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 and its privilege as the issuer of the reserve currency as a carrot-stick tool of foreign policy.
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.
“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.”
Locking a country completely out of SWIFT would effectively cut it off economically from the world. But there would also be consequences that ripple through other economies. For instance, a member of the Russian parliament warned locking his country completely out of SWIFT would halt the flow of goods into Europe.
If Russia is disconnected from SWIFT, then we will not receive [foreign] currency, but buyers, European countries in the first place, will not receive our goods — oil, gas, metals and other important components.”
Given America’s history of using sanctions as a foreign policy tool, Russia wasn’t unprepared for the move. In fact, A number of countries that know they could easily find themselves in the crosshairs have taken steps to limit their dependence on the dollar and have even been working to establish alternative payment systems. This includes Russia, China and Iran.
A growing number of central banks have also been buying gold as a way to diversify their holdings away from the greenback.
Meanwhile, the Russian central bank was aggressively divesting itself of US Treasuries. Russia sold off nearly half of its US debt in April 2018 alone, dumping $47.4 billion of its $96.1 billion in U.S. Treasuries.
It’s not just America’s “enemies” who are worried about the U.S. abusing its economic power. Her friends are also wary, as they should be.
This underscores a risk to the U.S. sanction policies could also have long-run consequences, eventually undermining the dollar as the world reserve currency.
China is looking on thinking, well, Russia is doing something America doesn’t want. They’re getting sanctioned. What if we do something that America doesn’t want? We get sanctioned. They pull the dollar out from under us. Let’s get out from under the dollar on our own. Let’s not leave this weapon in the hands of the U.S. that can be turned against us at any time.”
If enough countries abandon the dollar, the value of the U.S. currency would collapse and create economic chaos here at home. The de-dollarization of the world economy would likely perpetuate a currency crisis in the United States. Practically speaking, it would likely lead to hyperinflation.
Meanwhile, the U.S. government should be wary of throwing its economic weight around too glibly. It isn’t the only country with an economic nuclear option. China ranks as the largest foreign holder of U.S. debt. If the Chinese were to dump a significant amount of U.S. Treasuries, it would collapse the bond market and make it impossible for the U.S. to finance its massive debt.
Most people view economic sanctions as an acceptable alternative to military force. But economic warfare also comes at a cost. It’s typically not the sanctioned government that suffers. It’s the innocent people living in that country that must cope with shortages and increasing prices.
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.
Michael Maharrey is the Communications Director for the Tenth Amendment Center. He also runs GodArchy.org and hosts the GodArchy podcast, both of which explore the intersection of Christianity and the state. This article was originally published on The Libertarian Institute.