The Source and Exercise of American Financial Power

Abstract

Abstract Chapter 2 explains how dollar dominance gives the United States the unrivaled capacity to cut off foreign actors from their dollar-based assets and from the global dollar-based financial system. It unpacks the mechanics of the correspondent banking system in which US financial institutions serve as intermediaries in most cross-border financial transactions. It then describes the critical role played by presidential Executive Orders and the US Treasury’s Office of Foreign Assets Control in overseeing and enforcing the US financial sanctions regime. Finally, the chapter presents original data documenting how the United States has used its financial sanctions capabilities with increasing frequency in the first two decades of the twenty-first century, targeting states with specific characteristics. These data are used to illustrate how political risk associated with the dollar varies across countries and over time: the risk of facing sanctions is not equally distributed.