1장
When Currency Becomes a Weapon
In August 1971, millions of Americans watching Bonanza were startled when President Nixon interrupted their Sunday evening entertainment to announce his New Economic Policy. This wasn't just another political speech - it was the declaration of a financial emergency. By ending dollar-to-gold convertibility, Nixon was effectively admitting that America's currency was in crisis. Fast forward to today, and we're engaged in what former Brazilian Finance Minister Guido Mantega bluntly called a "global currency war" - one potentially far more destructive than Nixon's crisis. Currency Wars has become a global phenomenon since its 2011 publication, with former Fed Chairman Alan Greenspan calling it "a thoughtful analysis of how we got into this mess." The book's warnings about competitive devaluations and monetary manipulation have proven remarkably prescient as central banks worldwide continue their race to the bottom, making it essential reading for anyone seeking to understand the hidden forces shaping our economic future.
2장
The Battlefield of Financial Warfare
On a rainy March morning in 2009, I found myself in a top-secret facility between Baltimore and Washington, D.C., participating in the Pentagon's first-ever financial war game. The Applied Physics Laboratory (APL), which had developed critical technologies like the proximity fuse that helped win World War II, was now hosting a different kind of combat simulation - one where the only weapons allowed were financial instruments.
Sixty experts gathered in APL's Warfare Analysis Laboratory, a sophisticated war room with wall-sized screens and tiered seating. Unlike traditional military simulations, we would wage war using only currencies, stocks, bonds and derivatives. The Pentagon had recognized that America's overwhelming conventional military superiority had pushed rivals toward unconventional tactics - including financial warfare.
As one of the few participants with Wall Street experience, I'd helped design the game over several months. I'd emphasized the need to incorporate the unpredictable dynamics of capital markets and recruited seasoned financial veterans to make the simulation realistic. We were divided into teams representing the U.S., Russia, China, Pacific Rim nations, and a "gray cell" representing hedge funds and other global players.
Before the game began, I'd secretly coordinated with Steve Halliwell on the Russia team to launch a financial attack that would shock the U.S. team. Our plan: Russia would announce a new gold-backed currency for international trade, effectively abandoning the dollar.
When Russia unveiled this move during the game, the academic experts dismissed it as "ridiculous" and "irrelevant." But as the simulation progressed, Russia doubled down by purchasing China's entire gold reserves - the largest gold transaction in history. By the second day, what had initially been ridiculed was now being taken seriously, with Russia gaining power points for "taking concrete steps toward launching a credible alternative to the dollar."
The war game revealed how unprepared the U.S. was for financial attacks on the dollar. Meanwhile, in the real world, a currency war had already begun with the Federal Reserve's quantitative easing program in 2008. Over the following two years, both stocks and gold rose over 85 percent - mirroring what happened in 1933 when FDR devalued the dollar during the Great Depression.
One reassuring lesson from the war game was that America's massive gold reserves - stored at Fort Knox and West Point - provided a critical financial backstop, highlighting the enduring connection between national wealth and security. The simulation demonstrated that in financial warfare, conventional thinking could be dangerously inadequate against innovative attacks on the dollar's dominance.
3장
The Golden Age Before Currency Wars
Currency wars, fought through competitive devaluations, are among the most destructive outcomes in international economics. They evoke the ghosts of the Great Depression and 1970s oil crises. When Brazil's finance minister declared a new currency war in 2010, global financial elites were shocked despite underlying tensions building for years.
These conflicts embody a paradox: while fought internationally, they're driven by domestic distress. A weaker currency makes exports cheaper abroad, but triggers unintended consequences: higher input costs, competitive devaluations by trading partners, and ultimately protectionism. Despite these adverse outcomes, currency wars have occurred twice in the twentieth century: Currency War I (1921-1936) and Currency War II (1967-1987).
Before these modern currency wars, the world experienced what economists consider a golden age of monetary stability: the classical gold standard era of 1870-1914. This period featured remarkable economic growth without inflation. Gold had served as international currency since at least the sixth century BC, but this 44-year period was unique - characterized by benign deflation as technological innovation increased productivity.
This first age of globalization featured improved communication and transportation, creating interconnected global commerce underpinned by gold. Nations voluntarily joined this "gold club" with no formal rulebook, maintaining open capital accounts, free markets, minimal government interventions, and stable exchange rates.
The system's simplicity was its strength - countries merely declared their currency's gold value and stood ready to buy or sell gold at that price. When two currencies anchored to gold, they anchored to each other without requiring international institutions. The system was self-equilibrating: trade imbalances would trigger gold flows between nations, automatically adjusting money supplies and price levels until trade rebalanced.
This efficient anchor eliminated currency hedging and provided merchants greater certainty in their transactions. The world hasn't seen a pure gold standard in international finance since 1914, when World War I disrupted the system.
The Federal Reserve's creation in 1913 stemmed from the Panic of 1907. From 1836 to 1913, America had thrived without a central bank during an unprecedented period of prosperity. Following the 1907 crisis, Wall Street titans including J.P. Morgan and Rockefeller representatives convened a secret meeting at Jekyll Island to draft what would become the Federal Reserve Act.
Though designed to appear decentralized, the system was actually dominated by the New York Fed under Benjamin Strong, a Morgan protege. The structure ensured the banking system would have a lender of last resort during future panics - a function that would prove enduring when Citibank received the largest bailout in history almost a century later in 2008.
By 1921, the stage was set for the first modern currency war: the classical gold standard served as an intellectual reference point, World War I had created massive sovereign debts that presented obstacles to normal capital flows, and the Federal Reserve System had established America as the dominant player in international monetary affairs.
4장
Currency War I: Hyperinflation and Gold
Currency War I began in 1921 with Germany's hyperinflation, not primarily to escape reparations (which were specified in gold marks), but to boost exports and generate foreign exchange. The Reichsbank's monetary debasement became one of history's most destructive.
Initially, many Germans were insulated from the worst effects - businesses owned hard assets that gained nominal value, banks were hedged, and unionized workers received inflation-matching wage increases. However, middle-class pensioners and savers were devastated, forced to sell furniture for food, with pianos becoming a form of currency. By 1923, hyperinflation was so extreme that American visitors couldn't spend dollars because merchants couldn't make change, and diners paid for meals in advance before prices rose further.
The crisis ended in November 1923 with the introduction of the rentenmark, backed by mortgages and property taxes. Though devastating, the hyperinflation achieved political goals: unifying Germans against "foreign speculators," forcing France to show its hand in the Ruhr Valley invasion, gaining sympathy for reparations relief, and strengthening German industrialists who controlled hard assets.
While Germany grappled with hyperinflation, major industrial nations established a new gold exchange standard at the 1922 Genoa Conference. Unlike the classical gold standard where paper and gold circulated freely, this new system allowed central bank reserves to be held in either gold or foreign currencies. England codified these arrangements in the Gold Standard Act of 1925.
The system had serious flaws, particularly the instability from large accumulations of foreign exchange followed by unexpected demands for gold. Another fundamental flaw was the price at which gold had been fixed to the dollar. During World War I, countries had printed enormous amounts of paper currency while the gold supply expanded little. This created a dilemma: either contract the money supply to target prewar gold prices (causing severe deflation) or revalue gold upward (effectively devaluing currencies).
The United States, despite cutting rates in 1927, began raising them in 1928 - the opposite of what the rules required given its dominant gold position. This decision, driven by domestic concerns about a stock market bubble, disrupted the system's functioning.
The Great Depression, conventionally dated from Black Monday (October 28, 1929), represented the bursting of a U.S. asset bubble in a world already struggling with deflation. The most dangerous phase came in spring 1931 when the Credit-Anstalt bank of Vienna announced losses that wiped out its capital. A banking panic gripped Europe, with bank holidays declared across multiple countries. By July, the panic spread to England, causing massive gold outflows. On September 21, 1931, England abandoned the gold standard, causing sterling to fall 30% against the dollar.
Franklin Roosevelt, elected in November 1932, inherited a deteriorating situation with widespread bank failures. Two days after his March 1933 inauguration, Roosevelt declared a nationwide bank holiday. When banks reopened on March 13, depositors lined up to redeposit their hoarded cash, confidence restored.
Roosevelt then confronted the problem of deflation being imported through exchange rates. On April 5, 1933, Roosevelt issued Executive Order 6102, prohibiting gold hoarding and requiring citizens to surrender their gold to the government in exchange for paper money at $20.67 per ounce. After confiscating gold, FDR gradually drove up its price to $35 per ounce by January 1934, devaluing the dollar by about 70 percent against gold.
The devaluations by England and the U.S. had their intended effects - prices stopped falling, money supplies grew, and unemployment declined. The Great Depression was far from over, but a corner had been turned for those countries that had devalued. Currency War I finally ended with the Tripartite Agreement of 1936, which allowed France to devalue slightly while all parties pledged to maintain currency values at newly agreed levels against gold.
5장
Currency War II: The Dollar Under Siege
The Bretton Woods Conference of July 1944 established a new monetary order to avoid the mistakes of Versailles and the interwar period. This system, which lasted from 1944 to 1973, created remarkable stability, low inflation, low unemployment, high growth and rising real incomes - the opposite of Currency War I. Under Bretton Woods, the international monetary system anchored to gold through the U.S. dollar at $35 per ounce, with other currencies fixed against the dollar.
Despite Bretton Woods' persistence into the 1970s, Currency War II's seeds were sown in the mid-1960s, particularly with Lyndon Johnson's "guns and butter" platform. The opening shots were fired in Britain, where a sterling crisis that had been brewing since 1964 came to a head in 1967 with the first major currency devaluation since Bretton Woods.
The public attack on Bretton Woods began in 1965 when President Charles de Gaulle declared the dollar finished as lead currency. By August 1971, Nixon's "New Economic Policy" ended dollar-gold convertibility completely. Nixon's 10% import surtax acted as "a gun to the head" of trading partners, forcing currency revaluations. Japan quickly allowed the yen to float, rising 7% against the dollar.
By December 1971, the Smithsonian Agreement formalized an 8-17% total adjustment through dollar devaluation against gold (9%) and currency revaluations. The agreement collapsed within two years. By 1973, the IMF declared Bretton Woods dead, ending gold's role in international finance.
The promised prosperity never materialized - instead, the U.S. suffered three recessions between 1973-1981, with 50% dollar purchasing power decline and quadrupling oil prices. "Stagflation" - the unprecedented combination of high inflation and stagnant growth - proved devaluation's proponents completely wrong.
With dollar confidence near collapse, salvation came through Paul Volcker's Federal Reserve chairmanship beginning August 1979 and Ronald Reagan's presidency starting November 1980. Volcker applied monetary "shock therapy" by raising federal funds rates to 20% by June 1981. This dramatic move, combined with Reagan's low-tax, deregulatory policies, crushed inflation from 12.5% in 1980 to 1.1% by 1986.
This Reagan-Volcker partnership launched one of America's strongest growth periods - 16.6% real GDP growth from 1983-1985. The strong dollar, contrary to conventional wisdom, supported growth when paired with pro-growth policies. However, persistent unemployment and growing trade deficits revived political pressure for dollar devaluation by 1985.
Treasury Secretary James Baker orchestrated another dollar devaluation through the Plaza Accord of September 1985, bringing finance ministers from West Germany, Japan, France and the UK together to coordinate a massive $10 billion intervention that successfully drove the dollar down 40-50% against major currencies by 1988. Yet again, the economic results disappointed - unemployment remained high, growth slowed, and inflation eventually surged to 6.1% by 1990. The G7 finally stabilized the dollar with the 1987 Louvre Accord, ending Currency War II.
6장
Currency War III: The Battle of the Giants
Three supercurrencies - the dollar, euro and yuan - issued by the world's three largest economies form the battleground of Currency War III, which erupted in 2010 following the 2007 depression. This currency war spans three main theaters: dollar-yuan across the Pacific, dollar-euro across the Atlantic, and euro-yuan across Eurasia.
Unlike previous currency wars, CWIII involves not just national issuers and central banks but also multilateral institutions (IMF, World Bank) and powerful private entities like hedge funds and global corporations. The scale dwarfs previous conflicts - considering the growth in national economies, money printing and derivatives leverage since the 1980s - and carries the risk not just of competitive devaluations but potentially of monetary system collapse itself.
The Pacific theater features the most direct confrontation. The 2001 recession created a severe employment crisis in America, with unemployment jumping from 5.6 million people in late 2000 to 8.2 million by end of 2001. When the 2007 recession hit, unemployment skyrocketed to 15.6 million by October 2009, with total unemployed and underemployed Americans exceeding 25 million.
U.S. politicians attacked China's yuan-dollar peg, blaming it for American job losses. A bipartisan Senate letter to President Bush in 2008 claimed the undervalued yuan gave Chinese firms an "unfair price advantage" that bankrupted American companies. This political rhetoric ignored economic realities - even doubling the yuan's value wouldn't make American workers competitive with Chinese earning $118 monthly.
The Bush administration recognized these complaints but balanced them against other strategic interests with China. President Bush launched the China-U.S. Strategic Economic Dialogue in 2006, which the Obama administration expanded into the Strategic and Economic Dialogue (S&ED). The United States ultimately chose the G20 as its preferred forum to pressure China on revaluation.
The Atlantic theater - the dollar-euro relationship - is characterized by codependence rather than confrontation. Germany welcomed U.S. and Chinese support for the euro despite being an export powerhouse. Unlike most exporters, Germany was both an external exporter and an internal exporter within the European Union. If the euro collapsed, Germany would lose crucial markets.
Germany found the perfect balance: a euro weak enough to boost exports to the U.S. and China but not so weak as to collapse. With the self-interests of the United States, China and Germany all aligned, the euro's survival was assured.
In the Eurasian theater, China emerged as a potential savior for peripheral European economies like Greece through sovereign bond purchases. China has vital interests in maintaining a strong euro. The European Union exceeds the United States as China's largest trading partner, and any euro collapse would severely damage Chinese exports.
China's European strategy serves multiple objectives: diversifying reserves beyond dollars, cultivating goodwill, and securing valuable concessions like direct investment in sensitive infrastructure and access to advanced technologies.
Beyond these major theaters, numerous other fronts are unfolding globally. Brazil represents the most prominent of these peripheral battles. From 2009-2010, the real appreciated 40% against the dollar, devastating Brazilian exports. Finance Minister Guido Mantega declared a "global currency war" in September 2010.
Brazil fought back with central bank intervention and capital controls, but like many emerging markets, it faced the dilemma of choosing between inflation and currency appreciation. By April 2011, Brazil was "waving the white flag" after controls failed to stop the real's rise.
7장
The G20 and the Search for Solutions
The Group of Twenty (G20) emerged to address global issues in the absence of true world government. Its twenty members include the original G7 economies, fast-growing emerging economies, resource-rich nations, and countries added for geographic balance. The G20 operates on multiple levels - finance ministers and central bankers meet regularly, while leaders' summits bring together heads of state.
Presidents Bush and Sarkozy transformed the G20 from a finance ministers' meeting to a leaders' summit in November 2008 during the financial crisis, recognizing China's crucial role as a potential source of rescue capital. This sequence of summits became the closest thing to a global board of directors.
By June 2011, the United States had emerged as a winner in the currency war's first round, wielding quantitative easing (QE) as its secret weapon. QE allowed America to unilaterally weaken the dollar through inflation, just as Nixon had done in 1971.
The strategy worked brilliantly against China because of their yuan-dollar peg. As the Fed printed money through QE programs, much flowed to China as trade surpluses or hot money. China's central bank absorbed these dollars by printing yuan to maintain the peg, forcing China into an impossible choice: maintain the peg and suffer runaway inflation, or revalue the currency and lose export competitiveness.
Inflation proved particularly dangerous for China, being uncontrollable and potentially triggering social unrest. By mid-2011, China increasingly chose controlled revaluation over unpredictable inflation.
The collateral damage spread globally as Fed money printing fueled inflation in emerging markets. The Arab Spring revolutions partly resulted from these rising food prices. Despite G20 efforts to coordinate policy, progress remained glacial. Only another crisis - which arrived with Japan's devastating March 2011 earthquake and tsunami - could force coordinated action again.
8장
The Weaponization of Finance
Currency wars can escalate beyond competitive devaluations to become actual weapons causing economic harm to rivals. A nation's currency is its Achilles' heel - destroy it and everything else collapses. Understanding these dangers requires examining how globalization, state capitalism and terrorism have created new vulnerabilities.
Globalization emerged fully in the 1990s after the Cold War, transforming multinational corporations into truly global entities. This "borderless world" enabled infinite financial risk through unlimited derivatives creation and complex securitizations. This second age of globalization (1989-2007) mirrored the first (1880-1914), which similarly ended in catastrophe.
State capitalism represents a modern version of mercantilism, the economic model that dominated from the 17th through 19th centuries. Modern state capitalism manifests in companies like China's Sinopec that appear private but have unlimited state resources, allowing them to bid on resources, buy competitors, and sell below cost without financial constraints.
Russia has weaponized gas supplies, cutting off Ukraine in 2006 and 2009, causing widespread European shortages. Putin has regionalized these disputes, demonstrating Russia's willingness to combine energy and currency as geopolitical weapons - a particularly devastating strategy during global financial crises.
China's military doctrine explicitly recognizes financial warfare as a "hyperstrategic weapon" that's "easily manipulated and allows for concealed actions." While China holds over a trillion dollars in U.S. Treasury securities, their strategy isn't simple dumping but rather shortening maturities and diversifying new reserves into commodities - including gold, which they secretly doubled between 2004-2009.
The greatest financial warfare risk may be correlation - multiple threats striking simultaneously, either through coordination or catalytic reaction. Russia and China could time commodity and currency assaults to be self-reinforcing. These trends pose difficult choices for U.S. national security, as dependence on rivals to finance debt constrains both fiscal and military options.
9장
The Failure of Economic Models
Economics divorced itself from political science, philosophy and law in the late 1940s, seeking alliance with hard sciences like mathematics and physics. Despite economists' promises that fine-tuned policies and risk-spreading derivatives would smooth market fluctuations, the Panic of 2008 revealed their failure.
The Federal Reserve, despite its mandate to maintain the dollar's purchasing power, has overseen a 95% loss in value since 1913 - a stark contrast to historical currencies like the Roman denarius and Byzantine solidus that maintained value for centuries. The Fed has failed in its lender-of-last-resort function twice: during the Great Depression by not providing liquidity, and in 2008 by providing liquidity to insolvent banks rather than closing them.
Monetarism, championed by Nobel laureate Milton Friedman, holds that money supply changes drive GDP changes. The Fed's strategy shifted to creating negative real interest rates by keeping nominal rates low while stoking inflation expectations. Bernanke's playbook became clear: zero interest rates, dollar devaluation through quantitative easing, and manipulating public opinion to create inflation fears.
Keynesian economics suffers from the flawed "multiplier" concept - the assumption that government deficit spending produces more than a dollar of output for each dollar spent. The Obama administration relied on Christina Romer and Jared Bernstein's study claiming a 1.54 multiplier to justify its $787 billion stimulus program in 2009. However, more rigorous research revealed multipliers less than one, meaning stimulus spending actually reduced private sector output.
Financial economics developed theories on options pricing that fueled derivatives growth. Two particularly destructive concepts - "efficient markets" and "normal distribution of risk" - infected the global financial system. But empirical evidence shows markets aren't efficient, price movements aren't random, and risk isn't normally distributed. The Value at Risk (VaR) model, built on these flawed theories, contributed to the 1987 crash, 1998 Long-Term Capital Management collapse, and 2008 financial crisis.
10장
Complexity and the Future of Money
Despite the failures of Keynesian and monetarist approaches, they remain dominant in policy responses to faltering growth. These outdated paradigms drive the new currency war through public debt expansion that requires inflation and devaluation. Fortunately, economic science has evolved, particularly through complexity theory.
Complexity theory rests on four principles: complex systems design themselves through evolution rather than top-down planning; they exhibit emergent properties where the whole exceeds the sum of parts; they require exponentially greater energy as they scale; and they're prone to catastrophic collapse when resource inputs can't sustain their scale.
Complex systems differ fundamentally from merely complicated ones. Complex systems require four key elements: diverse autonomous agents, connectedness between them, interdependence of their actions, and adaptation through learning. Two crucial characteristics are emergent properties and phase transitions (when systems suddenly change state).
Phase transitions occur in critical states, where small triggers can cause catastrophic effects - a single snowflake triggering an avalanche. These dynamics explain "black swan" events; they're not extreme events but extreme results from everyday occurrences. Complex systems follow power law distributions rather than normal distributions, making extreme events more common than conventional models predict.
Financial markets exemplify complex systems perfectly, with millions of diverse traders densely connected through exchanges and information networks. The 2008 crisis illustrates complexity dynamics - relatively small subprime losses ($300 billion) triggered a $6 trillion systemic collapse.
The currency wars will likely follow a predictable pattern: a series of temporary dollar victories followed by its ultimate defeat. A simple model demonstrates how dollar confidence could unravel. In a population of 311,001,000 Americans, each person has a critical threshold representing how many others must lose confidence in the dollar before they follow suit. Minutely small changes in initial conditions can lead to catastrophic results.
Anthropologist Joseph Tainter's analysis of 27 collapsed civilizations reveals that as societies become more complex, they require exponentially increasing inputs while producing diminishing returns. By 2011, evidence showed America was well down this curve: 25 hedge fund managers made $22 billion while 44 million Americans relied on food stamps; CEO pay increased 27% while 20+ million Americans were unemployed.
11장
The Four Paths Forward
Using both conventional and cutting-edge analysis, we can foresee four potential outcomes for the dollar - "The Four Horsemen of the Dollar Apocalypse." In order of increasing disruptive potential, these are: multiple reserve currencies, special drawing rights, gold and chaos.
A world of multiple paper reserve currencies with no single anchor would be unprecedented - instead of one central bank abusing its privileges, several could do so simultaneously, creating greater volatility and instability. This scenario could devolve into regional currency blocs dominated by dollar, euro, yuan and possibly ruble - potentially leading to regional trading blocs and diminished world trade.
The special drawing right (SDR) is world money controlled by the IMF, backed by nothing and printed at will. Created in 1969 during monetary distress, SDRs were initially valued using gold before switching to a paper currency basket in 1973. After small issuances totaling $33.8 billion through 1981, no SDRs were created for 28 years until the 2009 financial crisis prompted a massive $289 billion issuance.
The IMF's vision is for SDRs to replace the dollar as the global reserve currency. With doubled borrowing capacity to $580 billion, the IMF now functions as a de facto central bank - creating money and serving as lender of last resort - without democratic oversight.
A modern gold standard could take several forms: a pure gold standard with one-to-one backing, or a flexible standard with partial backing. Using April 2011 data with a 40% coverage ratio would require a gold price of $3,337 per ounce. Based on U.S. money supply and gold reserves with a 40% coverage ratio, gold would be approximately $3,500 per ounce. However, on a global basis with the need to restore confidence, a price closer to $7,500 per ounce might be necessary.
The most likely outcome may be a chaotic, catastrophic collapse of investor confidence, triggering emergency government measures. In such a scenario, the president would likely invoke the International Emergency Economic Powers Act to take extraordinary measures, including suspending transfers of foreign-held U.S. Treasury obligations and closing stock exchanges.
At this point, policymakers would recognize the paper dollar had lost its store of value function due to collapsed trust, necessitating a new gold-backed currency. The U.S. would reveal its hidden financial strength by using its massive gold reserves - about seventeen thousand tons representing 57% of global official reserves. The U.S. could declare a "New United States Dollar" equal to ten old dollars, convertible to gold at one thousand new dollars per ounce - an 85% devaluation against gold.
The dollar's current path is unsustainable. To avoid catastrophe, we must recognize that complexity becomes dangerous at scale, requiring descaling, compartmentalization and simplification. Financial reforms should include breaking up big banks, limiting their activities to basic services, banning proprietary trading from banking, and eliminating most derivatives. A flexible gold standard would provide certainty about inflation, interest rates and exchange rates.
Without such reforms, the Pentagon may eventually be called upon to restore order when Treasury and Fed measures fail. The dollar remains the pivot of the global financial system, and its debasement parallels the debasement of America's exceptional moral values. There's still time to save it, but that time grows short.
