The United States is no stranger to waging financial warfare, observes David Katz. What’s different now, however, is its unique position within global financial markets. It’s enabling Washington to project power in cutting edge ways.
Imagine warfare waged in financial cyberspace: electronic, remote, fought in hypervelocity with millions of engagements per second, and with nations forced to construct redundant systems, sacrificing billions in economic efficiency for survival capacity. Financial warfare strikes can blockade vital industries; delink countries from the global marketplace; bankrupt sovereign economies in the space of a few days, and cause mass exoduses, starvation, riots, and regime change.
The aim of financial warfare is, quite literally, to disarm opponents by reducing their ability to finance production or distribution, complete transactions, or manage the consequences of a transaction failure. If precisely employed, financial warfare can reduce a targeted society’s will and cohesion by forcing upon it, in stark terms, the daily necessity to choose between “guns” or “butter.” This dilemma highlights and magnifies the real, immediate, and personal consequences of resource allocation. Deployed within an indigenous society’s political framework, financial warfare can deepen the divide between rival constituencies, reducing societal cohesion and inciting civil unrest.
Financial warfare is not a new concept. While many individual policy actions had financial aspects, perhaps the first pure financial warfare campaign in United States history occurred in the Eisenhower administration. It was prompted by the Soviet invasion and suppression of the Hungary Revolution on 4 November 1956 and sparked by the seizure of the Suez canal by NATO allies, Britain and France, in Operation Musketeer on 5 November. President Dwight Eisenhower determined he could not effectively oppose Soviet military intervention in Hungary, while allowing European military intervention in Egypt. Diplomacy had not convinced the British or the French to withdraw. The United States was hesitant to intervene with military force against NATO allies. As an alternative, Eisenhower employed financial warfare. With just three offensive strikes, the United States achieved its immediate policy aims of forcing Britain and then France to withdraw from the Suez Canal. The three financial warfare strikes were: (1) blocking the International Monetary Fund (IMF) from providing Britain with $561 million in standby credit; (2) blocking the US Export-Import Bank from extending $600 million in credit to Britain; and (3) threatening to dump America’s holdings of pound-sterling bonds unless Great Britain withdrew from the Suez. The credit blockade froze Britain’s ability to borrow and forced it back onto its negative cash flow, effectively bankrupting it. The pound-sterling threat significantly raised the perceived risk of dealing in British currency. That threat, if executed, would have directly affected British ability to trade internationally.
In practice, financial warfare identifies systemic areas of opacity, agency and asymmetry in information, risk and reward; focuses on those areas with a high relative degree of centralization and leverage; and determines the ranges of integration and diversification that offer the greatest susceptibility to contagion and cascade failure. Offensive financial warfare seeks to engineer outcomes from altering adversary capabilities to creating “Black Swans,” which are large-scale events of massive consequence that occur far from the means of statistical distributions (fat-tailed events) and accordingly are unpredictable and irregular. Defensive financial warfare seeks to decentralize; de-lever; reduce opacity, asymmetry, and skewness; or construct extra capacity, strength, and layers of redundancy to negative outcomes. The intent of financial warfare is to extend the strategic and tactical engagement of the enemy from the kinetic battle space to the financial marketplace. It engages an opponent’s financial structure, or operations, by using the three principal functions of finance: capital formation, capital liquidity, and risk-management:
Capital formation is the accumulation of real capital surpluses through public and private savings and borrowings to create or expand future economic activity.
•Capital liquidity is the transaction of capital assets at volume, rapidly without loss of value, between buyers and sellers and among its forms, e.g., commodities to currencies, dollars to yen, stocks to bonds, etc.
•Risk management is the process of optimizing exposure to financial volatility.
Financial warfare engagements occur at both the tactical and strategic levels. Tactical wins, losses, and draws must be used coherently to advance strategy. In financial warfare, there is an added dimension best articulated through the concept of micro and macro. A micro financial engagement is the singular use of one functional avenue, capital liquid-ity, capital formation, or risk management, to affect a single transaction. Macro financial engagements typically occur at system integration points between an adversary and the global, bilateral, or multilateral markets. For example, terminating Protection and Indemnity (P&I) insurance for one ship precludes its use for hauling third party cargo internationally. This is a micro risk-management engagement. Removing an entire country’s P&I insurance uses a macro risk-management engagement to shut down a nation’s international, commercial maritime cargo industry. The difference lies in whether the exploitation of vulnerabilities is individual or systemic, and whether the exploitation occurs within a system or at the interface between systems.
Full article: Waging Financial War (ISN ETH Zurich)