CHAPTER TWO

A BRIEF HISTORY OF ECONOMIC WARFARE

Financial terrorism seems like a fantasy to many folks, who naively believe that nobody could manipulate the markets and sink America’s major financial institutions while covering their tracks. Historically, however, economic warfare, including financial terrorism, has been a common tactic. The difference between economic warfare and financial terrorism is that economic warfare is state-sponsored action taken against another state’s economy to coerce its government into certain activity, while financial terrorism is secret, behind-the-scenes manipulation of a nation’s economy by state or non-state actors.

If war, as Clausewitz said, is the continuation of politics by other means, then economic warfare and financial terrorism are simply war by other means. There are no bullets, bombs, or battles. There are only money and resources used to push states to pursue or not to pursue certain policies. While many attempts at economic warfare and financial terrorism are ineffective, at their extreme these tactics can provoke shooting wars and cripple a national economy. In the near future, it’s not inconceivable that these types of asymmetrical warfare could wipe entire countries from the globe.

Traditional economic warfare involves measures such as blockades, tariffs, currency manipulation, and embargoes. As this chapter will demonstrate, these were the primary economic weapons used throughout the last century. In the 1930s, currency and trade wars dominated the international scene, contributing to the outbreak of World War II. In the 1940s, the Nazis routinely counterfeited foreign currency as a wartime tactic. During the Cold War, the United States and the Soviet Union regularly attacked each other’s economies, for example, by creating restraints of trade to prevent the other side from funding its military weapons programs. In recent decades, Arab states have repeatedly resorted to economic warfare to coerce the West into pressuring Israel.

Economic warfare, in fact, began long before the twentieth century; as long as there has been warfare, there has been economic warfare, and as long as there has been terrorism, there has been financial terrorism. What makes the current version so dangerous is the sophistication and intricacy of today’s financial weaponry—derivatives, hidden orders, high-frequency trading, anonymity, and the interconnectedness of the markets.

What follows is a short collection of case studies outlining the history of economic warfare over the last few centuries and showing how it has influenced some of the world’s key conflicts.

THE BASICS: FROM THE SEVEN YEARS’ WAR TO THE CIVIL WAR

During the 1700s and 1800s, the chief version of economic warfare was the blockade, undertaken largely by Great Britain, the great naval power of the time. Opposing powers eventually hit upon a clever way to avoid such blockades: they used neutral countries to transport their products. The Dutch, then the other great naval power, became the blockade-runner of choice. The rule was “free ships, free goods”: if a neutral power ran the ships, the goods on the ships were considered neutral, even if they were intended for enemies of Britain.

All that changed during the Seven Years’ War. British jurists invented the “Rule of the War of 1756,” which decreed that “a neutral has no right to deliver a belligerent from the pressure of his enemy’s hostilities, by trading with his colonies in time of war in a way that was prohibited in time of peace.” This established the concept that what you do matters just as much as who you are—a notion that hedge fund traders and executives would be wise to take into account these days as they funnel cash from America’s enemies onto U.S. markets.

The British heavily engaged in other forms of trade war as well. Due to the popularity of mercantilist economics—which emphasized state-sponsored economic activity such as imposing tariffs, establishing colonies, subsidizing exports, and restricting wages and domestic consumption—many states began embroiling themselves in fierce trade competition. According to scholar Tor Egil Førland in the Journal of Peace Research, “Seeing the volume of international trade (and of gold and silver) as more or less static, nations considered they could enrich themselves only by taking over the trade of other countries. One way of accomplishing this was wrestling colonies from competitors through wars, simultaneously taking over the carrying trade . . . . In the seventeenth and eighteenth centuries the application of mercantilist theory led to a series of colonial wars involving Britain, France, Spain and lesser powers.”¹

Napoleon employed economic warfare to great effect against the British. He prevented the import of British goods into French-controlled territory, while simultaneously exporting tremendous amounts of French goods into Britain. The British, he said, were free to buy as much French merchandise as they wanted, so long as they paid in gold. Napoleon’s policy did hurt the British, though it failed to achieve its goal of destroying the British economy as a prelude to a French invasion of Britain. Moreover, his efforts created a serious problem: by eradicating British imports, Napoleon effectively raised the price French subjects paid for many goods. As Førland points out, “Napoleon’s weapon of economic warfare turned out to be a boomerang.”²

During the Civil War, the Confederacy also attempted to levy indirect economic warfare on Britain and France; the goal was to coerce them into joining the war against the North by cutting off their supply of cotton. This, too, ended in failure, as the Confederates cost themselves a great deal of cash sorely needed for the war effort.³

These examples show that economic warfare is often a two-edged sword: it sometimes achieves the desired ends, but almost invariably, it cuts the initiator to the bone.

THE OLD-FASHIONED BLOCKADE: PEARL HARBOR AND OIL

In the late 1800s and early 1900s, the Japanese used traditional mercantilist policies to rapidly industrialize and militarize their island nation. As Winston Churchill noted, “In less than two generations, with no background but the remote past, the Japanese people advanced from the two-handed sword of the Samurai to the ironclad ship, the rifled cannon, the torpedo, and the Maxim gun; and a similar revolution took place in industry.” ⁴

Around the turn of the century, after defeating Russia and China in wars, Japan secured resource bases in Taiwan, Korea, and Sakhalin. After World War I, in which the Japanese fought on the side of the allies, Japan’s militaristic regime was emboldened by the nation’s military triumphs and growing economy. In 1931, the Japanese invaded Manchuria, a situation depicted with some accuracy in the movie The Last Emperor. Fearing a possible conflict with the Soviet Union, they then signed a defense treaty with Nazi Germany. In another belligerent move, the Japanese blockaded ports in East Asia as they attempted to bring vast swathes of the continent under Japanese control in an area euphemistically called the Greater East Asia Co-Prosperity Sphere.

Alarmed at the extent of Japan’s aggression, the United States seemed to be on a collision course with Emperor Hirohito’s army. In Europe, America was covertly backing Britain against Japan’s ally, Nazi Germany. After Japan, encouraged by the Nazis, began creeping into French Indochina, President Roosevelt imposed an embargo on steel and scrap metal supplies to Japan. The Japanese responded by pushing farther into Indochina, and FDR countered by freezing all Japanese assets in the United States.

Days later, Roosevelt delivered the decisive blow, ordering an oil embargo against Japan that effectively cut off 90 percent of the empire’s oil supply and extinguished three-quarters of its foreign trade.⁵ Churchill recounted the events:

For several months the British and American Governments had been acting towards Japan in close accord. At the end of July the Japanese had completed their military occupation of Indo-China. By this naked act of aggression their forces were poised to strike at the British in Malaya, at the Americans in the Philippines, and at the Dutch in the East Indies. On July 24 President Roosevelt asked the Japanese Government that, as a prelude to a general settlement, Indo-China should be neutralized and the Japanese troops withdrawn. To add point to these proposals, an executive order was issued freezing all Japanese assets in the United States. This brought all trade to a standstill. The British Government took simultaneous action, and two days later the Dutch followed. The adherence of the Dutch meant that Japan was deprived at a stroke of her vital oil supplies.⁶

This threw Japan’s war machine into crisis, forcing its Navy to rely on its precarious oil reserves. Recognizing the choice that had been thrust upon the Japanese, Churchill commented, “It was evident that this was a stranglehold, and that the choice before them was either for Japan to reach an agreement with the United States or go to war.”⁷

The Japanese requested a meeting between their prime minister and Roosevelt, ostensibly to propose a deal: Japan would give up certain assets— but not all of them—in Indochina and China in exchange for an end to the U.S. oil blockade. The United States refused the request, believing with some credibility that the Japanese would interpret such a deal as a sign of appeasement. On November 27, 1941, the United States told the Japanese that it would only sell them oil if they left Indochina and China forthwith—and that it would only send enough oil for civilian needs. Furthermore, the United States sent Japan a ten-point note demanding that China remain under the full control of General Chiang Kai-Shek, who was fighting both the Japanese and Mao Tse Tung’s Communist guerrillas. Secretary of State Cordell Hull fumed that Churchill had gotten his way—the United States would be forced into war. “The diplomatic part in our relations with Japan is now virtually over,” he said. “The matter will now go to the officials of the Army and Navy, with whom I have talked.... Japan may move suddenly and with every possible element of surprise.”⁸

On December 7, Hull’s predictions came true. The Japanese, who planned to seize the oil fields of the Indies but knew the move would provoke an armed conflict with the United States, decided to strike first by attacking Pearl Harbor.⁹

Here’s the point: economic warfare often leads to real warfare. This was the case during World War II, although of course, Japan itself provoked U.S. sanctions by rampaging across Asia and allying with Hitler.

During wartime, the United States doubled down on its economic warfare policies. FDR instituted a Board of Economic Warfare tasked with securing the resources necessary to pursue the war—and to preventing our enemies from doing the same. Dean Acheson, assistant Secretary of State during World War II, explained the strategy: “We waged economic war on foes and friends within their grasp alike, spreading deprivation with evenhanded harshness.”¹⁰

As part of this policy, the United States economically bludgeoned neutral states that aided the Germans. The campaign yielded some benefits, but neutral countries often refused to bend to the Allies’ will. In August 1943, for example, the Allies proposed to make concessions to the Swiss in return for the Swiss cutting off arms supplies to the Germans. Switzerland indicated it was interested. According to Acheson, however, when the Swiss opened their books, the Allies “learned the shocking truth that, instead of reducing exports to Germany in the second quarter of 1943, the Swiss had actually increased them over the first quarter by from fifty to a hundred percent. They also withheld the figures from the British and ourselves until after the agreement was made.” The Allies threatened “postwar retaliation and cancellation of all import permits” and even threatened to blacklist some Swiss firms, but the Swiss would not budge.

In sum, although economic warfare is a powerful weapon that can even provoke a shooting war, the tactic is not always successful—especially when the target faces more immediate threats, like sharing a border with Nazi Germany.¹¹

THE SOPHISTICATED GAME: OPERATION BERNHARD

In 1939, members of Adolf Hitler’s Security Service (Reichsicherheitsdienst ) proposed that the Germans destroy the British currency by counterfeiting millions of pounds worth of banknotes. By deceitfully inflating the British currency, the value would collapse, hindering the Brits from buying the goods and services needed to win the war. At first Hitler rejected the plan as “dishonorable,” but eventually he embraced part of it, instructing his underlings to begin paying German spies and fellow travelers with forged notes. This would serve the dual purpose of allowing Germany not to pay these operatives and allowing these individuals to become dispensing points for fake British currency.

Major Bernhard Krueger, after whom the operation was named, led the German Security Service’s Forgery Division, creating fake papers for its operatives. Forging banknotes on this scale was an immense task—after all, banknotes are the most highly scrutinized pieces of paper in the world. Fortunately, Krueger had the ultimate supply of cheap labor hidden away in concentration camps all over Europe. Jewish inmates were selected for the job and rewarded with better living conditions.

Krueger began by having his slaves create five-pound banknotes. He mixed up the paper from Turkish flax obtained through Italy, ensuring that every detail of the notes, down to the way the ink absorbed into the paper, was accurate. He even sent a batch of counterfeited currency to Switzerland to see if bankers could tell it was fake—and they could not. Even the Bank of London was fooled.

Every month, Krueger’s men turned out over £500,000 worth of currency to be distributed in Britain. Soon, with demand by his distributors outstripping supply, they began asking for £50 notes. Over the course of the year, Krueger expanded his operation and increased his staff to number nearly 150. His team created millions’ worth of banknotes each month and even branched out to print U.S. dollars. The fakes were so good that they circulated quite normally; in fact, Krueger’s agents began receiving their own forged notes when trading other currencies. In a noteworthy move, Krueger asked for—and received—medals for his prisoners.

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. Krueger’s scheme only ended when the war drew to a close. The prisoners were lucky enough to escape.¹²

Despite its vast scale, Operation Bernhard wasn’t nearly comprehensive enough to truly damage the British currency—and because it was launched late in the war, it did not have much time to achieve its objectives. However, examining Operation Bernhard is instructive. If the operation had succeeded, it would have knocked the British out of the war. Adding hundreds of millions of pounds into the British economy could have seriously undermined Britain’s floating currency.

It’s a lesson well worth learning, especially when we consider the many weaknesses of the U.S. dollar today. Here’s one example: the North Korean regime runs its own version of Operation Bernhard aimed at the United States. According to David Rose of Vanity Fair, North Korea is home to a secret agency called Office 39, directly overseen by the nation’s dictator, Kim Jong Il. That office used messengers to launder counterfeit “supernotes” worth millions of dollars through the casinos in Las Vegas. According to Rose, “Most of the notes have ended up in general circulation.” David Asher, head of the State Department’s Illicit Activities Initiative from 2003 to 2005, further explains, “In one sense, Office 39 is like an investment bank. It provides the money for the stuff Kim needs. Like any organized-crime syndicate, you’ve got a don, and you’ve got accountants, and it’s a very complicated business, keeping track of all this money and making sure the boss gets paid. But when members of the organization don’t deliver, they get killed.”

Office 39, not coincidentally, handles Kim Jong Il’s personal bank accounts in Switzerland and sells missiles to foreign countries. Overall, Office 39 rakes in between $500 million and $1 billion per year or more. That’s not enough to substantially damage U.S. currency holdings, but it spreads uncertainty that can create risks. As Rose reports, “In 2004, Taiwan’s central bank issued a warning that supernotes had been turning up on the island. This caused a panic, and the Taiwanese banks were overwhelmed by customers seeking to return $100 bills totaling hundreds of millions of dollars, most of them perfectly genuine.”¹³

The high-quality counterfeits are essentially indistinguishable from the real bills. The United States has even had to force the shutdown of foreign banks that act as distributors for the North Korean supernotes. And the scale of the counterfeiting does not seem to be diminishing: in 2007, the North Koreans bought enough paper to print $2 billion.¹⁴

THE BIG GAME: THE COLD WAR

Shortly after World War II, with the Soviet Union seizing large swaths of Eastern Europe, the United States began slapping economic sanctions on Moscow. In March 1948, the Department of Commerce restricted exports to the Soviets and their satellite states. Under the Export Control Act of 1949, the United States refrained from sending any sort of strategic materials to the Soviets. We followed this up with the 1951 Battle Act, designed to punish countries helping the Soviets import strategic materials, including oil drilling equipment.¹⁵

Such trade restrictions became de rigueur during the Cold War. Before the communist takeover of Cuba, for example, the United States was the largest buyer of Cuban sugar, purchasing nearly 60 percent of Cuba’s exports. Once Castro seized power, America instituted an embargo that nearly crippled the industry, after which the Soviet Union filled the gap. Over time, the Soviets spent more and more money on Cuba, effectively relieving it of the need to compete on the world market. In the late 1980s, the Soviets bought up between 50 and 60 percent of Cuba’s sugar exports at an insane markup—in 1987, the Soviet Union paid Cuba a whopping forty-two cents per pound for sugar, even though the average world price was just six cents per pound. That was actually the low water mark for the 1980s—during the decade as a whole, more than 80 percent of Cuban sugar was exported to the Soviet Union. Meanwhile, the Soviets sent oil so cheaply to Cuba that Castro began re-exporting it at prevailing world prices. This largess turned Cuba into a reliable Soviet ally, but over time it became an increasing burden on the Soviet economy.

During the 1970s, the United States loosened some of its anti-Soviet trade restrictions, lowering barriers especially to wheat exports in reaction to a Soviet grain crisis. These conciliatory moves only encouraged more belligerence among Soviet leaders. Leonid Brezhnev told senior party officials in 1972, “We communists have to string along with the capitalists for a while. We need their credits, their agriculture and their technology. But we are going to continue massive military programs, and by the mid-1980s, we will be in a position to return to an aggressive foreign policy designed to gain the upper hand with the West.”¹⁶

After his election as president in 1980, Ronald Reagan changed the American strategy against the Soviets from a policy of containment to one pursuing victory. The core of this strategy was economic warfare. Exploiting the inherent weakness of the Soviet economy (which was smaller than the economy of California alone), Reagan turned the dollar into a weapon, subjecting the Soviet economy to unrelenting pressure. He began by forging an alliance with Saudi Arabia and convincing the desert kingdom to increase its oil production, thereby lowering world oil prices. This move undercut the Soviets’ chief economic export—oil—and forced them to ramp up production to compete.¹⁷

Reagan also pushed for a technological embargo on the Soviet Union, but he arranged for the Soviets to get hold of one particular type of technology. According to Thomas Reed, who was a member of Reagan’s National Security Council, the United States allowed the Soviets to steal technology specifically designed to malfunction. This was a clever maneuver, especially because the Soviets were planting Soviet intelligence officers into all their supposedly friendly delegations—for example, every Soviet cosmonaut who worked with the Apollo/Soyuz flight was a KGB officer. “Within a few months, the shipments began,” Reed recalled. “‘Improved’—that is to say, erratic—computer chips were designed to pass quality-acceptance tests before entry into Soviet service. Only later would they sporadically fail, frazzling the nerves of harried users.” Used to sabotage the Soviet oil and fuel system, 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.¹⁸

The program was called “Farewell,” and as Reed pointed out, the “campaign was cold-eyed 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. Its ultimate bankruptcy, not a bloody battle or nuclear exchange, is what brought the Cold War to an end.”¹⁹

THE SUEZ CANAL: HOW THE UNITED STATES USED ECONOMIC WARFARE AGAINST OUR ALLIES

The United States employed economic warfare not just against our Cold War rivals, but against our own allies as well. In 1956, the United States cut off Egypt’s arms supply, fearing Egyptian leader Gamal Abdel Nasser would attack Israel. Nasser then turned to the Soviet Union for his 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, the British and the French used the resulting Israeli-Egyptian clash as a pretext to send their troops 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.” Agreeing with Dulles, President Eisenhower decided to intervene on Egypt’s behalf.

Eisenhower realized that Britain’s currency was vulnerable. This was a legacy of World War II, which had devastated the British economy. The Brits rebuilt largely by exporting tremendous amounts of products all over the world, building up their balance of payments. According to historian James Hubbard, “British officials saw that half the world’s trade was still conducted in sterling and the Treasury imagined that sterling’s international role could be enhanced further. The Treasury loosened controls on the sterling balances held in London and inched towards full convertibility of sterling.”

Normally, when a country moves toward convertibility, it attempts to centralize enough foreign currency to trade back for its own currency, thus preventing the currency from collapsing. If, for example, the United States wants to allow the dollar to be traded easily with other currencies, we will hold large amounts of foreign capital in store so that we can always get our own currency back. If we did not hold such amounts, people could trade our currency for less and less foreign currency, driving down its value.

That is precisely what happened in Britain during the Suez crisis. Britain didn’t have enough reserves to stem a run on sterling, so the Chancellor of the Exchequer asked the United States for help. But instead of assisting our erstwhile ally, America itself began selling sterling, declaring that we would only prevent a currency crisis if Britain withdrew its troops from the Suez.²⁰ Overall, $650 million was sucked out of British reserves to deal with the crisis, making Britain utterly dependent on other European countries for financial support. The United States increased the pressure by suspending its oil shipments to Europe, creating massive European pressure that 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.²¹

To make matters worse for Britain, after the Europeans succumbed to the pressure and withdrew from the Suez, Nasser’s renewed control of the canal gave him a new form of leverage. Not only was he able to control shipments through the canal, but he also became the de facto leader of the Arab world. From that position he urged Arab nations to reduce oil exports, eventually forcing Britain to introduce gas rationing.²² It was the first of many oil manipulation schemes used by Middle Eastern countries as a weapon against the West.

If Middle Eastern nations have learned from the Suez experience, the Chinese likely have, too. Holding more than $1 trillion in U.S. currency and treasury bonds, Beijing may one day use these resources against us in the same way we used our sterling holdings against the Brits during the Suez crisis.

FULL-SCALE ECONOMIC WARFARE: OPEC IN 1973

After joining the United States in cutting off oil supplies to Europe during the Suez crisis, the Muslim Middle East began to feel its oats. The region was further empowered in 1960 by the creation of OPEC, originally including Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, and later taking in Libya, the United Arab Emirates, and Qatar, among others. Over time, as OPEC came to control a greater and greater share of world oil production, its members began to realize they could strongly affect international affairs.

OPEC threw its weight around the U.S. economy during the Nixon administration, when the United States 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 supply, driving up prices. The result was a stagnating U.S. economy—an “oil shock” that prompted the Nixon administration to intervene much more directly in the economy. Fatefully, Nixon also ended oil quotas, setting the stage for America to import massive quantities of oil from OPEC nations. According to Daniel Yergin, author of The Prize, “By the summer of 1973, United States imports were 6.2 million barrels per day, compared to 3.2 million barrels per day in 1970 and 4.5 in 1972.” At the same time, Saudi Arabia’s “share of world exports had risen rapidly, from 13 percent in 1970 to 21 percent in 1973, and was continuing to rise.” The Arabs concluded they could use their newfound power to leverage America against Israel.²³

This proposition was put to the test in the early 1970s when Egypt, led by its new strongman, Anwar Sadat, sought to consolidate its stranglehold on the Suez Canal; at the time, the Israelis were firmly planted on the northern end of the canal. “Sadat aimed not so much for territorial gain but for a crisis that would alter the attitudes into which the parties were then frozen—and thereby open the way to negotiations,” wrote Secretary of State Henry Kissinger. “The shock would enable both sides, including Egypt, to show a flexibility that was impossible while Israel considered itself militarily supreme and Egypt was paralyzed by humiliation. His purpose, in short, was psychological and diplomatic, much more than military.”²⁴

Sadat went to Saudi Arabia and gained the support of King Faisal for a war against Israel. Faisal had one demand: “We want to see a battle which goes on for [a] long enough time for world opinion to be mobilized,” he reportedly insisted. By September 1973, with Middle Eastern tensions rising, the United States had begun pulling away from Israel. The Assistant Secretary of State stated on Israeli television, “While our interests in many respects are parallel to the interests of Israel, they are not synonymous with the state of Israel.... There is increasing concern in our country, for example, over the energy question, and I think it is foolhardy to believe that this is not a factor in the situation.”²⁵

In October, on the holiest day of the Jewish year, Israel was attacked by its Arab neighbors. The Jewish state was caught off guard as the Egyptian Air Force bombed Israeli positions in the Sinai in coordination with Syrian attacks from the north. Despite its earlier equivocations, the United States backed Israel in the conflict. Fearing Arab economic retaliation against the United States, U.S. oil executives opposed Nixon’s pro-Israel position. “The whole position of the United States in the Middle East is on the way to being seriously impaired,” the chairmen of Exxon, Mobil, Texaco, and Standard of California wrote to the president, “with Japanese, European, and perhaps Russian interests largely supplanting United States presence in the area, to the detriment of both our economy and our security.”²⁶

When the United States openly sent military supplies to Israel, OPEC withdrew from oil negotiations and began setting prices unilaterally. The cartel decided to cut oil production by 5 percent, vowing to enact additional 5 percent cuts each month until they forced Israeli concessions. When Nixon announced a $2.2 billion aid package to Israel—enough for Israel to maintain parity with the Arab states but not enough for it to win a decisive victory—the Saudis announced they would completely shut off the oil spigot to America, later extending the embargo to other nations. The next planned step, reportedly, was Arab nationalization of all U.S. oil interests in the Gulf.²⁷ The Europeans quickly came to heel as did Japan. In the end, so did the United States, which pressured the victorious Israelis to make some concessions and pull back some of their troops from Arab territory.

There is an important lesson in the 1973 oil embargo that America, unfortunately, failed to learn: when supplies of America’s strategic resources, particularly oil, are not secure, America’s enemies are encouraged to act—and they are unafraid to do so, even if their actions do short-term damage to their own economies.

GEORGE SOROS: FINANCIAL TERRORIST?

Nearly every part of George Soros’ life has sparked controversy. This includes his childhood in Nazi-occupied Hungary, where the young Soros (originally named Schwartz) worked for the Nazi-established Jewish Council, which handled administrative issues affecting his fellow Jews, including deportations. After the war, Soros traveled to Britain, where he attended the London School of Economics and studied under the great philosopher Karl Popper. In 1970, he founded Soros Fund Management, and shortly thereafter he set up another hedge fund, taking in $12 million in investors. This became the famed Quantum Fund.

Soros quickly earned a reputation for being a brilliant and unscrupulous market operator. He made his bones shorting the living hell out of the British pound and bringing Britain to its knees. Soros conducted this legendary machination in 1992, when the pound faced serious problems due to an economic recession. Since 1979, the pound had been traded on the European Exchange Rate Mechanism (ERM); Britain had joined in an attempt to stabilize its currency and peg it to other European currencies, an arrangement that presaged the rise of the euro. Due to rising interest rates in Germany and a depreciating dollar, the pound began rapidly losing value, raising doubts about whether Britain could maintain the exchange rate necessary to stay in the ERM.

Recognizing the currency was already on the brink, British Prime Minister John Major refused to devalue the sterling. At that point Soros pounced, shorting $10 billion worth of pounds and forcing the sterling value down. As economic historian Dan Briody put it, “In essence, Soros was betting against Major and his ability to prop up the sagging pound. It has been called the highest stakes poker game in history. Currency speculators were either to believe in Major’s ability to save the pound or Soros’ intent to eviscerate it. Soros won.”²⁸

On September 16, 1992, the British government attempted to raise interest rates in order to increase the value of the pound. But their efforts were futile, as Soros’ short selling prompted more and more traders to short as well. Soon there was a run on the pound, which lost value hand over fist. “On Black Wednesday,” writes Briody, “the pound crashed, crippling the British economy and embarrassing the prime minister. Soros made a profit of $950 million.”²⁹

In light of Soros’ ruthless attack on the British pound, other governments have suspected him of instigating the collapse of their currencies. In 1997, Malaysian Prime Minister Dr. Mahathir Mohamad blamed Soros for the collapse of the ringgit, whose value plunged 20 percent in the summer, taking the Malaysian stock market down with it. This had all the hallmarks of a Soros-style bear raid. Mahathir, a virulent critic of Israel, blamed the collapse on international Jewry in general and on Soros in particular (though ironically, Soros himself is a strident detractor of Israel and its American supporters). “We have definite information that [Soros] is involved,” declared Mahathir. “He is not the only one but he started it. He has wiped out billions from our economy.” While it’s unclear whether Soros initially shorted the ringgit, we do know that he ended up buying the currency as it plunged, believing it was ready to hit rock bottom and reverse course. “[Mahatir] is using me as a scapegoat to cover up his own failure,” Soros argued. “He is playing to a domestic audience, and couldn’t get away with it if he and his ideas were subject to the discipline of an independent media inside Malaysia.”³⁰

Regardless of the role he may have played in the collapse of the ringgit, countries everywhere have reason to fear powerful traders like Soros. His activity even attracted the attention of at least two colonels in the Chinese Army, Qiao Liang and Wang Xiangsui. In Unrestricted Warfare, a seminal study of Chinese military strategy that recommends economic warfare as a primary means of attacking the United States, the two officers commented,

During the 1990’s . . . we began to get an inkling of a non-military 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 philosophy of life is different from that of certain blind and inhuman terrorists. Frequently, he or she has a firmly held philosophy of life and 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?³¹

Whether a financial terrorist or not, Soros can launch powerful financial attacks that have far-reaching effects on entire nations. And as we will see, if Soros can do this, so can others—people who are motivated by something other than making money.

In the past, the main global threats to the United States were aggressive state actors such as Nazi Germany, Imperial Japan, and the Soviet Union. Now, however, the art of war has morphed and expanded. As Qiao Liang and Wang Xiangsui argued in Unrestricted Warfare,

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.³²

It should be clear that economics can be warfare by other means. Whether via blockades or embargoes, counterfeiting or short selling, America’s enemies can and will find ways to strike us without using arms. It is one thing to kill thousands of American soldiers on the battlefield—that requires immense amounts of money, weapons, and manpower. But attacking America’s economic infrastructure requires different resources: money and creativity. It doesn’t require suicide bombers or standing armies or big arms caches. It requires only motive, means, and opportunity.

As we will see, our enemies had them all in September 2008. And they still have them today.