How the US Dollar Became an International Weapon of War

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1:16Hello and welcome to another episode of the Odd Lots podcast. I'm Jill Weisenthal. And I'm Tracy Alloway. Tracy, you know, something that has always struck me about, I don't know, the financial system, I guess, is that from the U.S. perspective, it feels like any time anyone spends any money anywhere, particularly dollars anywhere, like the U.S. can sort of go after them, even if it's overseas, completely out of the country. It feels like the U.S. basically has the prerogative to say you're breaking the law. So you're doing something we're not going to allow. This is what exorbitant privilege looks like, right?

1:57Yeah, I guess that's it. Well, I think you're hitting on something that's kind of fundamental about the current financial system, which is the dollar is the global reserve currency. And there are some pros and benefits that come with that. One of them is that you can use it as a tool of statecraft. So you can go after people that you don't like or people that are breaking the law. But there is also this tension on the other side where it seems like there are some downsides too, right? Like maybe at certain times the U.S. would desire a weaker dollar in order to jumpstart economic growth or certain exports, manufacturing, things like that.

2:43I think on the whole, most people would agree that the dollar's special status in the financial system has been a massive benefit for the U.S. viz the huge deficit and people willingly funding that and things like that. But there are downsides. And that debate kind of bursts into the public consciousness every once in a while. Yeah. One thing, obviously, since early 2022, when Russia invaded Ukraine, that sort of seems to have, you know, then the U.S. responded with an extraordinary amount of sanctions and cutting off Russia from the dollar base system in almost every way imaginable. It's sort of like, you know, maybe catalyzed a new round of talk of, OK, are parts of the world.

3:30The power of the dollar. The power of the dollar, exactly right. And I think that was sort of a pivotal moment. I don't know if it'll be a pivotal moment for the future of the dollar, but at least it was a pivotal moment, at least in this current cycle of people talking about dollar alternatives. You know, it's interesting you bring that up because you're absolutely right. It feels like that was the catalyst for the current round of discussion about the power of the dollar and the future of the dollar in the financial system. But thinking back to some odd lots history, when I think about that question of the U.S.

4:06maybe overreaching or using the dollar in this particular way and the way they used it for Russia, I think about the conversation we had with the former head of Afghanistan's central bank. Do you remember that? Yeah, that was a great episode. Because there was, I think, like seven or eight or nine billion dollars worth of reserves held by the Afghan central bank. And when the Taliban took over, the U.S. basically seized all of it. They put some of it aside for 9-11 litigation and then some of it got put into a fund that was supposed to be dispersed to the Afghan people in some way. But that to me, and maybe we touched on it in the episode, but that to me was sort of the crossing the Rubicon moment when you can actually say, I'm going to take these central bank reserves.

4:55You know what it sort of gets to this idea in my head? And I think that's a great example, which is that a dollar is not really a thing that you have. It's a claim to capacity on this global, complicated dollar network. Right. And so we think maybe it's like, oh, money, you have it. It's sort of like property, but it's not like really like property. It's really just it's almost like it's almost like a ticket in some way to like a plane. But if the plane doesn't want to honor your ticket at the airline, like it can. And so it almost feels like there's sort of a reminder that, yes, you could theoretically hold dollars.

5:34But in the end, like the U.S. could sort of decide, like, actually, your dollars are no good here anymore. Yeah, there's conditions attached to that ticket or that it's not an actual piece of paper, but that line item in a computer system somewhere. And so I think it's really interesting. What is the history of all of this? What are the limits to this power? How did we sort of emerge with this capability to sort of track the dollar flows and decide who gets access and how do we cut people off from the dollar system? It's extremely, extremely interesting question. Yeah, and it's definitely core Odd Lots content at this point.

6:11So in addition to speaking to the former head of Afghan Central Bank, we've had Zoltan Pozar on a number of times to talk about his vision of de-dollarization and Bretton Woods III. We've had Perry Merling debate Zoltan to talk about this particular issue. And I'm happy to say that today we have one of our own Bloomberg colleagues to talk about this. We literally have the perfect guest. We are going to be speaking with senior Washington correspondent for Bloomberg News, Saleha Mohsen. She is the author of a brand new book, Paper Soldiers, How the Weaponization of the Dollar Changed the World Order.

6:49Saleha, thank you so much for coming on OddLots. I'm so excited to be here, Joe and Tracy. Why did you write this book? What prompted this book about the weaponization of the dollar? It's a crazy thing. It might have been January 6th, the insurrection. I don't know. It's hard for me to put a pinpoint where, you know, for a journalist, it's a natural course to say, oh, maybe I'll write a book. But something happened that day. A lot of emotions. Let's set most of them aside and just talk about the Treasury Department and the dollar. On January 6th and in the couple of days that followed, we all saw reports and I reported on how then Treasury Secretary Steven Mnuchin may or may not have been involved in talks about the 25th Amendment and do we need to sideline President Donald Trump.

7:39And I thought to myself, wow, the Treasury Secretary's job has just gotten so huge. You know, a couple of weeks ago, he was in Congress trying to get another spending bill through. A couple of days after that, he was in the Middle East pitching our international economic policy and economic sanctions programs and other elements of geopolitics. And here we are now. He might be involved in removing the president. That combined with a op-ed that Bob Rubin wrote right after January 6th. And he wrote an op-ed. It was about a couple of different things. But there was one sentence that I think it kind of sums up the kind of reporting that I've done for many years now.

8:24And it sums up why I wrote the book. He said in this column, faith in democracy and faith in markets go hand in hand. And I just thought, oh, my gosh, the dollar is part of our democracy. Democracy is part of our dollar. And that's kind of what started everything for me in my brain. So I'm glad you brought up Trump here because this came up on an episode relatively recently. Actually, I think Trump is kind of, for once, a very good prism, a very clear prism to view some of the debate around the dollar, because he sort of instinctually understands that a strong dollar might be in the U.S. interest.

9:04It sounds good to be able to say, like, we have the world's reserve currency and the dollar is great, etc. But on the other hand, there were times during his administration where he would talk about the desire for a weaker dollar. And we need a weaker dollar in order to boost manufacturing, get more jobs back to the country, etc. In your reporting, was it ever clear to you like which side he landed on or even broadening it out? The U.S. Treasury kind of has a long and complex history when it comes to expressing its desire for the greenback, whether it wants a strong one or not. Absolutely. And that's what Paper Soldiers is all about.

9:50It's all about the complexities of Treasury secretaries and any other Fed or White House or congressional official talking about the dollar and how sensitive each and every syllable can be. You know, if we talk about Bob Rubin, how many words he used to describe his view on the dollar, what order those words were in. Currency traders in the 90s used to listen to everything to determine how to make their trades. Now, on the question of Donald Trump in, you know, from 2017 through 2020 into 2021, you know, as usual, he's a mercurial person, lots of gray areas. He definitely saw the benefits of saying, yes, we have a strong dollar policy.

10:38We have a strong dollar because it reflects a strong economy. But he was the first politician who in any real way realized that a strong dollar and that policy from the 90s and that had persisted was hurting certain parts of the country. And we're talking about the forgotten man in, you know, like the manufacturing sector, the Rust Belt of the country. And in the book, I take you into Weirton, West Virginia, into Moraine, Ohio, and what happened to those factory workers in the manufacturing sector as globalization, which is underpinned by a strong dollar policy, sort of overtook everything. And people kind of forgot about the economic scarring that happened as the manufacturing sector in the U.S.

11:28kind of disappeared. So he kind of looks at it both ways. But actually, earlier in March, Trump was on as a presidential hopeful again on CNBC talking about how he thinks it's dangerous that people are talking about de-dollarization. He is wading into the de-dollarization debate. And we've all learned that he puts action behind those kinds of words. So there's two things and they're sort of related, but they're also sort of separate. So there is the strong dollar in the sense of the price of the dollar against our trading partners or the price of the dollar against the yen and the euro and all that.

12:09And then there is the sort of strong dollar, which is it is the currency that everybody, for the most part, uses globally to settle trade. And, you know, and this sort of gets to the incredible power that the U.S. has over this network. Like just high level, what is the the limits of what the U.S. can do to the dollar network, to the various like banks, et cetera, and messaging services where dollars and goods are traded? Like what is this sort of what is the perimeter of America's ability to, I guess, police transactions in the dollar? It's a debate that's raging in political and economic circles in Washington and I think in pretty much every capital around the world because the U.S.

12:56is actually figuring out what that perimeter is, where that boundary is. There's been a couple of moments where the U.S. has realized, ooh, I touched it and it was too hot. So there was in 2018 when Steven Mnuchin's Treasury Department sanctioned Oleg Deripaska, a Russian oligarch who owned a majority stake of Rusal at the time, like one of the largest aluminum makers in the world. And Treasury and the U.S. found out kind of the hard way that maybe we overdid it or didn't look into these sanctions deeply enough because we had a lot of blowback from them. You know, there was a lot of self-inflicted wounds there because commodity prices swung 20 percent on each headline about those sanctions.

13:48Any kind of change in the date that they would be implemented or what kind of carve outs were coming, markets swung. And that's not actually a goal of OFAC, which sort of oversees the Treasury Department sanctions implementation, the Office of Foreign Assets Control. They want to move a little bit more softly without triggering this much turmoil. And what we saw was, you know, a little manufacturing plant in Ireland that is realizing that, well, sanctions might completely muck up our cash flow. So we might be forced to shut down our smelter. OK, that smelter runs at 2 ,800 degrees Fahrenheit. It costs a lot of money to shut it down.

14:37It should take days or maybe a couple of weeks to actually physically shut it down. But if they run out of money, they have to shut it down quickly. That means there's going to be all these toxins polluting the air and the water supply. But sanctions are going to trigger that closure. Treasury did not think it through. That was one example of the Treasury Department learning boundaries. And the other one is the one that Joe Teresa, you guys just mentioned. the big sanctions in February 2022 with, you know, cutting Russia off from the dollar.

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16:37Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Paid for by Public Investing. All investing involves the risk of loss, including loss of principal. Brokered services for U.S.-listed registered securities, options, and bonds in a self-directed account are offered by Public Investing, Inc. Member FINRA and SIPC. Crypto trading provided by XeroHash. Complete disclosures available at public.com slash disclosures. So you go into detail on this in your book. And by the way, I love that example of the smelter and sort of an unanticipated consequence of doing this.

17:14But you talk in your book about the internal debate of whether or not to sanction Russia. And I think you mentioned that Janet Yellen sort of had to be convinced and that there was this memory of the Oleg Deripaska incident sort of hovering around. And I guess what I want to ask is how much of this, this weaponization of the dollar is a question of political will and how far the U.S. Treasury wants to push on that string versus technological ability. It seems like the U.S. does have the capacity to shut people off in some respects. So, for instance, through the SWIFT system, which, again, you go into some detail on.

17:57But there is this overarching question of whether or not it should, whether or not it'll backfire either in the short term or in the long term by diminishing the desirability of the dollar as a reserve currency. It's complicated, as things tend to be in Washington. There is huge political will to use economic sanctions and to make them even more sophisticated than they've ever been. What we've seen is we've gone from, you know, in the early 1900s up until pretty much 2001. OFAC was a bit of an orphan of the Treasury Department. No one really paid attention to them. Economic sanctions at that time, they were so blunt.

18:39It was just like embargoes on Cuba. But it didn't really have this great big impact. It wasn't discussed. In 2001, 9-11 hits. And, you know, the global war on terror did not start with military tanks rolling into some country or American troops in their boots hitting the ground somewhere. It started September 24th, 2001, with George W. Bush with a stroke of a pen, giving the U.S. Treasury Department the authority to weaponize the dollar, to use the dollar to find out how did the terrorists finance those attacks? Because 9-11, it cost those terrorists like$400 ,000. And later officials found out that that money was moved in the light of day.

19:29So the U.S. realized that, OK, we can track these money flows and either stop the next attack or just choke off, you know, bad actors or terrorist organizations or terrorists themselves from money flow and the ability to get cash by cutting them off from the global financial system because we control the dollar. That's kind of where it started. And sanctions have gotten more and more sophisticated. Treasury created an entire unit called the Terrorism and Financial Intelligence. unit that was created in the aftermath of 9-11 in 2004 and built out basically an intelligence unit within the Treasury Department.

20:09So Treasury in the U.S. is the only finance ministry in the world with its own intelligence operation, basically. Yeah, this is so fascinating. And I thought this part of your book where you talk about 9-11 was really interesting. So So what were the sort of capabilities of OFAC or the Treasury in terms of tracking illicit money flows prior to 9-11? And then like sort of what was the difference between specifically what they did, what they could do and then pre and post 9-11? They didn't have much before 9-11. Like I said, OFAC was this orphan. No one really paid attention to them. They did a lot of work, but their budget was small.

20:49Their staffing was small. They didn't have a lot of access to the Treasury secretary, which, you know, then you have no one to sort of lift the profile. But also the U.S. wasn't looking at how to work in this space that's between kinetic action, which is, you know, sending tanks and forces in and diplomacy. That's what sanctions are. Right. It's that spot in the middle, meaning diplomacy has failed us, but we are not ready for like an actual live bloody war. So let's go in the middle and use sanctions and it's pretty cheap. Right. So that's where the like what Tracy asked earlier, that's where the political will is that it's not as expensive and doesn't spill blood as like a war.

21:28But it's a good option when diplomacy isn't working. We talked us a little bit more about technological ability. This is why I was curious, like how much of it is the politics versus what we are actually physically able to do in the financial system. So if I have a dollar, to Joe's point in the intro, there are certain conditions that are attached to that dollar. And there is, to some extent, visibility on that dollar as well. Talk to us a little bit more about what a dollar looks like or how much visibility the U.S. government can have into it. That's such a good question, Tracy, because dollars are actually transported sometimes wrapped in plastic shrink wrap and in trucks like loaded into Afghanistan.

22:15Like the New York Federal Reserve actually sends money like this to Kabul or they did in the past. Right. That's why the Treasury Department would have an attache in Kabul there to sort of witness that millions of dollars of actual physical cash greenbacks coming into the country. So that's the really hard part, right, how to monitor that. Banks do have a responsibility to tell the Treasury Department through these suspicious activity reports, SARS, when they see transactions happening that touch their financial institution that look suspicious to them. But these SARS are just it's just like throwing something in some obscure filing box and maybe someone shifting through it will see what they need to see.

23:05It's hard to see a pattern. Basically, after 9-11, officials realize that they don't have a ton of visibility. The U.S. itself autonomously to see how dollars are moving through the global financial system. And this is where it gets interesting. After 9-11, Treasury officials wanted to get that glimpse, and they knew that SWIFT, based in Belgium, part of the EU, and that jurisdiction, has data within its fortresses. You know, the building itself in La Houpe, Belgium, looks like an actual fortress. But they have the data that shows the routing number and the transaction time in real time. You know, SWIFT is basically the Gmail of the banking system.

23:53It is. I like that. Yeah, it's a way for banks to communicate with each other. Here's the bank account number. Here is the name. Here is the address and the amount that needs to be moved. But it promises privacy. No one will know the nature of the transaction. Right. And a couple of different central banks are involved in sort of that network that SWIFT has built up, including the Fed, Bank of Japan, Bank of England, and a couple of others. And so Treasury officials got together and they spoke to Swift. The head at the time after 9-11 was Lenny Schrenk, really, really interesting guy that I spoke to for the book, a colorful character.

24:32And he said, well, they approached me. And he said he knew that that call, as soon as those planes hit the Twin Towers in Manhattan, he says he remembers he was in Europe for, I think, Ireland for a meeting with a SWIFT board member. He was biting into a sandwich when he heard that 9-11 happened. He found out exactly the depth of the problem. And then he knew right then, I'm going to get a call from the Chargers Department. They're going to want data. They're going to want to know how did money that financed that attack move through this system? How did we miss it? And how can we catch the next one?

25:09Because bring yourself back to September 12th and 13th. We were terrified. You know, everyone at that time internationally said, I'm an American today because if someone can attack this country, they're attacking everyone. If you remember the Queen of England at the time, she sang the national anthem, the American national anthem, because she said, I stand with America. So Lenny Schrank, an American himself, knew that that call was coming. So when Treasury finally called, he was ready. You know, it depends on who you ask, but it's possible that Treasury might have approached SWIFT a couple of times before then looking for some data.

25:46And they'd always kind of said no. And so they finally got to talking about specifics. And Lenny Schrank spoke to a couple of the different central bank governors that were involved. According to one source, Alan Greenspan at that time was against it initially, against Treasury having any insight into SWIFT data because he said gentlemen shouldn't read gentlemen's mail. So he didn't like the idea at first. First of all, I think you wrote in your book that this only came out like in 2006 that the Treasury had approached SWIFT about getting access to more data. Like it was done pretty surreptitiously or secretly for a while.

26:30Yeah. So SWIFT, okay, Speed, that's what it alludes to. Treasury's code name for the whole program was Turtle, the opposite of Swift. I love that. Yeah, it's great. The Turtle and the Swift. Yeah. So if you were at an airport maybe in 2001 through 2006 and saw these government gray or sort of muted suits, a man maybe handcuffed to a briefcase. And if they were talking about a turtle, they were talking about Swift. Swift. So they used Swift. They were able to come to an agreement. They would have to subpoena the information. There was a lengthy process there. Lenny Schrank said, I want the U.S.

27:10to have the information that they need and not a bite more because he didn't want it to be abused and he wanted to set a precedent. He did say to me that the only reason that the U.S. was able to get that information was the power of the dollar. It is the owner of the world's reserve asset coming to Swift saying we need to protect our economy and our financial system because after 9-11, the stock market was wiped out. Up$1.4 trillion of value disappeared that day. The S &P 500 plunged over a couple of weeks. The markets were closed because physically the heart of American stock market had been attacked, right?

27:49The financial district was right by the World Trade Center. So he said that's why. That's the only persuasive power. If any other country had come to us, it was a very easy no. We wouldn't even have to explain. So one thing that I think often comes up when we're debating the role of the dollar, I mean, obviously people can see the benefits that it has for the U.S. There is that idea of exorbitant privilege and the U.S. is able to issue a lot of dollar denominated debt and fund a lot of different things thanks in part to its currency. But I guess one thing that often doesn't get discussed or doesn't get discussed as much is the idea of what the rest of the world gets from the dollar's special position.