The Lawfare Podcast: Weaponizing the Dollar with Saleha Mohsin

[Introduction]

Saleha Mohsin: It came to me like this, you know, I would hear Treasury Secretaries and Treasury officials and former officials say, well, nothing can happen to the dollar as long as the U.S. is strong. And I had Hank Paulson, who was George W. Bush's third Treasury Secretary and steered the country through the global financial crisis in 2008 and onward for a few years, he said this to me.

He said that, you know, no matter what, what happens in the world if the U.S. economy is strong, no one can touch us. And I realized when I heard him say it directly to me with this context in my head about de-dollarization, threats from abroad. You know, the Chinese Yuan or the Euro becoming more dominant than the dollar, or other countries finding ways to trade amongst themselves outside of the dollar. None of that really will affect us, if the U.S. itself is strong.

Scott Anderson: I'm Scott R. Anderson and this is the Lawfare Podcast for March 20, 2024. Since World War II, the United States and its currency, the dollar, have come to play a central role in the broader global economy. And in recent decades, U.S. policymakers have used this role as a weapon, cutting off access to malign actors and punishing those who act contrary to U.S. national security interests. But cultivating such primacy has proven to be a double-edged sword, with more complicated ramifications for many Americans.

In her new book, “Paper Soldiers,” Bloomberg reporter Saleha Mosen digs into the history of the dollar's role in the global economy and what its increased weaponization may mean moving forward. She recently joined me on the Lawfare Podcast to discuss her new book and what we should all know about the new economic and political moment we are living through. It's the Lawfare Podcast for March 20: Weaponizing the Dollar with Saleha Mosen.

[Main Podcast]

So Saleha, in this book, you have pulled together a pretty interesting combination of narratives. You open with and close with a pretty compelling anecdote that listeners to the podcast will be familiar with, and that is the incredibly consequential moment that the United States, Ukraine, the world faced in February 2022, that among many other measures resulted in truly historic array of economic sanctions and related measures imposed by the United States and Western allies on Russia. And yet, then you dip back into history and you spend a lot of time talking about, I think, what a lot of people tend to categorize as kind of a different story about, you know, the foundations of the global economy and particularly the U.S. role in the global economy and how Treasury secretaries in particular think about managing that relationship. I want to dig into this narrative. I want to talk about the story as you see it, as you lay it out in very readable, very approachable narrative format, which was an absolute delight to work through.

Before I do that, though, tell us a little bit about what drew you to your story. The story, what made this the topic of something you wanted to spend as much time as a book on. And how did you arrive at it? How did it come out of your other work and other projects you've been doing at Bloomberg or elsewhere?

Saleha Mohsin: Well, first of all, Scott, thanks so much for having me on. I'm so excited to be on your podcast. I think my interest in government currency policy started, I'm going to say 10 years ago. When I joined Bloomberg I joined from the Oslo, Norway office. I was a contract worker filling in for one of their extended maternity leave. So I had a 14 month contract to fill in. I had a full-time beat. It was the economy and government. So, I covered Norwegian monetary policy, fiscal policy. They have the world's largest sovereign wealth fund. It's Europe's largest investor so there's a lot of interest there. It's a very interesting currency because it's a commodity currency.

And, you know, I, I was a cub reporter almost and was sent out to ask the prime minister and finance minister about the kroner, the Norwegian currency, and what the government thought of the currency's current value and how that affected their sovereign wealth fund, investing, how it affected their energy policy because it's an oil-based economy. And that was sort of the seed that was planted. Oh, a government has something to do with currencies, but it's not the day-to-day rate, the exchange rate. It's the policy. It's, even to say that the government doesn't get involved in the currency market is a policy. And so, I started to learn that.

And then if we get to early 2016, I transferred to Washington and I became the Treasury reporter covering the U.S. Treasury Department. And I learned that the strong dollar mantra was a thing since Bob Rubin in the nineties. And I learned that, you know, one of the reasons Bloomberg sends a Treasury reporter to follow the sitting Treasury secretary around the world and maintains such a strong coverage perspective of everything that the building, the agency, the policymakers, the people do is because of how their work affects the U.S. dollar and its policy. And then that led me to trying to figure out, well, why, why do we care? And I, naturally over the course of covering Treasury directly for six years, learned that the dollar is, it underpins our global financial system. It controls money flows, values. It actually influences the day-to-day lifestyles of Americans. And it kind of just launched from there.

Scott Anderson: Well, and that's a great snapshot of really what I think the narrative threat of the story you tell is. It is this idea about the role of the currency as the keystone of, I should say the U.S. dollar currency, as the keystone of the global economy, and of course the U.S. economy as well, less surprising on that front And that's what unites these domestic and international threats, this national security and economic security storie,s and that you help to illustrate so effectively the relationship between them and how they're interwoven, interconnected by economic policy, variety of other sort of policy measures.

Before we dig into some of the more modern elements of the story, I think it's useful to give the listener some history and pull up some of the lessons that you kind of use as, in the first few chapters of your book. And a lot of the story about how the United States became the premier currency, the reserve currency for the global economy and what that means dates back to the post-World War II era. Tell us a little bit about how the United States found itself in this position and what the dynamics of that position are, what it means for the United States to play that role.

Saleha Mohsin: Absolutely. You know, the U.S.'s role in the world and the dollar's role in the world, it was designed very carefully, very intentionally. It started in 1944 as World War II was finally, it looked like it was coming to a close. The, you know, 44 countries from around the world gathered in Bretton Woods, New Hampshire to start discussing what a post war world looks like, and this is after two back-to-back wars that tore up nations, you know, we had infrastructure blitzed across, around the world.

The U.S., however, on the mainland, had not had such a crisis of physical infrastructure of the country. Also, by that point, the U.S. had surpassed Great Britain as the world's largest economy. That happened, oh, maybe 60 years before the world, the two wars ended and at the same time Great Britain, which and you know around that era was still a, the leading power, its finances were a mess. The country was physically a mess. They needed to, to undertake a lot of spending to fix their buildings and bring back its economy and its country. So, they did not have the money to look outward and help.

And so, in 1944 at the Bretton Woods Conference, a couple of things happened. They wanted, the group there wanted to find a way for the world to be knit together so that if you start a war with each other, if one decides to start a war with another, you will hurt yourself just as much as the other person. So that you are so economically integrated that you actually can't start a war unless you're going to hurt your own citizens. And to do that, there were a couple of components. A key one was creating the International Monetary Fund and the World Bank. And the U.S. being in the strongest fiscal position was able to be the biggest shareholder at that moment, and continues to be.

And there was a discussion of, okay, we should all rally around a single currency. Sterling, the British sterling had been the world's reserve asset, but we're looking at a modern era looking forward, looking for the next leader. And it made sense for it to be the world's largest economy. The, you know, the country that was sort of this Hercules in a cradle, beginning to rise, becoming the backbone of the global economy. And while there was discussion if the U.S. dollar is the right currency to serve in that role, ultimately it was decided, yes, the dollar will be crowned king dollar in that moment. But, you know, with a hedge that is currently going to be at that point tied to gold. And that, you know, you have to kind of rush forward in history to the Nixon era when the gold peg was abandoned. And that's sort of where the seeds were planted, but it was not by accident at all. It was all very intentional.

Scott Anderson: So you mentioned that decision during the Nixon administration a few decades later after the Bretton Woods arrangement. And that's, I think, a big shift that is worth hitting on here. You know, we start with the U.S. dollar being a foundational element of the global economy, but pegged to gold. So it's, you know, degree of discretion the United States can exercise in its currency policy, monetary policy, a little bit more constrained, kind of underlying, rooted in substantial real asset that is seen as having real value, gold.

And then the ‘70s switches to a fiat currency, as this comment described this idea that the value of the dollar is really pegged much more upon, kind of, the overall economic performance and expectations of the United States, which I think is a fair way to describe it. Although you're, you're free to correct me or elaborate on that. Tell me a little bit about what drove that shift, the significance of it, and then what that begins to mean for currency valuations and the U.S. dollar in particular. Because you tell this really interesting story from the ‘70s, ‘80s, and ‘90s, in particular, about the struggle the Treasury Department had, which wasn't with terrorists and it wasn't with enemy states. Instead, you really talk about the struggle it has with investors and markets and currency fluctuation. So, so tell us how those two things relate.

Saleha Mohsin: Absolutely. You know, and this is a story in this aspect of the dollar, I learned about with a front row seat covering the Trump administration. And you're going to hear me come back to this a couple of times. There's a quote from Bob Rubin that really inspired a lot of the book for me. And the quote is faith in democracy and faith in markets go hand in hand. And so a lot of what is behind, you could say, the mythical power of the dollar, or just the actual power of the dollar through the strength of the U.S. economy, its sheer size, the Treasuries market, and how that kind of sets the rate of credit around the world, and domestically, of course. It all has to do with faith in democracy.

And so if I am going to go from there to the Nixon era, basically the U.S. dollar and the U.S. fiscal position in that moment, there was a lot of inflation. It didn't look like the peg from between the dollar and gold was going to hold. And rather than try to jawbone or use rhetoric to get around that, the policymakers at the time decided we're going to, we're going to drop the peg to gold right now. And it was basically because they needed to tame inflation. They had to make a decision. Are we going to try to protect this peg to, to gold? Or are we going to instead focus on inflation? And if you're looking at it from a credibility standpoint, it is better to do everything you can to protect your economy, because then you are protecting the dollar. And that's a lesson that Treasury officials and U.S. economic policymakers have had to learn again and again, have had to visit a couple of times over the last few decades, because maintaining that credibility and that faith in markets is connected to the U.S.’s democratic strength.

And the best way I can kind of unpack that is to look at how the world relies on the U.S. and its dollar to be the bastion of democracy in the world. We have rule of law. We have independent agencies. We have free and fair elections, something that we can't take for granted. We have an independent Federal Reserve. All of those things, as you look through history, starting with Bretton Woods, go back to Nixon's decision, ultimately, to drop the peg to the dollar, go to Bob Rubin and his efforts to calm, currency chatter in markets, and then come to now, 2024, when there's all this talk about de-dollarization, that is at the core of it, that we need to maintain faith and credibility if we're going to get anywhere with this.

Scott Anderson: So with the shift to kind of a fiat model, you begin to have investors in currency and this kind of contentious relationship with policymakers, which is a big drive to the kind of strong dollar policy that Secretary Rubin installs in the ‘90s and becomes really one of these big markers you draw in this story.

Tell us a little bit about that competition, the challenges it poses from a policy perspective, both for the United States and as you know, other governments that often coordinated with the United States in managing the consequence of this, and how that strong dollar policy begins to emerge from it as a way of handling those.

Saleha Mohsin: Yeah, I had a lot of fun with this. The strong dollar policy for financial journalists is this funny cat and mouse game with Treasury officials, particularly with the Treasury secretary, where we're always going to ask, and especially in the ‘80s and ‘90s and early ‘00s, ask, you know, what do you think of the dollar's value? And that comes from the fact that there were, at one point in time, many interventions in the dollar between, you know, coordinated between Treasury and the Fed, and then that kind of just persisted with markets wondering, is the U.S. government going to meddle? A lot of that disappeared because, you know, in the seventies through the nineties, the size of the foreign exchange market was not so huge as it is now, so any kind of meddling, government meddling actually had impact. Now, it's just too large.

You know, the chapter in the book where I lay out how the dollar policy was formed, it's called Bob Rubin's bumper sticker. And I had so much fun writing about this. I kind of, I managed to, in my reporting and research for the book, get into the room where the mantra was actually created. The mantra goes something like a strong dollar is in the nation's interest and that means two things. It's one, a strong dollar underpinned by a strong economy as in a dominant dollar, but it also has a little something to do with the actual exchange rate that a strong dollar controls inflation. It keeps interest rates low. It makes our imports, you know, consumer products are cheaper because we can import at a cheaper rate. And so that's a big boon to the economy. The dollar policy itself, you know, Bob Rubin was the first ever White House National Economic Council Director. And at the time there was a Treasury secretary, Lloyd Benson was in office.

And there were flubs about the, the current, about currency policy. Benson might have talked a little bit, opined a little bit about the benefits, or mentioned a weaker dollar against the yen as, as not a bad thing. And currency traders at the time were very, very sensitive to such talk because they had just gone through the Plaza and Louvre Accords in the 1980s when, you know, the Treasury Secretary at the time under Reagan worked with other finance ministers to actually, actively affect and influence the foreign exchange rate that the dollar was at. And so there was this sensitivity.

What Bob Rubin and the team that he worked with wanted to do was bring back some calm around all this talk about currency markets. So he actually wanted to make currency policy and any discussion from Washington about currencies boring. So he decided, I'm going to have a phrase. It's going to range between six to ten words. It's always going to say the same thing every time somebody asks the Treasury official, what do you think of the dollar? It's strong today, it's weak yesterday. What do you think of it sir? And the answer is a strong dollar is in the nation's interest.

And he was in a room, you know, I, I got into the room where they're at the White House. Bob Rubin is still at the NEC, he hasn't become Treasury secretary yet. And in the room is Roger Altman, who was a senior official at Clinton's Treasury Department. Larry Summers had not made it quite to secretary yet, but comes after Rubin. He was a senior official. Tim Geitner, who in the 90s, he started off at Treasury as a civil servant. And he was a registered Republican, and he was in that room as they were all discussing how do we bring down the temperature and all of the currency chatter that has markets just swinging at every utterance of the word dollar.

Scott Anderson: So this policy to try and stabilize the currency and stabilize it at a stronger level, you know, the idea of a stronger dollar has consequences, both pros and cons. Talk us through,  about those a little bit, because I don't think, I suspect a lot of listeners may not fully grasp the economic ramifications that people tie to those sorts of policies.

On the one hand, there are effects it has in terms of imports, and in terms of purchasing power for Americans and those who hold and work with dollars. But then there are downsides as well, and as you illustrate in a few chapters in the book, a lot of the downsides fall upon the U.S. manufacturing sector and other entities that are particularly geared towards exports or geared towards production where there's some competitive disadvantages perhaps with international competition. So talk to us a little about what the ramifications of this sort of strong dollar policy are in this period.

Saleha Mohsin: Yeah, you know, Scott, it's really kind of a battle between Main Street and Wall Street in a way, but nobody really labeled it as such at the time. As Bob Rubin was creating this mantra, globalization was really setting in and the U.S. was going to set that example, lead that example, with NAFTA with leading, you know, welcoming China into the WTO. And so, part of the underpinnings of globalization relies on a stable, predictable U.S. government policy on the dollar, which Bob Rubin created as the strong dollar mantra to always support a strong dollar that is backed by a strong economy.

So other countries could just rely that the U.S. dollar is strong enough that they can buy the lots and lots of our goods and import them and sell them to U.S. consumers at a cheaper rate. Now that globalization overlooked some of the problems in the manufacturing sector. And so, I got to do this great thing for the book where I take readers to small towns in, what is now known as the Rust Belt since factories have been hollowed out, in Weirton, West Virginia, you know, I'm from Cincinnati, Ohio, so I focused a little bit on that region. In Moraine, Ohio, where, you know, in these kinds of towns, you see firsthand how the American heartland suffered from a government policy that supported a strong value for the dollar because they wanted to, in part, support globalization and that trend.

So, U.S. blue collar workers, the whole manufacturing sector, these towns that are built around factories saw jobs disappear because those jobs, those goods, whether it's you know, Tupperware containers or, you know, you look at your Pyrex dishes and you look at the glass often you flip it over and it's called, it says Anchor and there's an actual anchor drawn out on there. Those companies once made all of those goods in America and with the shift toward globalization, it was too expensive to maintain those jobs in the U.S. And it was too expensive to try to ship those materials and those goods overseas or even sell them to the American public because there were cheaper goods coming from other parts of the world, parts of Asia, Latin America, I mean, you hear these days a lot about China and how much they've benefited.

And so, I have one chapter that's called Chicken Feet in Ohio and China's One Thousand Year Horizon. And it's kind of just about how there was this factory in Moraine, Ohio that had been there for decades and it had created different things and eventually it was creating glass. And then on Christmas of 2008, the factory shut and a couple of years later, around 2015, it was a Chinese company that opened it back up and boosted the local area restaurants and stores and strip malls because they brought factory workers back, but it was managed by a Chinese staff. And to make those, that Chinese staff feel at home, there was a restaurant that was open on, like, near the campus of this factory that, you know, on their menu was, you know, they sold chicken feet.

And I just thought it's so interesting that because of globalization and that trend, and because of the U.S. government's policy of supporting a strong dollar and what that did to the manufacturing sector, it took China to come in and revitalize that and bring something so foreign as chicken feet to a tiny town in Ohio.

Scott Anderson: I'm glad you brought China into the picture here because that's another big actor that we can't tell the story without as you illustrate in your book, particularly as we get into the 1990s in the high heyday in 2000, the heyday of globalization. You describe the United States and China as essentially entering into kind of a mutually beneficial, but also mutually harmful agreement, kind of a codependency of sorts economically, a bit of a, of a devil's bargain.

And then you also bring in a term that we're going to hear. We hear discussed today even, but it's really in the last few years, this is the idea of currency manipulation. Something that China isn't the only country that ends up getting accused of this, but is kind of one of the leading focuses of accusations of currency manipulation by foreign governments at this time and leading into the current present day. Tell us about that China relationship. How does this whole economic structure impact the Chinese relationship with the United States and vice versa?

Saleha Mohsin: Yeah, that's really interesting. It's come up a lot in the last couple of presidential election cycles as well. Donald Trump really honed in on that. And you can see what the very first chapter of the book is called, Surviving Donald Trump. And it is all about, Trump considering intervening in the U.S. dollar because he sees that other countries have intervened in their currencies namely he was focused on China.

You know, the, the two countries, they're the two largest countries in the, in the world. They are so financially and economically intertwined, but it's like this rivalry. One is forward looking, has a 200 some year history. The other one looks at everything in half century planning mode. One has elections every two- and four-years changing leadership in the executive branch and in Congress. The other one, you know, they will have the same dictator essentially ruling for many, many, many years. So they have different metabolisms as well when it comes to shifting policy and watching how the other develops. And what are their priorities in the U.S., it's a two year horizon because you've got midterm elections and the presidential elections. Whereas in China, it's a much longer horizon for their planning.

You know, they have different approaches to what they mean to meet their deadlines and meet their commitments. So globalization, the trend begins late nineties, early two thousands. Bob Rubin and Larry Summers successfully bring down the temperature around currency talk so that there isn't this constant wonder is the U.S. government about to meddle in its currency but China is undergoing a shift in its economy. It's going from one that's kind of run by central command where the government picks winners and losers and decides which sectors to grow and when toward something that's a little bit more open market, like the U.S., and that's going to take a long time for that shift to actually happen.

And part of their control over their economy in China happens through currencies. They have signed agreements with the G20 and the U.S. to refrain from a lot of that activity, but when you've been doing it for a long time and it is up to you core tenant of your economic policy, you know, you can't just snap your fingers and stop doing it. But also there's been a little bit of a cloak and dagger over the years. There's been a little bit of the U.S. maybe turning a blind eye to China meddling in currencies in a way that creates an unfair advantage to their exporters. So, it's just always going to be cheaper for Americans to buy Chinese goods because they're just able to keep their currency so low that each dollar can buy so much more in the Chinese Yuan. And that became a really, you know, the source of a lot of tension, you know, in the early 2000s.

And it continues, but there was a little bit of a pause in 2008 when a U.S. brewed global financial crisis hits. And China says, well, you've been telling us what is the best economic policy and currency policy for us and for you in the world, yet this subprime mortgage collapse happened on your watch. So maybe you don't always know what you're talking about. And so the currency manipulation and the, I guess the best way to explain it is that just not necessarily aligning and rushing to manage their economy and currency the exact way the U.S. would prescribe it to, it's slowed down even more. And then you get to Donald Trump who says, well, jobs have literally shipped over to China. There is a China shock that happened. And part of it has to do with them meddling in their currencies and us saying, well, they are doing it. We're not going to punish them, but we're not going to do it either and he wanted to rebalance that playing field. And since then you can see that the Biden administration has adopted some of that, that shift in policy, there's a ‘Buy America,’ friendshoring, a little bit more aggressive on China, the relationship is more fraught. And so a lot of that has to do with trying to protect the Rust Belt, the blue collar jobs, the manufacturing sector, and a lot of that comes down to terms of trade, which is a wonky way of saying currency policy.

Scott Anderson: Well, before we get that far ahead, I want to pull in the other thread of the story here, because one thing we haven't really talked about, and frankly, you, you don't really talk too much about in your book up until this point, but I think for good reason, is sanctions, is, is the, the authority, the action that you open and close the book with.

But right around this time is when the 9/11 attacks occur, which serves as a bit of a watershed moment in how sanctions are conceived of and used by the United States, at least in scale, but also eventually in type and technology. Tell us a bit about the rise in sanctions in this era, how that rides on this global economic role the United States has assumed and developed and uses that, what effect it has, how it becomes weaponized as you describe it, and also what the risks of that weaponization might be.

Saleha Mohsin: Yeah, Scott, you do, you're honing in now on like the second prong of what the dollar is. There's one side of the strong dollar policy, the pros and cons when it comes to the domestic economy and the manufacturing sector. And now we're talking about how it fits into foreign policy, national security, geopolitical alliances in terms of offering protection.

And that's what we learned in the aftermath of 9/11. One thing that's kind of interesting is that the global war on terror that started after September 11, 2001, did not start with a DOD or Pentagon action. It did not start with the rolling of military tanks or a machine gun going out off. It started at the Treasury Department. At the end of that September, George W. Bush signed an order that gave the U.S. Treasury Department unique powers to track the money flows of terrorists that committed the attacks on 9/11. How did they finance it? If we can figure out how they financed it, we can cut off those flows, but also predict when and where the next attack might be. Because at the time it was a couple of hundred thousand dollars that moved in broad daylight to finance that attack and it was kind of shocking.

And in that moment, the way America went to war changed. After 9/11 economic sanctions started to get much more sophisticated, the U.S. 's ability to track money flows became secretive, sophisticated, almost happening in real time as bank accounts were tapped and money was physically shifted about. Now, it took a couple of more years. It was with the, I believe, the USA PATRIOT Act close to 2004, that the Treasury Department actually created a sanctions unit. It's the Terrorism and Financial Intelligence Unit of Treasury. There's three units of Treasury. One is all on domestic affairs. One's on international. And this is for all intents and purposes, the shortest way to talk about it is the sanctions and financial intelligence, which is following the money.

So, what they did was they took this tiny little office, the Office of Foreign Assets control, put it under a larger umbrella with a focus on, we're going to see how we can use the power of the dollar to protect our homeland. And there was no big attack after that. You know, there were a lot of threats. There was a lot of terror and the U.S. Treasury Department was behind a lot of that and has continued to be behind a lot of that and what sanctions really are is the U.S. saying everyone in the world needs the dollar. Money cannot change hands in this world unless you're going to touch the dollar. You know, I think something like more than 90 percent of financial transactions back then, you know, 20, 25 years ago happened in dollars, touch the dollar in order to happen.

So if a country is going to attack us or if a group in the world is going to attack us, then you can't use the dollar anymore. And that cuts that person, that individual, that country, that official, that entity off from the world basically. That's like saying you can't use the internet anymore because you violated, you know, our safety too many times. So, it started to punish people in whole countries. And slowly, the U.S. you know, our leaders saw that there is a way to punish people without sending actual military boots on the ground, without sending U.S. troops on the ground to fight the war. It is using the dollar. That's why the, the, the back curve cover of the book, you'll see an origami paper dollar turned into a war plane and a military tank because it is an actual weapon now. And that all started with 2001.

Scott Anderson: But you, you note in the book that this isn't necessarily a one-way street. There's a risk factor that comes around. You tie it particularly to Jack Lew, who was President Obama's second Treasury secretary. And this idea that there is a concern that as the use of sanctions escalated, as the diversity in targets and different types of activities we began to use to shape with sanctions increased, there was a risk of a backlash. Tell us about that a little bit. And then what happened to that anxiety in the end of the Obama administration, of course, the Trump administration that followed?

Saleha Mohsin: Yeah, you know, this, this speech that Jack Lew gave, it was March of 2016. So just a couple of weeks before I became a Treasury reporter for Bloomberg. At the time, you know, it was an interesting speech. He talked about the power of the dollar, about what sanctions have accomplished so far. And he laid out that maybe we need a doctrine to help us determine when and how to use this tool, sanctions, as a tool as part of our national security and foreign policy.

This is before the GOP had selected Trump or that Trump had emerged as the candidate for the Republicans. There was still an open race there. It's, we still did not know what was all was going to happen in 2016 when Jack Lew gave this speech. Trump was on the scene, populism, you know, we could see the populist cries getting louder and louder. And Trump was, and Bernie Sanders and Elizabeth Warren were on, one of the few in the, in our country that could pick up on those sort of cries for help. But we really didn't know what was going to happen.

But Jack Lew, he made this speech and it was interesting at the time. But it was something that, you know, over the next, you know, then once I started covering the Trump administration over the next several years, I found myself, I bookmarked it and would find myself going back to it over and over again, because he had kind of predicted almost what was going to happen. That someday, policymakers, both in the executive branch and on Capitol Hill, are going to say, let's lean forward and sanction more people, more countries, if they're crossing us.

And I, I did when I interviewed Secretary Jack Lew for the book, I asked him, and I asked them of his advisors as I was interviewing and researching the book, what drove him to write that speech. And let's forget everything, all the knowledge that we have now about what happened in the Trump administration and now in the Biden administration of people really relying on economic sanctions. And what I learned was, and it's in the book, that over and over again, Jack Lew and other top Treasury officials would be in national security meetings and they would hear that, well, the costs of war, the human lives, the, the monetary costs of war, diplomatic costs are so high, kinetic action is, is, spills blood. What is a way that we can apply pressure on an adversary without doing that? Oh, let's sanction someone. Let's apply economic sanctions.

And Secretary Lew said that he saw over and over again, people just willy nilly throwing the option of sanctions on the table. And he thought at some point we might overdo it. We might have applied so many sanctions or wielded this sword and tried to threaten people with sanctions so many times that people think, you know what, before you even sanctioned me, I'm going to start moving away from the U.S. dollar. Why am I so reliant on the dollar? I'm going to start trading with my trade partners in our own currencies and encourage our businesses to find another way to settle oil contracts. And it's exactly what happened. It's exactly what happened.

We saw under the Trump administration, the use of sanctions went up. The Obama administration used sanctions a lot. Between 2001 and I think around 2020, the use of sanctions increased 933%. You would have congressional action dictating when the U.S. government would apply sanctions, which makes it very complicated to then remove sanctions because then you need congressional approval, which can get tricky because there's always strings attached to any agreement that they have in Congress.

And so, Jack Lew used that speech to say we need to think about this more before we overuse sanctions and they don't, they aren't as potent as they are because of the dollar's role in the world. And so part of protecting the dollar is taking a look at what our sanctions regime is and should be.

Scott Anderson: So as we come out of the Obama administration and into the Trump administration, we've seen first a major economic from 2008 to 2010, the ramifications of which are still being felt in a lot of ways. People are still wrestling with some of the policy response of this period. You see long term discontent that you've, as you've already described, President Trump taps into. You see this growth in economic sanctions, the weaponization of this dollar role that is becoming a very popular policy tool may have some negative consequences.

How do we see all that come to a head during the Trump administration? Because we see a lot of the conventional wisdom that has prevailed up until that point get turned on its head as you describe it. And I think it's important to understand what happened for those four years to tee up what the Biden administration is considering and pursuing now in relation to Russia, as well as in other contexts.

Saleha Mohsin: Yeah, it was interesting as I researched the book, I would come across articles and I would see a headline and, you know, I'm with Bloomberg, I would see a Bloomberg headline and it would say something about, oh, economic sanctions, Trump tried to undo them with a tweet or something on North Korea. And I thought, oh, I forgot that that happened. And then I would click on the story and it turns out I wrote the story. And so, so much happened in the Trump administration that when you look back at it, it surprises you.

So I'm just going to use one example to answer your question. The, the one I'm going to give you is what happened in April of 2016. The, the chapter title for this is ‘Mnuchin, the Oligarch and Jack Lew's Nightmare,’ and it's everything that you're, you're talking about. It's Treasury Secretary Steven Mnuchin under the Trump administration decided to sanction, apply sanctions on Russia in part due to the election meddling claims, allegations. There was a lot of pressure from both Republicans and Congress to take some action. And it ended up sort of being Jack Lew's nightmare come true, exactly what he laid out in March of 2016, as his concerns actually kind of all the bad things kind of happened. Where you know, it was April 6 of 2018, the Treasury Department announces sanctions on an oligarch, a Russian oligarch named Oleg Deripaska and anything that he has a large share in. And that included one of the world's largest aluminum companies called Rusal. And it was maybe the first time such a large entity had been sanctioned. And it shook global commodity markets.

And it's, depends on who you ask, whether the Treasury Department was aware of how big of a deal these sanctions were going to be. But it basically told the world that, well, this one company that controls so much of our aluminum supply pretty soon won't be able to sell you as much aluminum. And so aluminum prices shot up and other commodity prices also were affected by that because all of a sudden, maybe we won't be able to find our metals anymore. Whole factories that make aluminum in parts of Europe were at risk of shutting down and shutting down a aluminum factory has huge environmental consequences. You can't just flip a switch and it's off and then flip the switch and it's on again. So nobody really could understand how to untangle themselves and the company itself couldn't understand how to untangle itself from the dollar. And I spoke to a lot of Treasury officials who behind closed doors said, and White House officials who said, that Treasury did not do a deep assessment or analysis of what these sanctions could mean. And anytime I have asked Steven Mnuchin, on the record, off the record, he's always contended those sanctions worked exactly how we expected them to. And we knew what we were doing, and that's an interesting tension.

But it was kind of the U.S. overplaying its hand, that maybe there are entities or people that are too big to be sanctioned. And to point that out or to allow people to realize that is a little bit of a scary thing because then it's kind of like the too big to fail situation in finance and in banking. And so, it did kind of prove that there are parts of the world and certain situations where U.S. sanctions are not going to be effective because of the way markets work and because of how intertwined the world has now become and how different economies rely on each other.

Scott Anderson: I think this brings us up to the kind of seminal moment that you tee up at the beginning of the end of your book, this February 2022 decision to, in response to Russia's invasion of Ukraine, lay out a truly unprecedented array of multilateral economic sanctions by the United States, by European and other predominantly Western allies targeting Russian central bank assets, Russian sovereign assets, Russian finance instruments in various cases. I guess Russia, of course, a country that's in the G20 and the big concern there as you tee it up is that this could be the day, the moment we look back on as the beginning of the end of the era of the dominant dollar, the straw that broke the camel's back on de-dollarization.

You throw some cold water on that idea in the conclusion, but I think you acknowledge that this is a possibility. This is the underlying concern about doing something so dramatic against such a major part of the global economy using the weaponized dollar, the role of the dollar in the global economy. Tell me a little bit about where do you think we go from here. What is it that we should be thinking about, about de dollarization, about these toolkit, about these policies and how the Biden administration has wrestled with it, struck as you've already described in a few places, a little bit of a new tack from prior administrations. And what we need to look at as voters, as concerned citizens, as people who at least many listeners likely want to keep, you know, a strong economically strong United States, how these other policies enter into it that this administration and future administrations will have to wrestle with.

Saleha Mohsin: Yeah. And like you're pointing out, this is where I start in and the book, the very first line in the introduction is, “It is possible that 5:13 PM on Saturday, February 26, 2022 will one day be seen as the precise moment the ebb of the dollar empire began.” Now, we don't know whether that's the truth, but that is when the largest sanctions package against any country had come down. The U.S. led the world, over half the world joined the U.S., but it was potent because of the U.S. to cut off Russia from the global financial system, from the dollar.

And you know, the Russia was at the time the world's 11th largest economy, a G20 country. I'm surprised sometimes to remember that the World Cup in, what was it, 2018 was in Russia, I think. So intertwined culturally, you know, sports, financially, economically. And the U.S., they, you know, it was considered in the Biden White House, the nuclear option to go with this. So they knew it was going to be a big deal. And that weekend, on that day, that Saturday, Treasury Secretary Janet Yellen, who as sitting secretary, is charged with being the, the main steward of the dollar had second thoughts about do we want to do this.

One thing that you know, I learned as I was writing the book and doing the research was that sometimes the simplest comment Treasurer officials will get, give you on a complex subject really just, it is the answer. And, and it came to me like this, you know, I would hear Treasury secretaries and Treasury officials and former officials say, well, nothing can happen to the dollar as long as the U.S. is strong. And I had Hank Paulson, who was George W. Bush's third Treasury secretary and steered the country through the global financial crisis in 2008 and onward for a few years, he said this to me. He said that, you know, no matter what, what happens in the world, if the U.S. economy is strong, no one can touch us. And I realized when I heard him say it directly to me, with this context in my head about de-dollarization, threats from abroad, you know, the Chinese Yuan or the Euro becoming more dominant than the dollar, or other countries finding ways to trade amongst themselves outside of the dollar, none of that really will affect us if the U.S. itself is strong.

And again, I will bring you back to this one line that I found really inspiring from Bob Rubin, where he says that faith in democracy and faith in markets go hand in hand. So we come back to democracy, that if we remain a strong democracy, our elections remain safe. The country is as united as it can be. Institutions are independent, the public trusts its government, that lawmakers and policy makers protect all of that, whether it's through, you know, maintaining ethics and the appearance of ethics across the courts and the Federal Reserve and different agencies. Whether that is making sure that our public financing is taken care of without too much show, so debt ceiling fights and shutdowns are probably not the greatest thing for our country or even our democracy. If people see that we are strong and united, then no one can touch us.

You can de-dollarize as much as you want, you can move away as much as you want, but the fact of the matter is that when things get rough, when COVID hit, or when the financial crisis hit, investors and foreign countries were running toward the U.S. dollar to, to invest in, to protect the value of their savings. People will come to us for that. They will come to store money in the U.S. or invest in the U.S. because it is expected to remain strong. And that's what I learned from that line when Hank Paulson said that to me, that as long as we're strong, it doesn't matter if other countries de- dollarize or not.

But then I think it's all in our hands. It's, it's up to the American electorate and up to Congress, the executive branch, and every government official that is confirmed or not Senate confirmed is a civil servant, is a political appointee to work toward protecting our democracy because that is how we can protect the strength and power that the country has through this national treasure that is the dollar. And that's where I kind of end the book. You know, I end the book with a, a line of Shakespeare that's basically the fault is, is not in the stars. It's in ourselves.

Scott Anderson: Well, I think that's also a good note for us to end our discussion on but thank you so much for joining us here today on the Lawfare Podcast.

Saleha Mohsin: Oh, it was a pleasure. I had so much fun.

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