Article by Kevin Freeman – from the February issue of Tactics and Preparedness Download PDF
OIL EMBARGOS AND CURRENCY ATTACKS HAVE LONG SUPPLEMENTED DIPLOMACY.
Economic warfare is not a new concept. In fact, it has a long and storied history and has played a significant role in the outcome of major conflicts.
For the purposes of this study, economic warfare is defined as a state-sponsored act against another state's economy to coerce that government into taking a certain action, and financial terrorism is defined as secret, behind-the-scenes manipulation of a nation's economy by state or non-state actors. These definitions expand on the traditional definition of economic warfare as:
… an intense, coercive disturbance of the economy of an adversary state, aimed at diminishing its power. It is analytically distinguished from "military warfare," which attacks the adversary's military capabilities, not its economic resources. In practice, of course, the two forms of warfare may overlap, as for example strategic bombing [of] military targets as well as destroying [an] industrial plant.1
Traditional economic warfare involves measures such as blockades, tariffs, currency manipulation and embargoes, which were the primary economic weapons used in previous centuries.2 For example, in the 1700s and 1800s, the key to economic dominance was having control of trade routes, and Great Britain, the naval power of the time, used the blockade most effectively. Britain's opponents eventually began to apply a form of economic warfare by using neutral countries to avoid the blockades when transporting their products.3
By the 1930s, currency and trade wars dominated the international financial scene. In the midst of a global depression, nations attempted to devalue their currencies in order to gain an export advantage. While the source of these currency wars was economic competition, there is little doubt that they helped contribute to the outbreak of World War II.4 During the same period, the United States used the trade embargo in an attempt to curtail Japanese aggression. President Franklin D. Roosevelt took successive actions to (1) cut off Japanese access to steel and scrap metal supplies, (2) freeze all Japanese assets in the United States and (3) institute an oil embargo against Japan that cut off 90 percent of the empire's oil supply and eliminated three-quarters of its foreign trade. These actions left the Japanese two broad options: retreat or start a military conflict.5
During WWII, the U.S. leadership understood the importance of economic warfare policies. FDR instituted a Board of Economic Warfare that was tasked with securing the resources necessary to pursue the war and to prevent our enemies from doing the same. Dean Acheson, assistant secretary of state during WWII, explained the strategy: "We waged economic war on foes and friends within their grasp alike, spreading deprivation with even-handed harshness."6
In the 1940s, the Nazis routinely counterfeited foreign currency as a wartime tactic. Adolf Hitler's security service attempted to destroy the British currency by counterfeiting banknotes worth millions of pounds, which fooled even the Bank of England. The operation was named for Major Bernhard Krueger, who led the forgery effort. Every month, Krueger's men turned out over £500,000 of notes to be distributed in Britain, and they even branched out to print U.S. dollars. Krueger's operation was so successful that it forced the Bank of England to withdraw all notes larger than £5 from circulation during the war, and to change the paper on which the £5 note was printed. Near the end of the war, the Bank of England banned all pound notes from £10 to £1,000.7
During the Cold War, the United States and the Soviet Union regularly attacked each other's economies. For example, they created trade restraints to prevent the other side from funding its military weapons programs.8 However, such actions were primarily designed as containment measures rather than direct attacks.9 This approach changed during the Reagan administration, when the U.S. made a deliberate attempt to use economic weapons to hasten the demise of the Soviet Union.10 To exploit the inherent weakness of the Soviet economy, which was smaller than the economy of California, the administration forged an alliance with Saudi Arabia in which the Saudis agreed to increase oil production, thereby lowering world oil prices. This move undercut the Soviets' chief economic export—oil—and forced the Soviets to ramp up production to compete.11 The administration also forced a technological embargo on the Soviet Union while simultaneously allowing the Soviets to steal technology specifically designed to malfunction, according to Thomas Reed, who was a member of Reagan's National Security Council. For example, the United States arranged for the Soviets to obtain badly needed computer chips that were secretly defective. Used to sabotage the Soviet oil and fuel systems, these chips caused the largest natural gas explosion in world history—a blast along a trans-Siberian pipeline so large that measuring agencies thought a 3-kiloton nuclear device had been detonated.12 The program was called "Farewell" and as Reed pointed out, the "campaign was coldeyed economic warfare, put in place to inflict a price on the Soviet Union for corrupting the lofty ideals of détente. While there were no physical casualties from the pipeline explosion, there was significant damage to the Soviet economy."13 In some ways, this effort could be viewed as a forerunner to the Stuxnet virus that appears to have been designed to sabotage Iran's nuclear program.14
The United States employed economic warfare not only against our Cold War rivals, but against our own allies as well. In 1956, the U.S. cut off Egypt's arms supply, fearing Egyptian leader Gamal Abdel Nasser would attack Israel. Nasser then turned to the Soviet Union to purchase weapons, prompting the U.S. to withdraw financial support for Egypt's Aswan Dam project. Nasser reacted by nationalizing the Suez Canal, which had been under European control. After encouraging Israel to encroach into the Sinai Peninsula, the British and French used the resulting Israeli-Egyptian clash as a pretext to send their troops in to regain control of the canal. The move provoked Soviet threats, a Syrian oil embargo, and, most damaging for the French and British, the opposition of the United States. CIA director Allen Dulles denounced the invasion as "the straight old-fashioned variety of colonialism of the most obvious sort."15 Agreeing with Dulles, President Eisenhower decided to intervene on Egypt's behalf. Eisenhower realized that Britain's currency was vulnerable, as it did not have enough reserves to stem a run on sterling. The U.S. began selling sterling, declaring that we would only prevent a currency crisis if Britain withdrew its troops from the Suez.16 Overall, $650 million was sucked out of Britain's reserves to deal with the crisis. The United States increased the pressure by suspending its oil shipments to Europe, putting enormous pressure on the European economy, which helped force France and Britain to capitulate to Eisenhower's demands. As historian D. B. Kunz explained, "Economic diplomacy defined the course of the Suez crisis from beginning to end." In the end, the IMF had to bail out the British to the tune of $1.3 billion, with the United States eventually lending Britain an additional $500 million.17 After joining the United States in cutting off oil supplies to Europe during the Suez crisis, oil-producing nations in the Middle East recognized the potency of oil as a weapon. The region was further empowered in 1960 by the creation of OPEC, which originally included Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, with Libya, the United Arab Emirates and Qatar, among others, joining later. OPEC used oil as a weapon during the Nixon administration, when the U.S. disconnected the dollar from the price of gold and allowed the currency to float freely against other currencies. The dollar quickly lost value, and OPEC, which priced oil in dollars, cut supplies, which drove up prices. The result was a stagnating U.S. economy—it essentially went into "oil shock." According to a state department assessment:
The OPEC Oil Embargo, which lasted from October 1973 to March 1974, posed a major threat to the U.S. economy. Implementation of the embargo, and the changing nature of oil contracts, set off an upward spiral in oil prices that had global implications. The price of oil per barrel doubled, then quadrupled, leading to increased costs for consumers worldwide and to the potential for budgetary collapse in less stable economies.18
Over time, economic weapons have become more sophisticated and more effective. The Suez Crisis demonstrated the effectiveness of both oil embargos and currency attacks. Unlike earlier efforts to competitively devalue the currency of enemy nations, the weapon of forced devaluation emerged in the forms of counterfeiting and mass selling on global financial markets. Hedge fund manager George Soros is credited with perfecting the latter technique by making a direct attack on the British pound, shorting the equivalent of $10 billion in pounds and forcing the value of sterling down. "On Black Wednesday, [September 16, 1992,]" writes economic historian Dan Briody, "the pound crashed, crippling the British economy and embarrassing the prime minister. Soros made a profit of $950 million."19 Other governments have suspected Soros of instigating the collapse of their currencies. In 1997, Malaysia's prime minister, Mahathir Mohamad, blamed Soros for the collapse of the Malaysian ringgit, whose value plunged 20 percent that summer, taking the Malaysian stock market down with it. "We have definite information that [Soros] is involved," declared Mohamad. "He is not the only one but he started it. He has wiped out billions from our economy."20 This activity attracted the attention of the authors of Unrestricted Warfare, who wrote:
Precisely in the same way that modern technology is changing weapons and the battlefield, it is also at the same time blurring the concept of who the war participants are. From now on, soldiers no longer have a monopoly on war. Global terrorist activity is one of the by-products of the globalization trend that has been ushered in by technological integration. Non-professional warriors and non-state organizations are posing a greater and greater threat to sovereign nations, making these warriors and organizations more and more serious adversaries. During the 1990's … we began to get an inkling of a nonmilitary type of war, which is prosecuted by yet another type of non-professional warrior … Perhaps he or she is a systems analyst or a software engineer, or a financier with a large amount of mobile capital or a stock speculator … his or her faith is by no means inferior to Osama bin Laden's in terms of its fanaticism. Moreover, he or she does not lack the motivation or courage to enter a fight as necessary. Judging by this kind of standard, who can say that George Soros is not a financial terrorist?21
The authors were convinced that Soros had instigated an attack on the Asian economies, but they were not certain whether he was acting as an independent agent or in concert with others.22 They were certain, however, about the effectiveness of financial weaponry, likening the financial attacks to economic occupation and declaring that they had set back the "Asian Tigers"23 development by a full decade while enriching the attackers.24 Other recent examples of economic warfare include a counterfeiting operation by North Korea in which they produced massive quantities of phony U.S. $100 bills that are essentially indistinguishable from real U.S. money. In 2007, the North Koreans bought enough paper to print $2 billion in fake $100 bills.25 While this is clearly not enough to destabilize the U.S. economy, it is certainly troubling and could undermine confidence in the U.S. economy.
The United States has most recently entered into what many observers describe as an economic war with Iran, with the aim of forcing Iran to abandon its attempt to develop nuclear weapons. To accomplish this, the U.S. has led the call for international sanctions against the Iranian regime and recently forced the international payment system SWIFT to cut off Iran's access.26 The repercussions have been severe, as Iran is experiencing a serious economic slowdown and significant inflation . Iran has responded with threats to close the Straits of Hormuz, which, if successful, would dramatically raise oil prices worldwide. It also has arranged with India to trade oil for non-dollar currencies or even gold in a move viewed as a direct assault on the hegemony of the dollar.27
Kevin D. Freeman (www.GlobalEconomicWarfare.com) is the best-selling author of Secret Weapon: How Economic Terrorism Brought Down the U.S. Stock Market and Why It can Happen Again and Game Plan: How to Protect Yourself from the Coming Cyber-Economic Attack. He is the host of "Economic War Room" (coming soon).
1. Tor Egil Førland, "The History of Economic Warfare: International Law, Effectiveness, Strategies," Journal of Peace Research 30, no. 2 (1993): 151-162. Available at http://www.jstor.org/stable/425196. Accessed March 2012.
2. Førland, "The History of Economic Warfare."
3. Førland, "The History of Economic Warfare."
4. Liaquat Ahamed, "Currency Wars, Then and Now; How Policymakers Can Avoid the Perils of the 1930s," Foreign Affairs 90, no. 2 (March/ April 2011). Available at http://www.foreignaffairs.com/articles/67472/liaquat-ahamed/currency-wars-then-and-now
5. Winston S. Churchill, The Second World War: The Grand Alliance. Boston: Houghton Mifflin, 1951, pp. 426-427, 586, 599.
6. Dean Acheson, Present at the Creation: My Years in the State Department. New York: Doubleday, 1969, pp. 48-50.
7. Andreas Schroeder, Scams! Ten Stories That Explore Some of the Most Outrageous Swindlers and Tricksters of All Time. Buffalo, NY: Annick Press, 2004, pp. 72-87; Larry Allen, The Encyclopedia of Money. Santa Barbara, CA: Greenwood Publishing, 2009, p. 306.
8. "Embargoes and Sanctions: Cold War Sanctions," in Encyclopedia of the New American Nation. Available at http://www. americanforeignrelations.com/E-N/Embargoes-and-Sanctions-Cold-war-sanctions.html . Accessed March 2012.
9. Førland, "The History of Economic Warfare."
10. Peter Schweizer, Victory: The Reagan Administration's Secret Strategy That Hastened the Collapse of the Soviet Union. New York: Atlantic Monthly Press, 1996, p. xviii.
11. Schweizer, Victory, p. xviii.
12. Matthew French, "Tech Sabotage during the Cold War," Federal Computer Week. April 26, 2004. Available at http://fcw.com/articles/2004/04/26/tech-sabotage-during-the-cold-war.aspx. Accessed September 2011.
13. French, "Tech Sabotage during the Cold War."
14. Steve Kroft, "Stuxnet: Computer Worm Opens New Era of Warfare," 60 Minutes, March 4, 2012. Available at http://www.cbsnews.com/8301- 18560_162-57390124/stuxnet-computer-wormopens-new-era-of-warfare/. Accessed March 2012.
15. William Roger Louis, Ends of British Imperialism: The Scramble for Empire, Suez, and Decolonization. London: I. B. Tauris, 2006, p. 602.
16. James P. Hubbard, The United States and the End of British Colonial Rule in Africa, 1941-1968. Jefferson, NC: McFarland & Company, 2010, pp. 153-154.
17. Catherine R. Schenk, The Decline of Currency: Managing the Retreat of an International Currency. Cambridge, England: Cambridge University Press, 2010, pp. 112-113; Jerald A. Combs, The History of American Foreign Policy: From 1895. Armonk, NY: M. E. Sharpe, 2008, p. 163.
18. "Milestones: 1969-1976, OPEC Oil Embargo, 1973-1974," U.S. Department of State, Office of the Historian. Available at http:// history.state. gov/milestones/1969-1976/OPEC. Accessed March 2012.
19. Dan Briody, The Iron Triangle: Inside the Secret World of the Carlyle Group. Hoboken, NJ: John Wiley, 2003.
20. Michael Kaufman, Soros: The Life and Times of a Messianic Billionaire. New York: Alfred Knopf, 2002.
21. Liang and Xiangsui, Unrestricted Warfare, pp. 35-36.
22. Liang and Xiangsui, Unrestricted Warfare, p. 160.
23. The term "Asian tigers" has often been used loosely to encompass many growing economies in East Asia. However, it is most often used to describe Hong Kong, Singapore, South Korea, and Taiwan—economies that have maintained high growth since the 1960s.
See "Four Asian Tigers," Investopedia. Available at http://www.investopedia.com/terms/f/four-asian-tigers.asp#axzz1ur5dPcSt. Accessed May 14, 2012.
24. Liang and Xiangsui, Unrestricted Warfare, pp. 39, 160.
25. David Rose, "North Korea's Dollar Store," Vanity Fair. August 5, 2009. Available at http:// www.vanityfair.com/politics/features/2009/09/office-39-200909. Accessed March 2012.
26. "SWIFT Kicks Up Pressure on Iranian Regime," Voice of America, March 31, 2012, http://www.voanews.com/policy/editorials/Swift-Kicks-UpPressure-On-Iranian-Regime–145825465.html. and https://editorials.voa.gov/a/swift-kicks-up-pressure-on-iranianregime–145825465/1493071.html Accessed March 2012.
27. Garry White, "Iran Presses Ahead with Dollar Attack," The Telegraph, February 12, 2012, http://www.telegraph.co.uk/finance/commodities/9077600/Iran-presses-ahead-with-dollar-attack.html. Accessed March 2012.