Daniel McDowell, professor of political science and Maxwell Advisory Board Professor of International Affairs, explores the sources of American financial power and some of the international challenges it now faces. The U.S. dollar became the world economy’s dominant reserve currency through the creation of the post-war Bretton Woods monetary system and the international spread of the free trading system. The international economy has only become more dollar-centric in the decades since. Global commerce, investment, debt and other transactions all depend on access to the dollar; and access to the dollar depends on the implicit consent of the U.S. government.

By cutting foreign targets off from their dollar assets or blocking them from participating in cross-border dollar payments, Washington can impose economic costs on adversaries and other actors. Financial sanctions were deployed during World War Two and in the early Cold War period, but they remained a blunt and limited instrument. Several key events and laws subsequently transformed the tool: sanctions against Iran in 1979; the development of U.S. anti-money laundering law in the 1980s; the Iran-Libya Sanctions Act of 1996; the U.S. Patriot Act of 2001.

These events contributed to the further development of targeted as well as secondary sanctions. The sanctions instrument has thus evolved to become a versatile, non-lethal, coercive tool—exceedingly precise yet also scalable. After 9/11, financial sanctions became Washington’s coercive foreign policy tool of choice, and the imposition of sanctions on foreign targets— including states, non-state actors, as well as individuals—soared.

Sanctions appeal to policymakers because they can be a powerful and flexible means of responding to hostile states, terror and criminal groups, human rights abusers, and the like. Yet there has also been growing criticism at home and abroad that the U.S. has become over-reliant on sanctions. Further, targets and would-be targets have been adapting with workarounds and sophisticated circumvention strategies. The more the U.S. has used its currency as a weapon, the more the free world’s adversaries—as well some of the U.S.'s treaty allies, partners, and would-be partners—have looked for ways to curtail their reliance on the U.S. dollar.