exchange would stand in direct competition with London’s International Petroleum Exchange and the New York Mercantile Exchange, both of which use dollar-denominated systems. Originally, the Iranian Oil Bourse was to be opened on March 20, but was instead delayed for unpublicized reasons.

    Are Iran’s moves a threat to dollar dominance in the international system? Not immediately. Despite the scaremongering being thrown around in the blogosphere, the logistical and financial impediments to establishing an oil exchange in Iran are drastically high. Iran’s economy is riddled with corruption. Rule of law is almost a foreign concept.

    But Iran’s intentions are representative of a larger movement against America’s economic dominance. In 2001, Venezuela’s ambassador to Russia spoke of switching all his country’s oil sales to the euro. North Korea actively counterfeits American dollars to undermine the money’s integrity on the world market.

    Increasingly, “”rogue states”” realize that they cannot combat America directly, but rather, can quietly try to subvert the system that feeds America’s economic, and therefore military, strength.

    If the invasion of Iraq was any indication, you can be sure the Bush Administration won’t take it lightly.

    Matt Stone is an international studies and economics junior. He can be reached at .

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