The Modern History of Economic Sanctions

The Modern History of Economic Sanctions

By Henry Farrell

Tuesday, March 1, 2022, 2:40 PM

The Central Bank of the Russian Federation. (Фотобанк Moscow-Live, https://flic.kr/p/zrZkuX; CC BY-NC-SA 2.0, https://creativecommons.org/licenses/by-nc-sa/2.0/)

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Nicholas Mulder’s new book, “The Economic Weapon: The Rise of Sanctions as a Tool of Modern War,” remakes debates over European history between the two world wars. It rescues the League of Nations from the enormous condescension of posterity, arguing that the league was neither ridiculous nor doomed. However, it also demonstrates that the league’s actual and possible successes helped provoke Germany’s and Japan’s territorial ambitions. The league’s authority rested less on futile moral imprecations than on economic and financial sanctions. Those sanctions were more effective than most modern commentators have accepted, but they spurred a fierce counterreaction. Liberal politicians’ ambition to create a world that was safe from territorial aggression provoked illiberal states into greater aggression. Today—in a world in which sanctions have again come to play a crucial role in international politics—we need to understand why they went so very badly in the past.

The modern history of the “economic weapon”—sanctions, and their wartime cousin, the blockade—begins during World War I, when Britain and France tried to isolate Germany and its allies from the global economy. The global economy of the early 20th century—like the global economy of the early 21st—was complex and deeply interconnected. That allowed countries such as Imperial Germany, which had come to empire building relatively late, to draw on global trade for resources that it did not itself possess. Its industries depended on foreign minerals such as manganese, which it paid for through a global financial system centered on London.

The prevailing doctrine of free trade liberalism protected global trade from wartime measures, shielding countries such as Germany from efforts to target their foreign dependence. In Mulder’s description, 19th century wars “protected commerce and finance to a degree that is almost unbelievably generous.” Nations continued to pay loans to other countries they were at war with, almost as a matter of course, and signed treaties that rendered private property immune from seizure.

But economic vulnerabilities could still be exploited by a sufficiently ruthless adversary. As Mulder emphasizes, the new thinkers who opposed this artificial separation between war and commerce “were merely thinking the material realities of a globalized world through to their logical conclusions.” Once the veil of illusion was rent, an interdependent world offered irresistible opportunities for those powers that played a central role in the global economy, such as the United Kingdom (and, to a lesser extent, France). 

As World War I came closer, officials began to consider how best to turn globalization against Britain’s enemies. The historian Nicholas Lambert has documented how British naval officials contemplated drastic measures to end the expected war quickly, cutting Germany and its allies out of the global economy. Their ambitions were never realized, but during the war, Britain and France blockaded Germany and its allies, seeking to starve their economies of resources and their citizens of food. Germany, for its part, used U-boats to cripple transatlantic shipping.

As World War I drew to a close, some commentators portrayed the economic weapon as an irresistible threat, which could bring aggressors to their knees “without a drop of blood.” Others acknowledged that blockades would lead to civilian deaths but saw that as a regrettable necessity. Harold Nicholson, the English diplomat and diarist, acknowledged that a blockade against Béla Kun’s briefly lived communist government in Hungary had “extremely inhumane” consequences for civilians, and that it was “most unpleasant to feel that women and children are starving in Hungary.” Nonetheless, he concluded that “it would be illogical to reverse our policy at the very moment when we most need to maintain all possible pacific means of pressure on our enemy.”

Nicholson’s description of blockade as a “pacific means of pressure” acknowledged a crucial change in the politics of the economic weapon. Once, it had been considered off-limits, even in wartime. Then it was legitimated as a means of waging war. After World War I, it became a weapon of peace, which could perhaps be employed without any declaration of war and, indeed, as an alternative to it. 

The advocates of the economic weapon hoped that it might rarely or even never have to be employed and that, instead, its mere existence might be sufficient threat to deter aggressors. Still, H.O. Arnold-Foster, one of the League of Nations’ most important British advocates, acknowledged the potential for horrible civilian casualties in a world where “Lord Curzon’s pen will replace the invader’s bayonet, and there will be no distressing scream audible in Downing Street.” 

The economic weapon was a cornerstone of the League of Nations. The league’s bad reputation comes in part from Edward Hallett Carr, who portrays the league in his classic realist account of the interwar period, “The Twenty Years’ Crisis,” as his prize example of the pernicious uselessness of the “idealist” approach to international relations. Mulder argues to the contrary that the League of Nations was a bet on the power of economic sanctions to enforce global peace.

The league began from the supposition (shared both by victors and the defeated) that blockade had “been decisive to the outcome of the war.” That assumption may have been partly mistaken. The consequences of blockades were horrific: 300,000-400,000 people in Central Europe died of starvation or illness thanks to blockade, while 500,000 perished in the Ottoman Empire. Mulder argues that the blockade did not play a decisive role in Germany’s defeat. Still, the general belief that the economic weapon had worked led its advocates to see it as a promise, and its targets to see it as a threat.

When the U.S. and Britain drafted plans for the postwar order, they disentangled economic coercion from wartime belligerence. Article 16 of the covenant that established the League of Nations declared that when a member of the league breached its violations by resorting to war, the other members would “immediately subject it to the severance of all trade or financial relations” and prevent it from economic relations with other countries too.

Behind the league lay the belief that the threat of sanctions could underpin peace between nations. This was an extraordinarily ambitious goal, but it was defined in limited ways. Sanctions would be applied to belligerent states, but they would not be used, for example, to change how states behaved toward their own citizens. And sometimes the league’s sanctions worked. The threat of action under Article 16 deterred Yugoslavia from going to war against Albania, and Greece from military action against Bulgaria. 

However, the league was always hampered by the absence of one of its key founders—the United States. This made it hard to cordon Italy’s economy from the rest of the world when, in 1923, it bombarded the Greek island of Corfu. 

Furthermore, the workings of the League of Nations, like those of other international organizations, were greased by the lubricating oil of great power hypocrisy. Italy believed it only right that it, as a real European power, could get away with actions that Yugoslavia could not. Britain and France, for all their protests against Italy, themselves engaged in actions that were at best questionably consistent with the principles of the league.

Despite these flaws, Mulder maintains that the league was more successful than its detractors admitted. It might, had history gone a little differently, been more successful still. When Italy invaded Ethiopia, the league rapidly declared it to be an aggressor, and 52 of the 58 members applied sanctions against Italy. Not only did they ban crucial exports to Italy, but, by banning imports as well, they sought to cut off Italy’s access to foreign exchange. They bet that Italy’s economy would gradually and inexorably be suffocated, forcing it to break off its adventure and sue for peace.

Had Italy’s Ethiopian campaign been bogged down in the summer rains, as English and French officials anticipated, they might have won their bet. But Italy’s offensive—helped by the deployment of chemical weapons—was rapid and aggressive, undermining an economic counteroffensive based on the slow cumulation of pressure. Britain and France were unwilling to escalate by imposing new measures, for fear that Italy might target their own empires, while the United States remained neutral. Italy’s economy suffered badly, and it avoided crisis only through brutal internal rationing and deflation. But it did not suffer badly enough to make it want to withdraw from Ethiopia. 

Slower military progress for Italy, or a more ruthless and immediate program of punitive measures on the part of the league (for example, denying access to the Panama Canal) might have led to a very different outcome, and a different modern understanding of the role of the league. Even more importantly, the league could have deployed what Mulder calls the “positive economic weapon,” providing Ethiopia with the economic resources that it needed to deter invasion rather than denying them to Italy.

Despite these failures, states took a different lesson from sanctions and blockade than Carr’s account would suggest. Rather than despising their inefficacy, they feared them. Italy, Germany and Japan worried about their vulnerabilities to sanctions, and took extensive measures to mitigate them. Italy strove for autarky—effective independence from global economic pressure—but failed, falling ever deeper into Germany’s shadow. Japan, entangled in its own war with China, embarked on what one authority cited by Mulder has described as a “perverted search for self-sufficiency.” Germany placed the principles of “raw materials freedom” and “blockade resilience” at the heart of its four-year economic plan. The Nazi leadership saw the threat of foreign sanctions as further justifying its hegemonic ambitions—the more territory it influenced or controlled, the less vulnerable it would be to the Jews and Bolsheviks whom it believed were orchestrating the international campaign against Germany.

Thus, even as Mulder resuscitates the league, he implicitly damns it. The book describes how the instrument through which the league sought to build an enduring peace helped spur a new and devastating war. In the later stages of World War I, Erich Ludendorff and his staff in Germany’s supreme army command had concluded that Germany needed to adopt a strategy of what Mulder calls “expansionary autarky,” winning territories to the east to protect itself against blockade. A generation later, Hermann Goering returned in speeches and policy to Germany’s need to secure itself against outside pressure. Real geopolitical concerns commingled with the leprous distillment of anti-Semitism and historical distortion to provoke a kind of self-defeating aggression. The German pursuit of autarky spurred the economic countermeasures that helped undermine it. Adolf Hitler’s fear of sanctions and of blockade were one factor in his decision to invade Poland in 1939, precipitating World War II.

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One possible response to Mulder’s book is to look for modern parallels. For sure, there are plenty of them, provided you squint a little. Liberal powers rely ever more heavily on sanctions as an alternative to military action, while remaining unwilling to pay any sustained attention to the human costs associated with them. And an intricate global economy, in which everywhere is interdependent with everywhere, gives birth to exploitative practices that devour it.

But there are also crucial differences. The dollar-clearing system has replaced the City of London, so that the United States, which held itself partially aloof from the interwar system of sanctions, is now its master. If it feels the need, it can unilaterally cut foreign multinationals and even mid-sized countries out of the central systems of the global economy. Global sanctions work very differently when one country has go-it-alone power.

Rather than listing points of comparison, the historian’s perspective pushes observers to understand how apparently new dynamics have been shaped by the old. And they have been, even if the paths of influence have nearly been forgotten. Few modern histories of sanctions pay attention to the wartime blockades that gave birth to them, or to the concerted legal effort to separate them from war, and transform them into an alternative to it.

But as Mulder shows, the relationship between the wartime and peacetime deployments of the economic weapon never came close to disappearing. That doesn’t mean that modern policy makers should focus on what the league did or did not do back then. It simply illustrates a more fundamental underlying problem that spans both eras. No amount of lawyers’ arguments can conceal the relationship between sanctions and war. The more that sanctions bite, the more willingly their targets will turn to other means, including military aggression, to retaliate. 

Europe and the US’s decision to cut Russia out of the global financial system by denying key banks access to SWIFT and dollar clearing, and freezing central bank assets, are a distorted historical echo of the dilemmas that the League of Nations faced when it decided how to deal with Italy’s invasion. Might economic actions against Russia provoke it to respond through further military aggression? Russia’s publicly announced nuclear alert is an implicit threat that it may use a nuclear response. When sanctions critically endanger a regime, the regime is going to defend itself.

Just as they were a century ago, the crucial dilemmas of sanctions are the dilemmas of liberalism. Is the world better off when countries are interdependent with each other than when they hold themselves aloof? How far do you go in cutting countries out of the world economy when they turn to conquest, or look to spread illiberalism? Is the economic weapon really so much better than the military one?

International economic coercion is the dark shadow cast by the global liberal economy. Sanctions would not be nearly so effective in a world where liberalism had not won. Isolation from global trade and finance are painful precisely because they are so intertwined with the workings of national markets. In a world of complex supply chains spanning dozens of countries, and global financial systems that are woven into the warp and woof of local banking relations, it is impossible to tell where the domestic economy ends and the international economy begins.

Liberal proponents of sanctions have argued that they might create a better world. The historian James Sheehan chronicles how 19th century liberals described the Prussian state as “the spear that heals as well as wounds.” The economic weapon too was supposed to make the world whole through the threat of harm. Yet, at least in the interwar period, it did more wounding than healing.

In the 21st century too, the economic weapon may inflict wounds that cannot heal. Lord Curzon has long since fallen to dust and bones, but the cries of hundreds of thousands in Afghanistan, threatened by sanctions-induced starvation, seem nearly as hard for modern policymakers to hear as they were a century ago. Once the machinery of sanctions has become fully established, it provides its own justifying logic. It’s hard for politicians to see how to do without them, even as they deplore what seem to them to be unintended side effects of good policy.

Sanctions are often unpredictable in their consequences. To take a relatively small example, when the United States designated the Russian oligarch Oleg Deripaska’s aluminum giant, Rusal, it did not anticipate how this might compromise the economy of its West European allies. More seriously, American policymakers do not know how Russia will respond to sanctions. Like the authoritarians of the 1930s, Putin and those around him are not liberals in the economic sense of the term. They do not necessarily think about their best interests in calculating terms, weighing up punishments against rewards. Instead, they have their own narratives of Western perfidy and betrayal, of the need to secure themselves against values and institutions that are largely inimical to their own. They might indeed fold, as they see the forces arrayed against them. Alternatively, like Hitler’s Germany, they might see sanctions as an “existential threat … requiring a military response … initiating [what one of Nazi Germany’s] historians has called ‘a spiral of insecurity whose end could not be foreseen.’” 

In other writing, Mulder argues that the modern U.S.-dominated system of sanctions is, at best, ineffective in achieving its political goals and, at worst, liable to produce the same kinds of blowback that it did in the interwar era. The “positive” version of the economic weapon—providing assistance and support rather than looking to choke recalcitrant countries into submission—is more likely to be effective.

So could sanctions possibly escape the traps that Mulder identifies? Here, Mulder is himself more ambivalent than his main argument might imply. He has previously suggested that a “left sanctions policy” might “focus on the international oligarchy as the connecting link between domestic economics and foreign policy.” The tools and policies of the sanctions state—institutions such as Treasury’s Office of Foreign Assets Control—would be redeployed to help tackle corruption, end offshore tax avoidance and reduce economic inequality.

Perhaps Mulder anticipates that the targets of such measures would behave more predictably than political leaders. They would look to their pocketbooks to determine their interests. Implementing his proposed agenda would take a lot of work. One of the key lessons of his book is that implementing sanctions requires a lot of state capacity. The United States would need to develop further the means to collect, categorize and analyze complex data, and the specialized officials who can turn this information into actionable strategy. To avoid previous mistakes, it needs to work better to integrate the interests of democratic allies, whose officials have their own understandings of the national interest, and foreign relationships to navigate. 

This would imply a different understanding of the possibilities and limits of sanctions. Rather than trying to change the behavior of countries, Mulder’s proposed approach would look to remake the economic and financial connections that tie together the global economy, making them less amenable to corruption and tax evasion. 

The sanctions against Russia aim to change state behavior through threat and coercion. By accident or design, some of them also target the financial relationships that allow individual oligarchs to park their wealth in the West and make use of it. It is possible that the Biden administration, which has identified autocratic corruption as an urgent policy priority, could use these latter sanctions to build a different strategic approach to sanctions policy. Mulder’s arguments imply that sanctions—if they are to provide better results—should be used primarily not to punish countries, but to discipline international banks and the like, which otherwise have strong incentive to encourage economic pathologies. The United States would not target illiberal states but the liberal financial institutions that help foster illiberalism. This policy would surely have its own trade-offs, difficulties and perverse consequences. But it might help the United States to avoid the past and present risks that Mulder eloquently explains.