But the U.S. doesn't only project power across the globe through its massive military. It also weaponizes the U.S. dollar, using its economic dominance as both a carrot and a stick.
The U.S. government showers billions of dollars in foreign aid to "friends." On the other hand, "enemies" can find themselves locked out of the global financial system, which the U.S. effectively controls using the dollar.
How exactly does the United States weaponize the dollar?
It utilizes the international payment system known as SWIFT.
SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. The system enables financial institutions to send and receive information about financial transactions in a secure, standardized environment. Since the dollar serves as the world reserve currency, SWIFT facilitates the international dollar system.
SWIFT and dollar dominance give the U.S. a great deal of leverage over other countries.
The U.S. has used the system as a stick before. In 2014 and 2015, it blocked several Russian banks from SWIFT as relations between the two countries deteriorated. More recently, the U.S. threatened to lock China out of the dollar system if it failed to follow U.N. sanctions on North Korea. Treasury Secretary Steven Mnuchin threatened this economic nuclear option during a conference broadcast on CNBC:
If China doesn’t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the U.S. and international dollar system, and that’s quite meaningful.
Circumventing the Attacks
A number of countries, including China, Russia, and Iran, have taken steps to limit their dependence on the dollar and have even been working to establish alternative payment systems. A growing number of central banks have been buying gold as a way to diversify their holdings away from the greenback. It comes as no surprise that countries on shaky ground with the U.S. would take such measures, but even traditional U.S. allies have grown weary of American economic bullying.
On Sept. 24, the E.U. announced its plans to create a special payment channel to circumvent U.S. economic sanctions and facilitate trade with Iran. E.U. foreign policy chief Federica Mogherini made the announcement after a meeting with foreign ministers from Britain, France, Germany, Russia, China, and Iran. She said the new payment channel would allow companies to preserve oil and other business deals with Iran:
In practical terms, this will mean that E.U. member states will set up a legal entity to facilitate legitimate financial transactions with Iran and this will allow European companies to continue to trade with Iran in accordance with European Union law and could be open to other partners in the world.
The plan comes in response to Donald Trump’s decision to withdraw from the Iran nuclear deal. The E.U., Russia, and China released a joint statement saying the “Special Purpose Vehicle” will “assist and reassure economic operators pursuing legitimate business with Iran.” The statement also said the signatories to the Iran deal “reconfirmed their commitment to its full and effective implementation in good faith and in a constructive atmosphere.”
The Special Purpose Vehicle will serve as a clearinghouse for transactions with Iran. An Al Jazeera reporter explained it this way:
If the Italians want to buy some Iranian oil, they will wire the money to this entity which will then handle the financial transactions from there and vice versa. There will be no involvement of commercial banks and central banks, both of whom are terrified at the prospect of US retribution if they are seen to be going against US sanctions.
Rodger Shanahan, a research fellow at the Lowry Institute for International Policy, called the plan “a poke in the eye for the U.S.”
America's undeclared wars have cost trillions of dollars. Economic warfare could come at a similar price. De-dollarization of the world economy would likely perpetuate a currency crisis in the United States, and it appears a movement to dethrone the dollar is gaining steam. This is yet another consequence of the U.S. government abandoning the constitutional requirement for sound money. The Federal Reserve perpetuates the system with its money printing and interventionist monetary policy.
As James Madison said, "Of all the enemies to public liberty war is, perhaps, the most to be dreaded, because it comprises and develops the germ of every other." War always comes at a steep cost—whether military or economic.