Oh Henry! Can He put the “Green” Back in the Greenback?(A)

Alexander Hamilton, the nation’s first Secretary of the Treasury, once said “the national debt, if it is not excessive, is a great blessing.” With the national debt now sitting at $8 trillion dollars, do you think Treasury Secretary-nominee and former Goldman Sachs CEO Henry Paulson is feeling blessed?

It’s true that the budget deficit (as a percentage of gross domestic product) was higher during World War II. But the debt was financed by American citizens, not Asia, and was bolstered by the rise of American power. In fact, it was just after World War II that the American dollar (backed by gold reserves) became the world’s reserve currency. And for good reason. At the time, America produced two-thirds of the world’s oil, held eighty percent of the world’s gold and possessed one hundred percent of the world’s nuclear weapons. In the global hegemony business, that’s what’s referred to as “game, set and match.”

Today, the world is a much different place. Many countries have nuclear weapons and America prints money backed by nothing more than promises. America is also forced to import 55% of its own oil needs. The only silver lining for Hank Paulson is that (for now) the greenback is still the international reserve currency in large part because the world’s thirst for oil is financed with American dollars.

How does this work? Oil contracts with Organization of the Petroleum Exporting Countries (OPEC) are concluded in U.S. dollars. So any country who buys from OPEC must find a way to get enough dollars to meet their oil demand. This creates a huge demand for the U.S. dollars and a floor for its valuation.

At the expense of better fiscal management (like creating demand for dollars because they are the best investment), propping up the oil industry and the “crudeback” has become the shortcut to preserving American economic might. Unfortunately, war, peace and life on this planet hang in the balance. This is where Henry Paulson comes in.

The world outside of the Bush Administration has awakened to the environmental (and economic) danger of a world dependent on oil. As a former board member of the Nature Conservancy, Henry Paulson has been part of this world. He has supported policies that placed global warming over the short term economic benefits of oil dependence. Even his Wall Street legacy has environmentalists hopeful. In 2005 Goldman Sachs committed to spending $1 billion to generate energy from sources other than oil and gas.

How this plays out with a boss who remains wholly supportive (and supported) by the Big Oil industry remains to be seen. After all, the crudeback system is clearly the mainstay of the Bush Administration’s policies. To some, it even offers the only logical explanation for the war in Iraq because a passion to stop trading oil in U.S. dollars is a common trait of President Bush’s “Axis of Evil” countries (Iraq, Libya, North Korea and Iran). And make no mistake: the countries allied with them would like to follow suit, led by Russia and China. China in fact has already started inking long-term oil and gas supply deals with Iran.

What America needs now is a long-term plan to attract investment in the greenback that is not based on demand for oil or Americans’ need for cheap imports. Henry Paulson could bring a unique perspective to this problem. He did demand access to Bush’s inner circle of advisors before accepting the nomination, so maybe he has designs on changing the Administration’s thinking. If so, let’s hope Paulson heeds the words of James A. Baker III, another predecessor in the Treasury post: “never let the other guy set the agenda.”