China’s recent introduction of yuan-denominated oil futures has attracted some fairly extensive press commentary. Partly this is down to a habit of over-interpreting everything happening in China as just more evidence of their unstoppable rise to global superpower status, but it is also due to some profound misconceptions about the importance of oil as a commodity. It is widely thought, for example, that oil somehow underwrites the global financial system and guarantees the U.S. dollar’s hegemonic status.
Inevitably, stories about the toppling of the “Petro-dollar” and the long yearned for rise of an alternative reserve currency, one not dependent on the whims of a capricious political elite in Washington, have proliferated across the alter-net and on the state-backed media platforms of Russia and China.
But we should be clear: the Petro-dollar does not exist, and really hasn’t done in any meaningful way since the 1970s, therefore the “Petro-yuan” has no future. This is not to say that oil will never be traded in yuan, that is likely, but it is to say that trading oil in yuan will not suddenly transform the currency into the global reserve many claim is inevitable. 1
Origins Of The Petro-Dollar
The myth of the Petro-dollar comes from efforts in the 1970s to prevent the U.S. suffering severe negative effects in its balance of payments from rising oil prices.2 Until the late 1960s the U.S. had been an oil-exporter, but by also being an oil consumer they had never sought to maximize the rent from oil production by driving prices upwards. OPEC countries, however, never had such qualms 3 when the opportunity arose as the U.S. became an importer, happily restrained supply to drive prices, and their own national incomes, higher. The U.S. was worried about the resultant trade deficit caused by suddenly having to pay vast amounts for necessary imports, and so secured the agreement of Saudi Arabia to only trade oil in U.S. dollars, meaning the U.S. could pay for oil in their own currency. Saudi Arabia, for their part, accumulated huge reserves of U.S. dollars, investing some of them back into the U.S. economy.
The enormous lake of U.S. dollars this created augmented the role of the dollar as the global reserve currency, being a highly liquid, easily-exchanged claim on the products, services and investment potential generated by the U.S. economy. But this was merely one step in the rise of the greenback as the global reserve. The next step came when other economies–East Asia in particular–followed the lead of the oil producers and also built up huge reserves of U.S. dollars, all of which was made possible by the abandonment of the Bretton Woods fixed exchange rate system in the early 1970s. This practice helped to keep exchange rates for exporters low, and kept a lid on inflation in the U.S., which suited everyone up to a point.
Bringing this up to date, it was a long time ago when the link between oil and the dollar mattered much at all beyond the financial returns of non-dollar based oil companies. Since the 1980s, the dollar has been consolidated as the global reserve currency because of the strength and dynamism of the U.S. economy, and oil exporters have demanded to be paid in U.S. dollars because that’s the currency they prefer to hold on to. To do otherwise is to take on exchange risk. Exporters can, and routinely do, accept payment in whatever exchange medium they wish — tanks, planes and construction services — but their central banks demand dollars for reasons entirely unconnected to oil. Because the U.S. dollar is a hard currency, easily exchangeable, underwritten by the U.S. taxpayer, and founded upon decades of broadly consistent macro-economic policy management.
Those who believe that oil being traded in U.S. dollars gives the U.S. economy a unique advantage in the global economy have it exactly the wrong way around. The U.S. economy is the central economy in the global system because it is the most open, innovative, and productive economy in the world, and because of this, the U.S. dollar is the most convenient, liquid and reliable medium of exchange. 4 One can imagine another currency challenging it at some point in the future, but only on the basis of the openness of its underlying economy, and the depth of the capital markets denominated in it. And if the euro can’t do it yet, why does anyone imagine the yuan is up to the job?
Furthermore, the U.S. dollar’s position as the global reserve currency has been underwritten by Chinese economic policy. China has deliberately built up a huge pile of U.S. dollar-denominated reserves which, contrary to much press coverage and occasional threats of a big selloff from China, confirms rather than undermines the dollar’s status.
Yuan-Denominated Oil Futures?
When China, like any other economy, allows the trading of oil futures in yuan, the contract merely promises dated delivery of oil in exchange for yuan. The contract does not supply the oil, it does not forward the yuan to an oil producer, it is merely a transaction that allows a buyer guaranteed delivery of oil by paying for it in yuan. The counter-party has to supply the oil in exchange for the yuan. Somewhere along the supply-chain someone will be paying in U.S. dollars, unless the ultimate supplier wishes to hold yuan. And despite the fanfare over the last few years, the yuan still comprises a tiny share of foreign exchange reserves held globally. Indeed, at 1.1% of the total, the yuan is significantly behind both the Australian and Canadian dollars, meaning that–with pound sterling–Queen Elizabeth II’s head appears on 7.5 times more foreign currency reserves than Mao’s. If China wants to change that, it will need to open up its economy, liberate its capital account and start living up to, rather than repudiating, its reform promises. Shanghai-traded oil futures in themselves have nothing to do with it.
(It may be true that the Petro-yuan has no future, or that a change won’t be “sudden”, but this doesn’t prove that having oil trade in dollars isn’t still very important to the US)↩
(Couldn’t it be said that the cause of these deficits was also, in part, cold war military spending and the Vietnam war) ↩
(To portray this as financial opportunism by OPEC ignores other factors, such as the US’s significantly increasing the price it charged for wheat and supporting their enemy – Israel). Whether you approve or disapproval, isn’t it simplistic or misleading to attribute oil price increases to the idea that “OPEC never had such qualms”.↩
(This is the argument that the US Dollar deserves its dominance and the advantages the petrodollar gives it, not that it is unimportant to the US that oil trade in dollars)↩
If the petrodollar collapsed, the entire world would collapse with it into an economic crisis worse than the Great Depression. For a while.
A little history:
In the Bretton Woods conference of 1944, the US dollar was tied to gold at a fixed rate of 35 dollars per troy ounce of gold. This made the dollar very attractive as a reserve currency for many countries and created an artificial demand for dollars that allowed the US to print out money without it resulting in inflation. At one point the US held about 80% of the world’s gold reserves.
However, the US has a history for being bad at balancing budgets. In 1971, near the end of the Vietnam War, the US had a massive fiscal deficit. In the same way you fear for your money if your bank is making bad investments, countries who had their reserves in dollars started to feel uneasy with the way the US was spending (or printing money). They started buying back gold with the dollars they had, the equivalent of a bank run. The US realized it didn’t have enough gold reserves to cover the massive amounts of money they had printed out (like a fractional reserve bank), and so they unilaterally decided to let the dollar float in what is now called the Nixon Shock. It was a virtual default. Since then, the USD has lost more than 30 times its purchasing power relative to gold.
Without gold backing the dollar, demand for dollars would have collapsed. In fact, for a while, the “oil shocks” that resulted from Nixon’s decision caused considerable economic instability and inflation. The US had to figure out a way to stabilize and solidify the dollar.
So, how did they do it?
First, a deal was struck with Saudi Arabia, by far the biggest producer of crude oil in the 70s, that required them to sell their oil exclusively in US dollars. In exchange, the US offered the Saudis weapons and protection, something they readily accepted given the Middle East’s propencity to military conflict (in part exacerbated by the US itself). And thus the petrodollar was born. The idea was to make the global oil trade depend on the dollar, creating the demand needed to prevent too much inflation.
It was certainly easier for everyone (even if you had your differences with the US) to trade oil in US dollars, because it made markets more accessible, competitive and transparent. Soon after the Saudi deal, the entire world was trading oil in dollars, even the USSR. But it gave the US a massive amount of control, and since then the US has defended this fiercely with military force and political scheming. Recently, Gaddafi and Saddam tried to challenge the petrodollar, and the US immediately gave them a good dose of “democracy”. Saddam was falsely accused of having WMDs. They didn’t even bother to make up a good story for Gaddafi, and simply said he was an evil, corrupt despot (which he incidentally was). They’re both dead now. Al Qaeda and ISIS are both the result of the US funding proxy wars to topple governments they wanted to control. Just a few examples.
The US is the middle-man for the most lucrative trade in the world and much of its prosperity depends on keeping it so. With a high demand for dollars, they keep inflation under control, because all countries subsidize the growing money supply when they buy oil. It has worked brilliantly. The US has issued debt like crazy (and let’s not even mention the fact that the FED is a private institution), and despite this has had super cheap debt, because everyone wants those precious dollars to buy oil.
This has gone on for over 40 years now. 40 years of continuous fiscal deficits, military intervention in the Middle East (Iraq 2x, Libya, Syria, etc), artificially cheap debt, and a manufactured demand for dollars. All financed by the entire world’s consumption of oil.
Meanwhile, globalization has made the dollar the cornerstone of not only the oil industry, but virtually everything else, particularly the financial industry.
But make no mistake: the dollar itself is the biggest economic bubble there’s ever been. There is a massively corrupt and greedy element of geopolitical control in the dollar, rotten to the core. That greed is ultimately, I think, the biggest source of hate, sorrow and war in today’s world.
And yes: were it to suddenly collapse, it would be a disaster. The dollar supply would far and away exceed demand, resulting in high inflation. Everyone all around the world would scramble to get rid of their dollar reserves. And since everything, everywhere is connected to the dollar, it would be a catastrophe. It would all have to start with the US losing control of the oil markets.
It’s already happening now, to some extent. We’ve seen many instances where the US just can’t deal with the economic and political threats through military intervention as it did in the past:
- China and Russia are pushing towards a non-US dollar oil market. China already has plans for a gold-backed oil futures contract in yuan. Basically, China will do what the US was doing pre-Nixon, and that’s what made everyone want to buy dollars at the time. It’s already being called a “game changer” for the oil industry. It is by far the biggest threat to the petro-dollar right now, and the US is powerless to stop it.
- The Syria affair, one of the biggest screw ups in foreign policy history. Aside from that one, the US has a massive PR issue in the Middle East in general.
- Venezuela is collapsing and it seems Russia and China are ready for scavenging.
Times have changed. Today, even piss-poor countries like North Korea can force the US into submission, by threatening to fire a ballistic missile across the world and flatten an entire city. The world has become too unstable to use force as an effective foreign policy instrument.
A complete collapse of the petrodollar can’t happen overnight, though, because the dollar is backed by not just oil, but the world’s biggest economy. It also wouldn’t be a complete collapse, because the US itself is one of the biggest oil producers in the world, so a big chunk of trading will always be done in US dollars.
But a decline will gradually happen. The US government is running the biggest ponzi scheme in history and in doing so is keeping the entire world’s economy hostage to the privately owned FED. Since 2008, the US printed about 3 trillion dollars in their “quantitative easing” program, quadrupling the FED’s reserves. But China, Europe and Russia all want a piece of the pie and are fighting for it. In fact, I think the entire world is a little bit fed up with the whole thing too, especially in Europe, where the monumental cluster f**k that is the Middle East has resulted in serious demographic problems that aren’t on some remote corner of the world anymore… They are at their doorstep.
One day after we came back, we had to go to the White House for a meeting on oil and the
balance of payments.
And who should be the Undersecretary of the Treasury but my old mentor from Standard Oil
who had explained to me how offshore banking centers worked.
He explained to Herman and me that he told the Saudi Arabians, “You can charge whatever
you want for oil.”
This was right after America quadrupled the price of grain to finance the Vietnam War
in 1972-73, and OPEC responded by quadrupling the price of oil.
The Undersecretary of the Treasury explained to me that they could charge whatever they
wanted for oil.
He knew that the higher they charged, the more the American companies would be able
to charge on domestic oil.
But the Saudis had to recycle all of their dollars into the United States, into Treasury
bonds or the stock market.
“You can’t buy American companies, you can only buy stocks or bonds, and you have to
price your oil in dollars.
If you don’t, we’ll consider that an act of war.”
So here I was right in the middle of understanding how imperialism really worked.
This was not what is in most textbooks.
Most don’t talk about the balance of payments, but the key to financial imperialism is the
balance of payments.
The United States fights to prevent other countries from going back to the gold standard,
because at the time America went off gold in August 1971, every American dollar bill
was backed 25% by gold at $35 an ounce.
Well, finally there was no more surplus gold, and that’s what forced America off gold.
Its price immediately went way up.
As an American citizen, I wasn’t allowed to buy gold.
So I knew it was coming but I couldn’t make any money off it.
Instead I bought Tibetan and Indian art, Asian art primarily.
To make a long story short, I became a financial advisor to the Canadian government as a result
of the stock brokerage work in Montreal.
They said, “We need somebody who knows the American stock and bond market”.
I was at that time the highest paid economist per diem in the United States for financial
So I got a call saying, “They’re going to want to hire you but there’s only one way
in which they can tell how intelligent you are.
Do you know about wine?”
When I grew up at the University of Chicago, the university paid its professors so badly
that to make more money, their ideal was to be a wine steward at the Pump Room, which
was the fancy restaurant in Chicago.
It was featured in the Blues Brothers comedy with John Belushi.
Anyway, I took a sommelier course, got a license, and brought two bottles, one Richebourg and
one La Tâche that I bought in the remainder carton at an uptown store.
I gave them to my host in Ottawa and the government guys said, “That’s the guy we want.”
So I wrote a study that Canada didn’t have to borrow money abroad for the provinces to
They could create their own money.
Basically, what I wrote was the first example of what’s now called Modern Monetary Theory,
that governments can create their own money, their own credit.
They don’t need a foreign-currency backing for it, and so all basically the same circular
flow analysis that I’d developed from my history of thought.
a Physiocratic analysis.
One of the top investment analysts for the Royal Bank decided to become the head of personnel.
He said he thought that it’s a personality problem that economists can’t understand how
the world works, that there’s a particular kind of dumb person that becomes an economist.
It’s a kind of autism, of thinking abstractly without a sense of economic reality.
So he got me an appointment with the Secretary of State of Canada.
In Canada the Secretary of State is in charge of education, films and culture.
So I became Canada’s cultural adviser, which is what I thought was fine all along, and
I wrote a report.
Around that time I also was an economic adviser to the
United Nations Institute for Training and Research, UNITAR, writing their reports on
North/South debt, the foreign debt of third world countries, denominated in dollars, and
how this was deranging their economies.
They had a meeting in Mexico financed by the Mexican president and I was invited down there.
I gave a report saying that there was no way that the third-world debts can be paid.
My first job I worked on at Chase Manhattan was to estimate how much export revenue Argentina,
Brazil and Chile could make.
The idea was that all of their export earnings could enable them to pay interest on money
borrowed from US banks.
The idea was that the entire trade surplus should be pledged as debt service to the American
My job was to think how much that was, and what should Chase’s share be.
So, at the Mexican UNITAR conference, I said that these debts cannot be paid, therefore
they should not be paid, they should be canceled.
There was quite a stir over that.
Well at the end of the conference they had the rapporteurs summarizing the papers.
The US rapporteur said that Dr. Hudson has given a report saying that third-world countries
should export more in order to pay their debts.
I stood up slowly and said, “I must insist that the President of Mexico offer a public
explanation, apology to me and the conference.
This rapporteur has inverted and reversed everything I said.
I believe he has a covert purpose.
I’m pulling out the American delegation and I’m pulling out the Canadian delegation too.
We cannot be a part of this travesty.”
Then I walked out, wondering what’s gonna happen!
The Russian delegate came out laughing and said, “Ah!
You’ve dominated the whole conference.
You’ve made chaos out of it.
You’ve embarrassed the CIA.
This is fantastic.
Here’s my card in New York.”
Later that evening I was told, “You know, they’re looking for you to beat you up.”
Well as it happened an old girlfriend of mine was in a group who were in Mexico for an
They were surrealist artists from Amherst, and they were also doing a surrealist ballet.
So I went to the ballet with them and they said, “Look!
The thugs are there.”
So I hid out with them on the stage in their ballet.
The goons were looking in the audience and I was on the stage and we were all just surrealistic.
Nobody knew how to dance or anything, it was all just surrealistic.
And they, you know, the goons all went home.
I learned that if they can’t find you, they usually give up and leave you alone.
I went back to New York, but I realized that the debt issue was so controversial –
the idea that debt couldn’t be paid.
I spent about a year and I’d got through medieval period, Europe, World War One, and then even
Greece and Rome.
But then I found — it was about 1980, 1981, at that time I sold my house on the Lower
Side and moved into a loft near Wall Street which was very low price there at that time,
(I bought it for $20,000.
Later I sold it for $580,000 but that’s another story), it shows you the real estate in New
York, but at that time nobody wanted to live in lofts, and I wanted a big loft because
I had a big library at that time and a lot of art that I wanted to keep.
So basically I stopped working.
I realized that in the Bible there was the Jubilee Year and there were references to
Sumer and Babylonia and that there was a background of the biblical debt cancellations, almost
the same word for deror in Hebrew is andurarum in Babylonian.
I found that there was all this material and that had never been written in anywhere outside
of the field of assyriology.
There was no economic history of the ancient Near East, no economic history of Sumer and
It was all about religion and some culture, Gilgamesh and all that, but not what I was
most interested in, which was the debt cancellations.
So I wrote a draft of what I could find by 1984.
And one of my friends was the Ice Age archaeologist Alex Marshak.
Although he lived in New York, he was connected to Harvard’s Peabody Museum.
He showed it to the head of the Peabody, Karl Lamberg-Karlovsky, who told me, “This is great!
Nobody else is working on it.”
He appointed me a fellow of the Peabody Museum in Babylonian economic archeology.
I thought, “This is wonderful, this is really what I want to do.”
So I spent the next maybe three years writing the first draft of what became the book that’s
being published in a few months, “… and forgive them their debts”: Credit and Redemption
from Bronze Age Finance to the Jubilee Year.
I submitted it to the University of California Press.
They sent it to scholars to referee, who said that it was impossible that debts could be
Their argument was that if debts were cancelled, who would lend money?
That’s what Rabbi Hillel argued in the Judaic tradition.
I said, “Most debts were not the result of loans.
Most debts were when the crops would fail and the cultivators could not pay the palace
for the fees they’d run up, the rental fees for the land, the fees for the water, for
the draught animals, or the beer lady for the beer that they’d drunk.
So every ruler, when they would take the throne in Sumer and Babylonia, for a thousand years,
would start their rule by cancelling the debts with a clean slate, an amnesty.
It’s the same amnesty of the kind that Egypt’s Rosetta Stone commemorates.
Everybody knows that the Rosetta Stone has trilingual inscriptions of Greek, Egyptian
But few know that it’s a fiscal debt cancellation.
That’s what we call cognitive dissonance, people can’t imagine that the debts were cancelled.
I realized that this was very controversial, and so my Harvard colleague, Karl Lamberg-Karlovsky,
suggested that we hold a series of meetings, and asked me to organize them.
He said that we would hold a colloquium for each controversial chapter of my book.
We decided to have a meeting every two years, and invite every major specialist from early
Sumer, the Neo-Sumerian period, Babylonia, other Near Eastern realms, and Egypt.
Their role was to collect everything they had on whatever the meetings’ topic would
Since I was in New York, I worked with the leading Hebraic linguist Baruch Levine at
I needed someone who was respected in the linguistic field to invite people, because
most Sumerologists, readers of cuneiform, stayed away from economics, because the mainstream
economic idea of how society developed is as if Margaret Thatcher would have created
How would she have done it, or Milton Friedman, or what we call vulgar Marxists who think
that it was the idea that seemed plausible to Engels when he wrote The Origin of the
Family, Private Property and the State.
That’s not how early history actually occurred.
So the Sumerologists wouldn’t talk to economists.
But because I was now an archaeologist with Harvard in the anthropology department, they
agreed to come to the conference.
The first meeting, in 1994, was on privatization in the ancient Near East and classical antiquity.
Harvard published that.
Two years later, we moved on to the second volume, which was on land use and real estate
ownership: How did property ownership come into being.
Then, we had planned from the very beginning for the third colloquium volume.
That was on debt and economic renewal in the ancient Near East.
I asked for everything that people could find about debt cancellations.
We found that these occurred all the way through the first millennium.
Herodotus talked about debt cancellations in Babylonia.
It was a tradition remaining in the Near East for new rulers taking the throne to cancel
agrarian debts, to start their reign with the economy in balance.
Already in Hammurabi’s time 1750 BC, scribes would calculate the growth of compound interest,
and at that time it was 20% interest.
This growth diagram is the same exponential chart that I’d drawn up in the savings banks
in the 1960s to trace the growth of American debt.
So they were quite aware of the fact that debts couldn’t be paid and that, if you
insisted on them be paid, you would have debtors falling into bondage.
So they freed the bond servants, or for debtors had sold their means of self-support, the
land, they returned the land that had been sold under economic distress.
The word “distress” means the collateral that you’ve pledged to a creditor.
It’s an Irish term basically.
So we published that volume.
By that time I’d got the people Baruch and Karl and I had invited – the leaders of
their fields – agreeing with my interpretation.
We then followed it up with another meeting at the British Museum on the origins of money
and accounting, and the idea that money was created not for barter, not for trade in goods
and services, but to denominate debts.
If a cultivator owed a debt, how did he get money?
So we did the history of money.
Then, the one thing we hadn’t done finally was the origins of labor and what it was paid.
That took ten years to complete, and we found that the origins of labor was organized basically
in the palace economy, the palaces and temples.
The main use of such organized labor from the Neolithic and Bronze Age to classical
antiquity was to fight in the army and to work as corvée labor to build public infrastructure.
So how do you get a supply of labor?
You assign it land tenure.
Land rights were created to assign families enough to support themselves so that they
could perform corvée labor and fight in the army.
So taxes came first, then came land tenure, based on what labor you had to supply.
Attempts to substitute someone to work on the corvée became the basis for paying labor.
So all of the payments came from what today would be called the public sector.
That’s not really a very good term.
It was really the palatial sector, the palace and the temples, as opposed to the community-based
family on the land.
So we had a new analysis of the origins of property, not just individuals grabbing,
as Engels had thought.
Property was created by the public sector, by the palaces, as assignment of land as needed.
How much land area is needed in order to supply the labor for the public infrastructure, corvée
work and service in the army?
This was the reverse of what’s taught in economic textbooks today, which is, as I said, how
Margaret Thatcher and right-wingers and Donald Trump would have designed an economy if they
went back in a time machine.
So after organizing and editing these five volumes, I’m now writing my own popular version,
starting with a history of debt.
Then will come Temples of Enterprise, a series of books on classical antiquity.
I’m now following up with Greece and Rome.
Throughout early Greece and Rome, the main fight was between creditors and debtors.
Creditors ended up grabbing the land.
The same fight occurred all the way down through the Byzantine Empire.
The most divisive tension throughout history, from 3rd-millennium Sumer to 2nd-millennium
Babylonia to the 9th and 10th century in the Byzantine Empire is between the palace wanting
to collect taxes and have labor for the army, and creditors wanting this land and labor
This way of getting the economic surplus is not the way that Marx described it as being
obtained under capitalism, by employing labor to produce goods to sell at a profit.
It was by debt and taking interest in ultimately foreclosing in land, which was the real objective.
In the 9th century there was a big
fight against strong royal power.
It was sort of like Donald Trump and the Tea Party Republicans are fighting against the
state, like the privatization in the Soviet Union fighting against the state.
The Byzantine emperor invited general Bardas to a big meal.
The general said, “There’s only one thing that you should do if you want to end the
You have to tax the wealthy families so that they don’t have any surplus at all.
You have to give them so much burden that they can’t fight against you.
You have to prevent the polarization of wealth, because if you let the private sector make
an enormous amount of wealth, they’re going to try to fight against you and keep all the
wealth for themselves that you and the palace are now getting.”
This idea was expressed all the way back in the 7th century 6th century BC with Thrasybulus
and Periander of Corinth.
When Thrasybulus took Periander’s herald to a field of grain and said, “Here’s what you
The land was a field of grain and he took a scythe and he cut off the tops, to make
all the grain of equal height.
So Periander went back and exiled the wealthy families, seized their property.
There was probably a bit of fighting there, and that is basically the fight throughout
So that’s what I’ve been working on for the last 20 years.
Question: How did you take up the interest in Chinese economy?
Hudson: As Samir Amin said at the meeting yesterday, China is the economy that is trying
to be the exception to the Western economic model.
That model is forcing a choice between civilization and barbarism.
The West is moving rapidly into economic barbarism and militarism.
As you can see, the austerity program of the Euro is destroying the economy there.
The United States is cutting taxes on the rich, while indebting the working class very
The one country that is independent and not taking the advice of the World Bank and the
International Monetary Fund is China.
So we’re hoping to do what we can to make the Chinese economy successfully resistant.
What that means is how is China going to handle its real estate, how is it going to handle
its debt, how is it going to handle its tax system.
What I’m trying to do is what David Harvey was trying to do in the speech he gave yesterday:
getting Chinese Marxists to read volume 2 and especially volume 3 of Capital, where
Marx discusses the dynamics of finance.
Marxism is much more than volume 1 of Capital.
You have to read volumes 2 and 3, and especially the elaboration that Marx wrote in the drafts
that he left for volumes 2 and 3, his Theories of Surplus Value where he discusses the history
of economic thought leading up to him.
You realize how Marx was the last great economist in the classical tradition.
He showed that capitalism itself is revolutionary, capitalism itself is driving forward, and
of course he expected it to lead toward socialism, as indeed it seemed to be doing in the nineteenth
But it’s not working out that way.
Everything changed in World War One.
Afterward you had an anti-classical economics, which really was an anti-Marxist economics.
The fight for marginalist theory, for Austrian theory, the fight for junk economics that
we have today, is basically a fight against Marxism, because Marx showed the logical conclusion
to which the Physiocrats, Adam Smith, John Stuart Mill, Ricardo and Malthus, the conclusion
it was all leading was the synthesis that he made.
It was later developed by people like Thorstein Veblen and Simon Patten in the United States.
So I’m hoping that I can contribute what I can to help China’s economy to avoid the financialization
process and dynamic that is destroying the West.
Trump describes a hypothetical call to Exxon mobile in which he asks for campaign money in exchange for special treatment with permits.
The People’s Bank of China (PBOC) started working on its digital currency (CBDC) in 2014. In April, the PBOC introduced pilot programs in four large cities. In July, China’s ride-hailing company said it was working with the PBOC to test the Chinese digital currency on its platform. In August, China’s Commerce Ministry said it would expand the program to Beijing and Hong Kong. The PBOC also indicated the plan to test the digital yuan’s capabilities and risks in cross-border transactions during the 2022 Beijing Winter Olympics. The digital yuan is known as “DC/EP,” or “digital currency/electronic payment.” Users will not require bank accounts. The digital wallet might allow touch payments without the internet. Unlike Bitcoin, it will be highly centralized. And the central bank seeks “controllable anonymity.” The CCP is will more likely use the digital yuan to replace all renminbi in circulation and increase surveillance on Chinese citizens. On August 7, the Treasury sanctioned 11 Chinese Communist Party and Hong Kong officials. And China’s large state-controlled banks are complying because the US dollar currently holds a dominant position. Apparently, the CCP intends to bypass the dollar system. Once complete, Beijing could share the digital currency technology with other countries and ask the Belt and Road participating countries to accept the digital yuan, creating a digital belt and road. A cheaper, faster payment system that avoids US sanctions would be a challenge to the US dollar dominance. According to the BIS, about 50 countries participated in the Central Bank Digital Currencies (CBDC) projects. The Federal Reserve has been researching on the digital dollar. On August 13, Governor Lael Brainard brought up some obstacles. Trust in the CCP has been deteriorating even among belt and road countries. Some have canceled, downsized, or postponed the projects to avoid debt traps. It is hard to say if they’ll adopt the digital yuan. That doesn’t mean ignoring challenges to the USD. Instead of merely catching the digital trends, the US government and the Fed should focus on responsible fiscal and monetary policies that protect the market’s confidence in the USD.
TranscriptChinaâ€™s digital currency (CBDC) being tested has caught the worldâ€™s attention. And a Foreign Affairs article painted a picture as such. In 2022, Iran is purchasing critical components for its nuclear and missile programs. The funds come from selling oil to China and Europe. And all transactions are done with the digital yuan that bypasses U.S.-controlled financial systems. Americaâ€™s ability to sanction its enemies is significantly weakened. In this video, weâ€™ll discuss whether the digital yuan can challenge the USD dominance. What risks will it bring? And how is it different from the current digital payments and cryptocurrencies? The Leader in Large-Scale Testing The Peopleâ€™s Bank of China, Chinaâ€™s central bank, started working on its own digital currency back in 2014. In May 2019, the BBC revealed Facebook was planning to launch its version of cryptocurrency, Libra, by the first quarter of 2020. This motivated the Chinese Communist Party to speed up the digital yuanâ€™s development. And regardless of whether the Libra would be approved by western governments, the CCP wanted to win the race. In April 2020, the central bank introduced a pilot program in four of Chinaâ€™s large cities. And screenshots of the digital wallet mobile app were circulated on the internet showing functions of making and receiving payments. In Suzhou, a large city west of Shanghai, the government employees would start receiving half of their transport subsidies in digital yuan. In July, Chinaâ€™s ride-hailing company, Didi, said it was working with the People's Bank of China to test the digital yuan on its transportation platform. And in mid-August, Chinaâ€™s Commerce Ministry said it would expand the pilot program to regions that include Beijing and Hong Kong. The central bank also indicated the plan to test the digital yuan systemâ€™s capabilities and risks in cross-border transactions, which will take place during the 2022 Beijing Winter Olympics. Under the proposed timeline, a digital yuan-based international payment system will start running in about a year and a half. It will likely be the worldâ€™s first government-operated digital currency system. As an authoritarian regime, the Chinese Communist Party might not be concerned about violating peopleâ€™s privacy when pushing for the digital yuan. Once the tests turn out successful, large scale adoptions might complete very quickly. So how will the digital yuan work? â€œControllable Anonymityâ€ The digital yuan doesnâ€™t have an official name but is known internally as â€œDC/EP,â€ which is just short for â€œdigital currency/electronic payment,â€ Unlike the current digital payment systems such as Alipay and WeChat Pay, digital yuan users will not require bank accounts. And according to Mu Changchun, the Peopleâ€™s Bank of China official in charge of digital yuanâ€™s development, the digital wallet will allow some form of touch payments where transactions can occur even without the internet. Compared to Bitcoin, which is believed to be decentralized and anonymous, the digital yuan will be highly centralized. Although the central bank claimed the parties to the transactions will be anonymous, in practice, it seeks quote â€œcontrollable anonymity.â€ It will be able to track the usersâ€™ purchases. And therefore, the system could help fight money laundering, gambling, and terror financing. The Peopleâ€™s Bank of China has also claimed the digital currency was intended to replace some physical cash in circulation, also known as M0. That was not very convincing. China already has a very high level of cashless rate. According to the central bankâ€™s report, by the end of 2018, 82.39% of Chinaâ€™s adults used digital payments. There are 900 million people that use Alipay. And, in 2019, cash only accounted for 4% of household financial assets versus 24% in the United States. It would be hard to believe all the resources spent are just to erase the 4%. â€œActually, replacing the M0 would be just a start. It will not be limited to M0. Instead, it should replace all the currency and maximize the digital currencyâ€™s functionality and value. Otherwise, there will be issues with return on investment,â€ writes Wang Yongli, former vice president of Bank of China. Therefore, the CCP is will more likely use the digital yuan to replace all the renminbi in circulation and increase its surveillance on Chinaâ€™s economy and every Chinese citizen, especially political dissidents. When the central bank can create and issue money digitally, it can seize the citizensâ€™ money with one push of a button. And will the digital yuan help the CCP challenge the US dollar? â€œThe Digital Belt and Roadâ€ On August 7th, the U.S. Treasury Department sanctioned 11 Chinese Communist Party and Hong Kong officials. The targets included the director of the CCPâ€™s liaison office in Hong Kong, Luo Huining, and Hong Kongâ€™s chief executive, Carrie Lam. On August 12th, Bloomberg News reported that Chinaâ€™s largest state-controlled banks are taking steps to comply with U.S. sanctions. This might sound surprising to many people. Why would Chinaâ€™s banks do anything against their government by a foreign countryâ€™s order? But the reality is the U.S. dollar currently holds a dominant position in global finance. And in 2019, almost 90% of international transactions were conducted in US dollars. The U.S. government can ask all banks that process US dollar payments to stop providing services to those under sanctions. And, apparently, the CCP does not want to be put in such a position. It intends to bypass the dollar payment system. In the state media CGTNâ€™s words, the digital currency provides quote â€œa functional alternative to the dollar settlement system and blunts the impact of any sanctions or threats of exclusion both at a country and company level.â€ Aditi Kumar and Eric Rosenbach at Harvard Kennedy School, authors of the Foreign Affairs article, believed once the digital yuan is successfully launched in China. Beijing could simply share this technology to countries with the same motives. For example, Iran could adopt the same technology and build a compatible digital currency system. And the trade between the two countries would technically be no longer trackable by the US government. And what might happen when the People's Bank of China does become the first central bank to introduce a digital currency that works? Matthew Graham is the chief executive officer of Sino Global Capital. He predicted quote: â€œItâ€™s very possible that other countries adopt the China framework, and then a first-mover advantage turns into a strong network effectâ€¦This is the best-case scenario for China.â€ Beijing could ask the Belt and Road Initiative's participating countries to start accepting the digital yuan. And this might include using the digital yuan to make loan payments. It could pay to install infrastructures such as point-of-sale terminals and lower the transaction fees, effectively create a digital belt and road. As Bank of Americaâ€™s analysts pointed out, Asian countries like Thailand, Singapore, and South Korea are assessing their digital currencies. Those currencies might be integrated with the yuan-based systems and quote â€œespecially if it entails significantly lower transaction costs and real-time transfers.â€ In fact, the CCP has already been doing that under current systems. On August 3, China waived transaction fees between the yuan and 12 currencies, including the Russian Rouble, the Singapore dollar, the Korean Won, and the Thai Baht. According to the State Administration of Foreign Exchange, this move was to quote: â€œactively cooperate with the national belt and road development strategy.â€ A cheaper, faster payment system that can also avoid US sanctions would be viewed as a challenge to the US dollarâ€™s dominance. Then what should the United States do about it? Obstacles to The Digital Dollar The Peopleâ€™s Bank of China is not the only central bank working on the digital currency. According to the Bank for International Settlement, about 50 countries participated in the Central Bank Digital Currencies projects in 2019. Michael Casey at CoinDesk believes there is a lot at stake. â€œA China victory in the digital currency race would have profound negative effects for the U.S., and Western capitalism generally,â€ he said. "If the U.S. doesnâ€™t catch up soon, itâ€™s going to lose.â€ Kumar and Rosenbach suggested the United States develop the dollar version of digital currency. And they hope it will quote: "combine the strength and stability of the US dollar with the convenience and efficiency of digital technology." The Federal Reserve has indeed been conducting research and tests on hypothetical digital dollars. But, on August 13, Governor Lael Brainard brought up some significant obstacles to having a digital dollar. Among them was whether the Fed can build a digital currency system that can resist cyberattacks. And another would be to settle the legal question of whether the over 100-year old Federal Reserve Act allows issuance of digital currency at all. On top of those, we should expect to see pushbacks from Americans who value privacy and limited government surveillance. It seems a lot of debate will take place before the Fed receives a go-ahead. And the chance the Fed will roll out a digital dollar before the digital yuan would be minimal. The Future of the Dollar â€œRemember that credit is money.â€ This was a quote by Benjamin Franklin. And it revealed the essence of modern currencies. Since 1971 when President Richard Nixon declared that the dollar was no longer convertible to gold, we lived in a world with only fiat currencies backed by the faith in their respective governments and economies. More importantly, a fiat currency's fundamentals depend on whether a country has checks and balances, the rule of law, and a market-driven exchange rate. The CCP provides none of those. Therefore, in reality, the Chinese yuan has very low credibility. And although China is the second largest economy, the yuanâ€™s usage falls behind the EURO, the Japanese Yen, and the British Pound. The trust in the CCP has been deteriorating even among belt and road countries. Some of them have canceled, downsized, or postponed the projects to avoid potential debt traps. It is hard to say whether they will gladly adopt a digital yuan issued under the CCPâ€™s control. But that doesnâ€™t mean we can ignore challenges faced by the US dollar. We believe in the long run, the dollar's dominance will have to be secured by the US economy's strength, not the other way around. Therefore, instead of merely catching the digital currency trends, the US government and the Federal Reserve should focus on introducing responsible fiscal and monetary policies that protect the marketâ€™s confidence in the dollar. How much international acceptance do you think the digital yuan will receive? Leave your comments below. Thank you for watching Unseen Fortunes. If you enjoyed our content, please click like, subscribe, and share. Weâ€™ll see you next time!
Reserve Currency Status
Brainard’s speech didn’t address recent concerns regarding the reserve currency status concerns of the US dollar or China’s current lead in the CBDC race, which could advance its national interests. The reserve currency status is among others determined by the resilience of a country’s payment system, depth and trust in the well-functioning of the capital markets and exchanges, appeal to and innovation acumen of its tech industry and financial market infrastructure, international thought leadership, lead into climate change solutions and the global military might and power base, which reinforces adoption of a currency. (Customers pay for oil in the currency of the nation which offers regime protection at the oil fields. Asians and Europeans move every month out of their home currency in favor of the US Dollar to pay for their imported oil bill). Global adoption can also be ensured if censorship or control concerns, linked to the use of the CBDC, can be substantially mitigated.
Referring to innovation acumen and climate change solutions, could the central bank digital currency project incorporate scientific data observations regarding climate change triggering terrestrial and atmospheric trends? Could TRACE, a consortium tracking greenhouse gas emissions 24/7 by satellite, foster a balance between monetary policy and a thriving planet and be made part of this initiative? Could monetary policy be framed incorporating observations from those data trends, with support from climate scientists? Could digital currency be directed at ZIP code levels, impacted by climate change calamities? From a supervisory perspective, could solvency weightings for banks’ asset exposure be dynamically set as a function of the data observations and the remaining finite carbon budget? Could bank stress testing scenarios under CCAR (Comprehensive Capital Assessment and Review), undertaken to assess the banks’ adequacy of solvency levels, be articulated as an extended continuum of such climate change observations?
Innovative monetary design ingenuity linked to climate change solutions can only solidify the continued appeal in the US dollar as the global reserve currency.
The Current Five-Headed Crisis
The current crisis is five-headed in nature, characterized by a
- public health crisis, a
- financial crisis, a
- social justice crisis, a
- climate change crisis and a
- trust crisis in institutions and international trade.
Could a central bank digital crypto currency address each of the crisis challenges? How could financial inclusion offer a dent into the social injustice paradigm? How could distributed, decentralized and crypto-graphed data sharing enhance trust in institutions? How could the Central Bank consensus protocol be made more energy efficient than the private crypto-currency protocols? How could smart contract design introduce a central bank digital currency-based reward economy?
Instead of offering mere helicopter money, could compensation be offered in exchange for contributions to the regenerative (climate change) and caring economy (childcare and parental care at home)? How could blockchain supported supply chain data trace the global export and import flows in relationship to FX trades and exchange rates? How could market intervention and/or sustainable change to circular economic paradigms be steered on the back of those data?
Need For A New Anchor Currency
The debasing of currencies by the most important central banks ($6 Trillion of QE in the US alone), the arising currency tensions in the emerging markets (e.g. Lebanon, Turkey, South-Africa,….) and the COVID-19 default impact on total debt outstanding of $258 trillion per Q1 2020 will only accelerate the need and call for debt rescheduling and ensuing FX rate mechanism interventions. If gold is no longer an option, could a central bank issued stablecoin, finite in supply, become a store of value or new anchor currency to manage the restructurings and market support activities?
Brainard’s speech makes reference to a new initiative with the Bank of International Settlement’s Innovation Hub. This initiative could provide a useful avenue to design such Central Bank stablecoin.
The collateral base of the stablecoin could consist of a reserve of natural capital assets, consisting of
- 50% of land and forests,
- 35% In renewable energy initiatives, and
- 10% in the top 100 most compliant ESG companies and
- 5% in biotech research.
The collateral base would be managed dynamically, but would also benefit from monetary policy and prudential supervisory decisions aimed at regenerating the natural capital base on earth and replenishing its finite carbon reserve. The supply could be managed, within a range, as a function of the TRACE observations.
On the occasion of Bretton Woods II, the new Central Bank Stablecoin could be introduced and offered, akin to the gold standard, as a fixed rate against all other fiat currencies, including the US dollar.
Milton Friedman once observed, only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. Then, ideas once dismissed as unrealistic or impossible might just become inevitable.
Polls suggest that Americans tend to differentiate between our “good war” in Iraq — “Operation Desert Storm,” launched by George HW Bush in 1990 — and the “mistake” his son made in 2003.
Across the ideological spectrum, there’s broad agreement that the first Gulf War was “worth fighting.” The opposite is true of the 2003 invasion, and a big reason for those divergent views was captured in a 2013 CNN poll that found that “a majority of Americans (54%) say that prior to the start of the war the administration of George W. Bush deliberately misled the U.S. public about whether Baghdad had weapons of mass destruction.”
But as the usual suspects come out of the woodwork to urge the US to once again commit troops to Iraq, it’s important to recall that the first Gulf War was sold to the public on a pack of lies that were just as egregious as those told by the second Bush administration 12 years later.
The Lie of an Expansionist Iraq
Most countries condemned Iraq’s 1990 invasion of Kuwait. But the truth — that it was the culmination of a series of tangled economic and historical conflicts between two Arab oil states — wasn’t likely to sell the US public on the idea of sending our troops halfway around the world to do something about it.
So we were given a variation of the “domino theory.” Saddam Hussein, we were told, had designs on the entire Middle East. If he wasn’t halted in Kuwait, his troops would just keep going into other countries.
As Scott Peterson reported for The Christian Science Monitor in 2002, a key part of the first Bush administration’s case “was that an Iraqi juggernaut was also threatening to roll into Saudi Arabia. Citing top-secret satellite images, Pentagon officials estimated in mid-September [of 1990] that up to 250,000 Iraqi troops and 1,500 tanks stood on the border, threatening the key US oil supplier.”
A quarter of a million troops with heavy armor amassed on the Saudi border certainly seemed like a clear sign of hostile intent. In announcing that he had deployed troops to the Gulf in August 1990, George HW Bush said, “I took this action to assist the Saudi Arabian Government in the defense of its homeland.” He asked the American people for their “support in a decision I’ve made to stand up for what’s right and condemn what’s wrong, all in the cause of peace.”
But one reporter — Jean Heller of the St. Petersburg Times — wasn’t satisfied taking the administration’s claims at face value. She obtained two commercial satellite images of the area taken at the exact same time that American intelligence supposedly had found Saddam’s huge and menacing army and found nothing there but empty desert.
She contacted the office of then-Secretary of Defense Dick Cheney “for evidence refuting the Times photos or analysis offering to hold the story if proven wrong.” But “the official response” was: “Trust us.”
Heller later told the Monitor’s Scott Peterson that the Iraqi buildup on the border between Kuwait and Saudi Arabia “was the whole justification for Bush sending troops in there, and it just didn’t exist.”
Dead Babies, Courtesy of a New York PR Firm
Military occupations are always brutal, and Iraq’s six-month occupation of Kuwait was no exception. But because Americans didn’t have an abundance of affection for Kuwait, a case had to be built that the Iraqi army was guilty of nothing less than Nazi-level atrocities.
That’s where a hearing held by the Congressional Human Rights Caucus in October 1990 played a major role in making the case for war.
A young woman who gave only her first name, Nayira, testified that she had been a volunteer at Kuwait’s al-Adan hospital, where she had seen Iraqi troops rip scores of babies out of incubators, leaving them “to die on the cold floor.” Between tears, she described the incident as “horrifying.”
Her account was a bombshell. Portions of her testimony were aired that evening on ABC’s “Nightline” and NBC’s “Nightly News.” Seven US senators cited her testimony in speeches urging Americans to support the war, and George HW Bush repeated the story on 10 separate occasions in the weeks that followed.
In 2002, Tom Regan wrote about his own family’s response to the story for The Christian Science Monitor:
I can still recall my brother Sean’s face. It was bright red. Furious. Not one given to fits of temper, Sean was in an uproar. He was a father, and he had just heard that Iraqi soldiers had taken scores of babies out of incubators in Kuwait City and left them to die. The Iraqis had shipped the incubators back to Baghdad. A pacifist by nature, my brother was not in a peaceful mood that day. “We’ve got to go and get Saddam Hussein. Now,” he said passionately.
Subsequent investigations by Amnesty International, a division of Human Rights Watch and independent journalists would show that the story was entirely bogus — a crucial piece of war propaganda the American media swallowed hook, line and sinker. Iraqi troops had looted Kuwaiti hospitals, but the gruesome image of babies dying on the floor was a fabrication.
In 1992, John MacArthur revealed in The New York Times that Nayirah was in fact the daughter of Saud Nasir al-Sabah, Kuwait’s ambassador to the US. Her testimony had been organized by a group called Citizens for a Free Kuwait, which was a front for the Kuwaiti government.
Tom Regan reported that Citizens for a Free Kuwait hired Hill & Knowlton, a New York-based PR firm that had previously spun for the tobacco industry and a number of governments with ugly human rights records. The company was paid “$10.7 million to devise a campaign to win American support for the war.” It was a natural fit, wrote Regan. “Craig Fuller, the firm’s president and COO, had been then-President George Bush’s chief of staff when the senior Bush had served as vice president under Ronald Reagan.”
According to Robin Andersen’s A Century of Media, a Century of War, Hill & Knowlton had spent $1 million on focus groups to determine how to get the American public behind the war, and found that focusing on “atrocities” was the most effective way to rally support for rescuing Kuwait.
Arthur Rowse reported for the Columbia Journalism Review that Hill & Knowlton sent out a video news release featuring Nayirah’s gripping testimony to 700 American television stations.
As Tom Regan noted, without the atrocities, the idea of committing American blood and treasure to save Kuwait just “wasn’t an easy sell.”
Only a few weeks before the invasion, Amnesty International accused the Kuwaiti government of jailing dozens of dissidents and torturing them without trial. In an effort to spruce up the Kuwait image, the company organized Kuwait Information Day on 20 college campuses, a national day of prayer for Kuwait, distributed thousands of “Free Kuwait” bumper stickers, and other similar traditional PR ventures. But none of it was working very well. American public support remained lukewarm the first two months.
That would change as stories about Saddam’s baby-killing troops were splashed across front pages across the country.
Saddam Was Irrational
Saddam Hussein’s 1990 invasion of Kuwait was just as illegal as the US invasion that would ultimately oust him 13 years later — it was neither an act of self-defense, nor did the UN Security Council authorize it.
But it can be argued that Iraq had significantly more justification for its attack.
Kuwait had been a close ally of Iraq, and a top financier of the Iraqi invasion of Iran in 1980, which, as The New York Times reported, occurred after “Iran’s revolutionary government tried to assassinate Iraqi officials, conducted repeated border raids and tried to topple Mr. Hussein by fomenting unrest within Iraq.”
Saddam Hussein felt that Kuwait should forgive part of his regime’s war debt because he had halted the “expansionist plans of Iranian interests” not only on behalf of his own country, but in defense of the other Gulf Arab states as well.
After an oil glut knocked out about two-thirds of the value of a barrel of crude oil between 1980 and 1986, Iraq appealed to OPEC to limit crude oil production in order to raise prices — with oil as low as $10 per barrel, the government was struggling to pay its debts. But Kuwait not only resisted those efforts — and asked OPEC to increase its quotas by 50 percent instead — for much of the 1980s it also had maintained its own production well above OPEC’s mandatory quota. According to a study by energy economist Mamdouh Salameh, “between 1985 and 1989, Iraq lost US$14 billion a year due to Kuwait’s oil price strategy,” and “Kuwait’s refusal to decrease its oil production was viewed by Iraq as an act of aggression against it.”
There were additional disputes between the two countries centering on Kuwait’s exploitation of the Rumaila oil fields, which straddled the border between the two countries. Kuwait was accused of using a technique known as “slant-drilling” to siphon off oil from the Iraqi side.
None of this justifies Iraq’s invasion of Kuwait. But a longstanding and complex dispute between two undemocratic petrostates wasn’t likely to inspire Americans to accept the loss of their sons and daughters in a distant fight.
So instead, George HW Bush told the public that Iraq’s invasion was “without provocation or warning,” and that “there is no justification whatsoever for this outrageous and brutal act of aggression.” He added: “Given the Iraqi government’s history of aggression against its own citizens as well as its neighbors, to assume Iraq will not attack again would be unwise and unrealistic.”
Ultimately, these longstanding disputes between Iraq and Kuwait got considerably less attention in the American media than did tales of Kuwaiti babies being ripped out of incubators by Saddam’s stormtroopers.
Saddam Was “Unstoppable”
A crucial diplomatic error on the part of the first Bush administration left Saddam Hussein with the impression that the US government had little interest in Iraq’s conflict with Kuwait. But that didn’t fit into the narrative that the Iraqi dictator was an irrational maniac bent on regional domination. So there was a concerted effort to deny that the US government had ever had a chance to deter his aggression through diplomatic means — and even to paint those who said otherwise as conspiracy theorists.
As John Mearsheimer from the University of Chicago and Harvard’s Stephen Walt wrote in 2003, “Saddam reportedly decided on war sometime in July 1990, but before sending his army into Kuwait, he approached the United States to find out how it would react.”
In a now famous interview with the Iraqi leader, U.S. Ambassador April Glaspie told Saddam, “[W]e have no opinion on the Arab-Arab conflicts, like your border disagreement with Kuwait.” The U.S. State Department had earlier told Saddam that Washington had “no special defense or security commitments to Kuwait.” The United States may not have intended to give Iraq a green light, but that is effectively what it did.
Exactly what was said during the meeting has been a source of some controversy. Accounts differ. According to a transcript released by the Iraqi government, Glaspie told Hussein, ” I admire your extraordinary efforts to rebuild your country.”
I know you need funds. We understand that and our opinion is that you should have the opportunity to rebuild your country. But we have no opinion on the Arab-Arab conflicts, like your border disagreement with Kuwait.
I was in the American Embassy in Kuwait during the late 60’s. The instruction we had during this period was that we should express no opinion on this issue and that the issue is not associated with America. James Baker has directed our official spokesmen to emphasize this instruction.
Leslie Gelb of The New York Times reported that Glaspie told the Senate Foreign Relations Committee that the transcript was inaccurate “and insisted she had been tough.” But that account was contradicted when diplomatic cables between Baghdad and Washington were released. As Gelb described it, “The State Department instructed Ms. Glaspie to give the Iraqis a conciliatory message punctuated with a few indirect but significant warnings,” but “Ms. Glaspie apparently omitted the warnings and simply slobbered all over Saddam in their meeting on July 25, while the Iraqi dictator threatened Kuwait anew.”
There is no dispute about one crucially important point: Saddam Hussein consulted with the US before invading, and our ambassador chose not to draw a line in the sand, or even hint that the invasion might be grounds for the US to go to war.
The most generous interpretation is that each side badly misjudged the other. Hussein ordered the attack on Kuwait confident that the US would only issue verbal condemnations. As for Glaspie, she later told The New York Times, ”Obviously, I didn’t think — and nobody else did — that the Iraqis were going to take all of Kuwait.”
Fool Me Once…
The first Gulf War was sold on a mountain of war propaganda. It took a campaign worthy of George Orwell to convince Americans that our erstwhile ally Saddam Hussein — whom the US had aided in his war with Iran as late as 1988 — had become an irrational monster by 1990.
Twelve years later, the second invasion of Iraq was premised on Hussein’s supposed cooperation with al Qaeda, vials of anthrax, Nigerian yellowcake and claims that Iraq had missiles poised to strike British territory in little as 45 minutes.
Now, eleven years later, as Bill Moyers put it last week, “the very same armchair warriors in Washington who from the safety of their Beltway bunkers called for invading Baghdad, are demanding once again that America plunge into the sectarian wars of the Middle East.” It’s vital that we keep our history in Iraq in mind, and apply some healthy skepticism to the claims they offer us this time around.