Foreign Relations & International Law

Greenback Warfare: The Treasury Department’s Approach to Global Economic Security

Alex Zerden
Thursday, May 23, 2024, 10:03 AM

A review of Saleha Mohsin, “Paper Soldiers: How the Weaponization of the Dollar Changed the World Order” (Penguin, 2024)

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U.S. Dollar Dominance

U.S. dollar dominance exists as an essential element of U.S. national power on par with more visible military and diplomatic tools. Architected at the end of World War II through the Bretton Woods system, the U.S. dollar’s global role for trade and finance underwrites sustained military expenditures, generous foreign assistance, and agenda setting within multilateral institutions. It allows the United States to borrow at favorable rates, import cheaper goods, and sustain economic sanctions.

Despite its long history, the dollar’s preeminence and advantages face both international and, increasingly, domestic threats. Overseas, partners and adversaries continue to vie for an alternative currency or mechanism to move value at the scale, speed, and predictability of the U.S. dollar. Some international stakeholders lost confidence in the United States because of domestic shocks including the policy and regulatory failures that enabled the 2008 financial crisis and the unpredictability of the Trump administration. To many people overseas, the United States could no longer serve as a guaranteed bedrock of economic order and as a safe harbor for investments.

Whether these concerns are repairable or represent the beginning of an inescapable decline for U.S. economic power is at the center of Saleha Mohsin’s “Paper Soldiers: How the Weaponization of the Dollar Changed the World Order.” Chronicling four decades of U.S. economic leadership, Mohsin brings to life the often technical and dull world of financial markets in a thoroughly researched, accessible, and engaging narrative.

Mohsin, a Bloomberg News reporter who conducted hundreds of interviews with experts ranging from former treasury secretaries and Federal Reserve officials to economists and foreign diplomats, provides a richly textured account of the modern history of the U.S. dollar. (For disclosure, I provided technical edits to one of the book chapters involving economic sanctions and have been interviewed by the author.) These interviews in particular help bring to life the personalities that shaped the trajectory of the U.S. and global economies. The book covers the final years of the Cold War, the retrospectively halcyon era of 1990s globalization, the responses to the 9/11 attacks, the 2008 financial crisis, debt limit standoffs, and the pandemic, as well as the current era after Russia’s expanded invasion of Ukraine and an increasingly assertive and bellicose China. The author takes readers to closed door meetings, including a private reunion of former treasury secretaries and Federal Reserve Board chairs at the Hay-Adams hotel, a Washington institution equidistant from the White House and Treasury Department headquarters. Mohsin pulls the curtain back on the high-stakes negotiating rooms between senior U.S. and Chinese officials in Beijing. Mohsin importantly also profiles the work of the permanent civil servants who remain in place irrespective of political transitions in the Treasury Department. This book could have been unapproachably wonky and hypertechnical. Instead, Mohsin leverages a seasoned reporter’s knack for breaking down difficult concepts to widen the book’s audience appeal and ensure accessibility that does not require an economics degree. Mohsin even reminds us that former Treasury Secretary James Baker failed a college economics exam.

The Dollar on the Modern Global Stage

Starting in the 1980s, stability, based on the quiet strength of the U.S. dollar, operated as a bipartisan constant to promote U.S.-centric globalization. Here, Mohsin explains that the first and second rules of U.S. economic dominance are “don’t talk about your exchange rate.” Treasury Department Secretary Robert Rubin, a central figure in the book, enshrined this concept as doctrine in 1995 when he stated during his Senate confirmation hearing, “A strong dollar is very much in this nation’s economic interests.” This truism stuck across Democratic and Republican administrations for the next 20 years as successive presidents and treasury secretaries sought, as Mohsin explains, to “establish norms for a modern economic order centered around globalization.”

Discussion of monetary policy would not be complete without consideration of the Federal Reserve System and U.S. central bank dynamics, which Mohsin weaves throughout the book. Given the explicit Treasury Department focus of the narrative, readers have the opportunity to examine the Treasury Department-Federal Reserve System relationship through books like Timothy Geithner’s “Stress Test: Reflections on Financial Crisis.”

However, Mohsin does not extensively explore the foreign policy and national security dimensions of the relationship between the Treasury Department and the Federal Reserve System, particularly the Federal Reserve Bank of New York. This angle would have shed additional light on how policymakers grapple with unwieldy legal and policy questions like how to manage frozen Russian (and, on a much smaller scale, Afghan) central bank assets, navigate dollarized economies, contribute to whole-of-government strategies in military campaigns, and maximize the efficacy of economic sanctions. Unique partnerships between these two bureaucracies, especially in places like Afghanistan and Iraq, would have helped to draw out the “soldiers” part of “Paper Soldiers.” Explaining how tens of billions of dollars of shrink-wrapped cash shipped in pallets from a nondescript Federal Reserve warehouse in East Rutherford, New Jersey, to combat zones in Baghdad and Kabul (and likely other locales) would illuminate how these organizations support broader national security efforts. And this relationship extends to other places like Venezuela for both sanctions compliance and asset preservation. Mohsin also does not deeply examine the cycling of personnel between the Treasury Department and the Federal Reserve System both at the staff level and especially among (Democratic) leadership such as Lael Brainard, Timothy Geithner, Daleep Singh, and Janet Yellen.

Role of U.S. Economic Sanctions

Blessed with a strong and widely accepted dollar, the United States has used its unique position in the global financial system to shape other military and foreign policy priorities. Here, Mohsin weaves the use of economic sanctions as a tool of national economic power into the broader context of the role of the U.S. dollar. The categorization of many major sanctions actions over the past two decades is well communicated.

In the wake of the September 11, 2001, terrorist attacks, Treasury Department Secretary Paul O’Neill oversaw the transformation of the organization to, as Mohsin describes, “turn the dollar as a weapon to punish miscreants, exert American foreign policy goals and global security objectives—and keep Americans safe.” Mohsin smartly covers this period in appropriate detail while directing the reader to Juan Zarate’s “Treasury’s War: The Unleashing of a New Era of Financial Warfare” (previously reviewed on Lawfare), the seminal insider’s account of the creation and evolution of the Treasury Department’s Office of Terrorism and Financial Intelligence, which was started after 9/11 to target national and transnational illicit finance threats.

Complemented by her years of reporting on the Treasury Department, Mohsin goes through select historical case studies to capture the current debates about the use and potential misuse and overuse of economic sanctions and to communicate the strategic consequences of such actions for U.S. dollar dominance. Mohsin provides sufficient detail to tell compelling stories but does not dwell too long on any one particular vignette.

She catalogs the immediate response after 9/11 through sanctions and economic diplomacy to target terrorist financiers via expanded use of sanctions authorities and a novel, albeit controversial, partnership with the Society for Worldwide Interbank Financial Telecommunication (SWIFT) cooperative through the Terrorist Finance Tracking Program. Another chapter describes the unexpected efforts by Treasury Department Under Secretary Stuart Levey to seize a record $30 billion from Libyan dictator Muammar Gaddafi in 2011 during the Arab Spring. 

At the end of the Obama administration, Treasury Secretary Jack Lew’s March 30, 2016, admonition about the perils of sanctions overuse crystallized emerging concerns about this “attractive tool” that, as Mohsin explains, “offered a vast area to explore between diplomacy and war that didn’t involve the sacrifice of American troops—military force could not always be the answer when diplomacy failed.” Later, as a private citizen, Lew amplified these very concerns in an October 2018 Foreign Affairs article. Mohsin bluntly keys in on the differences between this approach to sanctions and the Trump administration’s outlook with a chapter titled “Mnuchin, the Oligarch, and Jack Lew’s Nightmare.” Mohsin unpacks the 2018 saga of a Russian oligarch, Oleg Deripaska, and his Rusal aluminum company to explain how one seemingly discrete sanctions action roiled the global aluminum market, put thousands of mining and factory jobs in Europe at risk, almost caused widespread environmental damage in County Limerick, Ireland, and forced a reckoning within the department about how to wield its powerful authorities. Examination of sanctions also scrutinized efforts to coordinate sanctions against Iran with European partners. This section provides a useful study in different approaches to sanctions implementation by the Obama and Trump administrations. The book’s final chapter ends where it started by cataloging the tense and highly uncertain days at Treasury Department headquarters in February 2022 as Treasury Secretary Janet Yellen and her staff took unprecedented sanctions measures against Russia as part of a novel multinational coalition.

However, Mohsin could have probed harder on the impacts of these sanctions actions for the future of the U.S. dollar. For instance, separate executive orders in February 2022 against Afghan and Russian central bank assets do not get the full attention they deserve when Mohsin analyzes how the U.S. operates as the steward of the world’s primary reserve currency and medium of exchange. (For disclosure, I am an expert witness on behalf of some 9/11 victims in a litigation involving some of the Afghan central bank assets.)

Threats to U.S. Dollar Dominance

Rumors about the demise of the U.S. dollar remain premature. In the 1980s, analysts fretted over Japan’s economic rise and the attendant threats to the United States, due in part to an overly strong U.S. dollar. The creation of a single European Union currency raised similar concerns. More recently, China’s seemingly inexorable quest to overtake the U.S. politically, economically, and militarily has put the dollar’s dominant status in jeopardy.

Political rivals and economic competitors nonetheless continue to develop alternatives to the use of the U.S. dollar. Mohsin does not extensively wrestle with this question. Russia and China have attempted to create alternatives to the SWIFT-dominated global payments messaging infrastructure through Russia’s System for Transfer of Financial Messages and China’s Cross-Border Interbank Payments System. China’s Belt and Road Initiative seeks to reorient economic activity in a way that could shift how many economies engage in cross-border transactions. The rise of new private and governmental digital asset initiatives presents a further challenge to the use of the U.S. dollar, including through the development of central bank digital currencies and Project mBridge, a wholesale cross-border settlement using multiple central bank digital currencies. Hesitation among allies and partners to implement and enforce U.S. economic sanctions creates increasing fissures among economically significant actors. 

However, Mohsin repeatedly makes the compelling point that the greatest threat to the U.S. dollar comes from internal rather than external pressures. At its core, the value of the U.S. dollar on the global scale rests on a relatively opaque foundation grounded in deep international (and domestic) trust in the United States based on its democratic commitments with adherence to the rule of law, relative predictability, and commitment to market-based economic principles.

The lingering effects of a strong dollar also had significant, if generally overlooked, impacts on the American heartland. A strong dollar allowed Americans to buy more goods from overseas manufacturers and entice foreign investors into the U.S. market. Mohsin takes the reader to places like Weirton, West Virginia, and Moraine, Ohio, where instead of feeling the benefits of a strong dollar, many Americans experienced its harms. They lost jobs to technology as well as to overseas competition (a strong dollar means that U.S. exports are relatively more expensive). Mohsin explains how these Americans provided backing to the candidacy of Donald Trump in 2015 as he tapped into America’s “economic anxiety.” Democrats have also recognized these limitations of U.S. power and sought to reexamine foreign policy through the lens of the U.S. middle class. These efforts began with a policy platform during the 2020 election cycle co-authored by future National Security Adviser Jake Sullivan through the Carnegie Endowment for International Peace and continued with Biden administration messaging to build the economy from the “middle out.”

If domestic political and economic instability pose the greatest challenges to the value of the U.S. dollar, then Mohsin accurately catalogs political dysfunction that gradually erodes the credibility of the United States. While many policymakers and economic observers may now seem inured to the recurring debt ceiling standoffs, Mohsin chronicles the 2011 debt ceiling crisis with rich reporting from former Treasury Secretary Timothy Geithner during the Obama administration. This includes the story of how the Treasury Department considered deploying a once-secret plan in the event of a U.S. government default if Congress failed to raise the debt ceiling. While fortunately averted, this potential contingency would have created massive practical national security challenges, including for funding to U.S. troops in both Iraq and Afghanistan as well as longer term investments in weapons platforms and research and development. Other anecdotes describe efforts during the Trump administration to erode the independence of the Federal Reserve, including through comments made by President Trump that criticized the U.S. central bank for raising interest rates. This effort contrasts with a secret admonition by the Reagan administration to the Federal Reserve Board chair to keep interest rates low before the 1984 election, a flagrant violation of this norm. Federal Reserve Chair Paul Volcker rebuffed the entreaty and preserved the independence of Federal Reserve decision-making. However, just a year later, Treasury Secretary James Baker brokered the secret Plaza Accord (because it took place at the Plaza Hotel in New York) with European partners in 1985 to depreciate the U.S. dollar by selling more dollars on the open market, thereby reducing the U.S. trade deficit (and helping the Europeans more cheaply pay off their U.S.-denominated debts).

This type of political intrigue and its wide-ranging impact on the U.S. and global financial systems make “Paper Soldiers” a compelling read, a necessary contribution to an increasingly unpredictable geoeconomic environment, and a way to understand the national security role of the Treasury Department. As a presidential election rematch takes place this fall to determine which economic governance style will prevail, this book will remain as a necessary reference about the domestic and international drivers of U.S. economic power.

Alex Zerden is the founder of Capitol Peak, a risk-advisory firm, an adjunct senior fellow at the Center for a New American Security, and a senior adviser to WestExec Advisors. Previously, he worked in the U.S. Treasury Department, including as a financial attaché; at the White House National Economic Council; and in Congress.

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