When we think of American power, we often think of missiles, guns, and tanks. But operating in the background is an incredibly powerful weapon whose use often goes unnoticed: the dollar. In her new book Paper Soldiers: How the Weaponization of the Dollar Changed the World Order, Bloomberg News correspondent Saleha Mohsin explains how the dollar’s power actually works. What does it mean for the dollar to be the “global reserve currency,” and how does this confer power? What do sanctions do, and what determines whether they succeed or fail? How do changes in the value of currency alter the relative power of countries across the world? Mohsin joins us to answer a few basic questions that are crucial for understanding the world today.

NATHAN J. ROBINSON 

You say that the United States dollar may look humble—it may look innocent—but it is, as you say, the most consequential weapon that the United States has. What do you mean by that?

SALEHA MOHSIN 

It’s a weapon that we don’t actually always realize exists. It’s a weapon that the U.S. didn’t know it had and almost didn’t really know that could become really powerful. It’s not like a military tank rolling down the street towards you, which you hear. But it’s a weapon that reaches, in the blink of an eye, almost every single person on this earth, and all of those elements make it a little bit terrifying. That power exists. There are great benefits to it for Americans and for the rest of the world, but there are also some downsides.

ROBINSON 

Let’s unpack that. How could the dollar possibly be used as a weapon?

MOHSIN 

The seeds of the weaponization of the dollar were planted in 1944 in the Bretton Woods Conference. Every economic wonk in the world knows this date, but it is when, by design, the dollar was crowned King Dollar, as the world’s most powerful, important asset that the rest of global financial transactions and commerce would be pinned against. That’s where the dollar’s power began, and it increased and rose as the U.S. became more and more of a dominant player on the world stage and became a superpower. And I would say the shift in weaponization happened almost overnight after 9/11. When those twin towers went down and America essentially became at war with an unknown unimaginable threat, everyone was wondering, where’s the next threat? Will it be powder in our envelopes? Is it another kind of biological weapon that we can’t see, something that’s going to fall from the sky? The U.S. turned to the dollar first. The global war, or the U.S. War on Terror, didn’t start with a tank or with troops going somewhere. It started with the stroke of a pen. George W. Bush gave fresh powers to the Treasury Department to weaponize the dollar and punish people with it.

ROBINSON

One of the extraordinary things about the story that you tell in this book is that you are revealing to us a kind of tussle for power that is always going on in the background in the world around us. As you’ve indicated, it’s not obviously visible to those of us going about our everyday lives. When we think of the War on Terror, we discuss things like the invasion of Afghanistan and Iraq and the very obvious human consequences of those invasions. Tell us more about what the silent, invisible financial war consists of.

MOHSIN

Economic sanctions. That’s what we’re talking about here. The most recent example was February 2022 when Russia invaded Ukraine and the U.S. decided that this was against American foreign policy and America’s role as the world’s global peacekeeper. I know that there’s a lot to say against that—I get all of that. In earnestness, I will say that ruling as global peacekeeper, the U.S. decided to punish Russia for that transgression. Economic sanctions are the weaponization of the dollar when diplomacy has failed. So, in this example that I just gave you, the pressure to convince Vladimir Putin not to invade Ukraine failed, the invasion happened, but the U.S. decided we didn’t want to send troops into this situation—we didn’t want to be part of the physical war where blood is spilled, with tens of billions of dollars of defense spending. Economic sanctions are cheap and really effective. The U.S. dollar is the world’s reserve asset, and that means that it is the lifeblood of the global financial system. You cannot participate in any kind of global commerce without touching the dollar. So, the U.S. said to Russia, or said to everyone, no more U.S. dollars for much of Russia: the central bank can’t have any of its own reserve assets that are held in dollars, many businesses and business tycoons—oligarchs—in Russia were cut off from the dollar, and that crippled their economy for a little while. The ruble plunged 30 percent in about a month. That’s what the immediate impact of economic sanctions can have. 

ROBINSON 

Tell us exactly how it works. If we impose sanctions, what does it mean to cut off access? What happens in the world when the decision is made? What are the chain of events that are actually triggered?

MOHSIN 

Logistically, implementing the sanctions is pretty dull. Basically, the Treasury Department is where all the economic sanctions work happens. There’s a little office called the Office of Foreign Assets Control (OFAC), and I profile this tiny but very powerful office in Paper Soldiers. I got a behind-the-scenes, after-hours tour of this building.

It’s a dusty set of offices staffed with government officials who are not political appointees. They don’t make a ton of money like private sector types. But I tell you what, when you talk to New York’s biggest finance titans, they go pale when OFAC wants to call or visit because maybe they had a violation. What they do is this. The administration says it wants sanctions on some Russian tycoon, and OFAC, with a lot of boring legal language, posts it on their website. That’s it! Every banker in the world that touches the financial system has to listen to OFAC because they posted it on their website. So, we’ve got not just news organizations but hedge funds, central banks, and financial institutions around the world pummeling this website to make sure they get immediate updates to their information.

ROBINSON 

So, what do they do when one of these notices is posted? What are the things that they then have to do?

MOHSIN 

Let’s just say you work for a bank—you’re working in the compliance department of a financial institution, and you see the winds are shifting. Let’s stick with the example of Russia: Putin is talking about invading, and Biden is verbally threatening sanctions, and you’re monitoring policy and talk from Washington and from other global leaders and constituents. Especially now that there’s so much economic sanctioning happening, there are probably teams and teams of compliance experts who are always digging up that if so-and-so is sanctioned, what is their exposure to that region, that industry, or that person? And so, they basically have to go back to that file and cut off these activities.

Now, it’s not always immediate. Many times, the Treasury will give them 30 days to wind down operations. There’s all this complicated language because behind the scenes, OFAC-ers, as they’re called, have been in touch with the private sector to say, what is your exposure? They can’t signal that a sanction is coming because that could cause asset flight, but they are doing their due diligence, always checking in on what the exposure is of the global financial system to different potential sanctions targets, to know what the repercussions will be. That’s part of their job as those who execute and implement sanctions.

ROBINSON 

Tell us more about what it means for the dollar to be the global reserve currency. When we’re talking about how powerful the United States dollar is, why does everyone have to go along with this?

MOHSIN 

Everyone needs dollars; everyone has become very dollar dependent. Basically, after Bretton Woods in the 1940s, the world had just emerged from the ashes of two world wars. Most of the world’s infrastructure had been physically damaged from the war, and the U.S. mainland was saved from all of that just through sheer geography. Our fiscal situation in the 1940s was a little bit better, and the trajectory was better than the last owner of the world reserve asset, which was Great Britain. And so, at that time in 1944, everyone was looking for a hopeful outlook that came from America, that came from the idea of becoming so economically integrated that if we start punching and fighting each other, we’re going to hurt ourselves as badly as I would hurt you. It was like saying, Let’s all get behind the dollar as the world’s reserve asset. The global financial system, as we know it today, kind of emerged from those meetings. And so, everyone kind of encouraged that dependency to avoid another war, but also to have shared growth so that all boats are rising together. There was a huge success in that globalization is good for many parts of the world, for many countries and people. The pendulum might have swung too far in one direction and forgot some people as it swung, and that’s kind of where populism comes from and what we’re dealing with now. But that’s why everyone is so beholden to the dollar. People have built their economies around it. In small emerging markets, they issue government debt in dollars. It’s a way to get investors to loan them money because there is a stability and predictability about parking your cash in dollars. You know when you come back to it, whenever you want, it’s going to be there. We can trust it.

ROBINSON 

You make the case that this is an extremely powerful weapon, that integration into the world financial system makes it so that the United States has the power to dictate terms and can say things like, now nobody can trade with Iran, and if you trade with Iran, you’ll be sanctioned yourself. But it also seems true that—the kind of thread running throughout—is that if this power is used too much, other countries around the world start questioning whether they want to maintain this level of U.S. dominance. It seems like we might be reaching a point where we throw our weight around us too much.

MOHSIN 

What we’re seeing right now is that the dedollarization debate is raging in Washington, and it’s raging in economic and financial circles in most of the capitals around the world. And actually, Donald Trump, earlier this month, talked about dedollarization. When he went on CNBC, he said that he doesn’t like the idea of people moving away from the dollar, and maybe he would take action. And we do know that when he says those kinds of words, there is something behind that.

The dedollarization debate began with the 2022 sanctions, and this is the beginning and end of my book. In the introduction, I write, it’s possible that 5:13 p.m. on Saturday, February 26, 2022, will one day be seen as the precise moment that the ebb of the dollar empire began. We don’t know if that’s accurate right now. This is the first real debate. For decades, people have wondered, when is the dollar’s hegemony going to end? Is the Japanese yen going to take it over? In early 2000s, the Euro was a big deal and people thought that maybe it would take over the dollar. Nothing really happened, and U.S. officials, particularly Treasury officials, really count on that. They say, we’ve heard this come up constantly. But this time there is some action behind it. It’s more talk than reality, but there is a real reason behind it. For the first time since Bretton Woods, the global economic order is coming apart. Russia invaded Ukraine, and populism, in large part led by Trump, but other people as well, has emerged onto the scene and triggered more protectionist and isolationist policies in many countries. But when the U.S. does it, it’s a big deal.

ROBINSON 

How effective is the use of this weapon? Obviously, there are cases, like the longtime sanctions on Iraq and on Iran, where it seems to have a serious negative effect on the country’s economy. On the other hand, what we seem to see about the sanctions on Russia is that, as you mentioned, initially, they had this massive effect and now somewhat less so. How much power does this have?

MOHSIN 

The efficacy of U.S. sanctions is something that has been discussed a lot lately. Everyone has their take on it. Plenty of people say that U.S. sanctions failed on Russia. 

ROBINSON 

Yes, I’ve heard that. 

MOHSIN 

The way that I’m going to describe that is by saying that if your house fell apart, the hammer failed. Sanctions are a tool, not a policy or a strategy. Sanctions are the tool by which you execute and implement a foreign policy strategy. It is fair to say U.S. foreign policy might have failed when it comes to Russia. But the sanctions are a hammer, a tool. Now, on the one hand, what I say to government officials when I’m talking to them, as I’m a reporter in Washington, is if you ask them if they failed, they go into a breathless explanation, which I’m about to give you. If you’re explaining, you’re losing—that’s the line—but there is something to it.

If you look at sanctions, you have to look at the goal. What, on the first day when they were first announced, was the Treasury Department’s stated goal of the sanctions? Is it part of a strategy? Do they have an expectation of what’s going to happen to the economy? Have they looked at it three or four steps ahead? That goal tends to get mucked up as you go down the line because administration officials muck it up. A month into the war, and a month after those sanctions, Biden himself said, look at the ruble, it’s rubble now. It fell 30 percent, but the ruble has recovered quite a bit. Russia has converted into a war economy, has economic expansion, and in the past year, they have imported a billion dollars worth of European and American microchips for war technology without violating sanctions. So, that looks like they failed, but I would actually say it’s more of a strategic failure, not a failure, necessarily, of the tool.

ROBINSON 

I want to ask you about the question of currency values. We’ve discussed economic sanctions here, but another thing you discuss in your book is the way that countries can increase or decrease their economic power through the strength or weakness of their currency. How does that work?

MOHSIN 

The U.S.’s dollar dominance does not necessarily come from the Exchange Rate Mechanism. It comes from its ubiquity and the fact that everyone needs it. On the exchange rate side, the U.S. has, in the past, wanted a strong dollar compared to other currencies because they want to be able to import a lot. That was what globalization was. So, that’s why I say in the book that a strong dollar policy, in terms of its actual exchange rate value against the euro, the yen, the yuan, should be strong because it underpins globalization and encourages the flow of commerce across borders into the world’s largest economy, which is consumer-driven. We’re just buying stuff from China, Bangladesh, from everywhere. Separate that from dollar dominance, meaning everybody needs it, and that’s where that power comes from. Now, what we’re seeing is—it started with Trump, and it continued into the Biden administration—not a weak dollar policy, but not necessarily a strong dollar policy, either, and not a policy that is going to avoid a weak dollar. It used to be that we didn’t want to ever say we wanted a weak dollar because it would make us look weak. And now they’re saying a weaker dollar is better for a large part of America—the forgotten man, the manufacturing Rustbelt. They need a weaker dollar, so we shouldn’t be so against that. There has been a shift, and it’s a pretty wonky shift, but it does have an influence.

In the book, I take you into the Heartland because I’m from Cincinnati, Ohio, so I wanted to connect what happens in these big economic circles, where everyone’s so smart and missed the financial crisis, and how it affects people in middle America. So, I take you to Weirton, West Virginia, where there’s a glassmaker that shut down because of the effects of globalization. I take you to Moraine, Ohio, where a manufacturing plant at one point made Frigidaire, then made parts of automobiles, and then made something else. It also shut down and then in 2015 was reopened under Chinese management. So I take you into what it means for the Heartland to have a strong dollar in terms of the power it gives the country but also the exchange rate.

ROBINSON

Can you help me better understand whether America is more powerful with a strong dollar or weaker? Because as I understand, there seem to be pluses and minuses for each, winners and losers. But what are the stakes of the fluctuations in the strength of the dollar?

MOHSIN

When you have a strong exchange rate, it is good for people who import in the country. It’s good for companies that have manufacturing plants overseas. So, let’s say you make T-shirts and are importing them from Vietnam, and their exchange rate—their currency—is really weak. And so, your $5 will buy way more of those T-shirts than they would if the U.S. dollar were weaker by comparison. It’s a boon for those kinds of companies. It’s not good when you are a company and you’re trying to sell products domestically and also overseas. Inside the borders, if this dollar is so high in terms of exchange rate, everyone’s going to think they can just get this cheaper in China, so they will get it there and not buy American. Overseas, no one wants to buy that U.S. export because they also say they can get this cheaper from some other country, so why should they buy it? Those companies suffer when the dollar is very strong.

ROBINSON 

I want you to help me reconcile something here. You say that President Trump’s economic plans amounted to the exploitation of American power and the weaponization of the dollar, and then you mentioned that Trump wanted the Federal Reserve to weaken the dollar, which you say would be devastating to America’s superpower status in the world. In fact, you say that that would be an understatement. I can’t decide—I still have trouble really understanding whether Trump was undermining or enhancing America’s power.

MOHSIN 

Well, exactly. He’s a mercurial man, and his policies stepped on themselves. Sometimes the right hand didn’t always know what the left hand was doing. And that is true about all administrations, but with him, it was just more on display, and with bigger policies. On the one hand, he said, I want a weaker exchange rate because it is good for our manufacturing sector and the Rustbelt economy—he tapped into a frustration across America and the world, a real one no one was listening to. So, it was a great thing that he shone a light on this part of the American economy.

On the other hand, he was enjoying the prowess that America has through the dollar, that he could weaponize, because he levied a lot of sanctions: hundreds of sanctions on Iran, and sanctions with the drop of the hat on Russia and on Venezuela. Sanctions use rose a lot. Generally, the trajectory since 9/11 has been an increase. Under George W. Bush and under Obama, sanction use went up, and it really went up under Trump. And that was him: with the left hand, he said, I want a weaker exchange rate for the dollar for my manufacturing folks, and with the right hand he was saying, but I want to be able to have the ability to geopolitically bully adversaries by sanctioning them. 

ROBINSON 

I suppose the irony here is that some of these policies that are designed and based on the rhetoric of America First—America must be the strongest and best in the world—actually, ultimately, undermine the country. You say that it’s devastating to America as a superpower, and that suggests that ultimately, his approach weakens American power. 

MOHSIN 

Well, for one thing, I don’t know if we can say “ultimately” yet because he might become president again, and so the story continues. And the Biden administration and Democrats have absorbed a lot of his inward-looking policies. He shifted the debate and shifted the way both parties look at the country. You hear President Biden say Buy America and talking about friendshoring, and that is another way of saying America First and Make America Great Again.

I interviewed all the living Treasury Secretaries—except for one who was quite elderly—for this book, and one really interesting one was Hank Paulson. He was the third Treasury Secretary under George W. Bush, and we all know that he was one of the big financial crisis fighters in the aftermath of the 2008 subprime mortgage and housing market collapse. He said this a lot as a secretary, and he said in his post Treasury Secretary life, that whatever happens in the rest of the world, if the U.S. economy is strong, no one can touch us. And that’s the note that I end on in the book: as long as our economy is strong, and that includes the electorate being happy, a lot of social issues may come up and unrest happens, but what’s at the root of it is economic scarring and unhappiness with where the chips fell. If the U.S. can rebalance from globalization so that the forgotten man is not forgotten anymore, the U.S. will emerge stronger. If we can get over this deep partisanship and the deep ideological divides that we’re in the midst of, then we will be so strong, and it doesn’t matter what another country does. Many countries can dedollarize as much as they want, but the U.S. is just too big and strong to get away from.

Transcript edited by Patrick Farnsworth.