Letting private merchants chart the path to future spoils suits the world’s sovereigns just fine. Ledgers seem less threatening than scepters, which is what makes them such effective tools of empire. In Underground Empire: How America Weaponized the World Economy (2023), political scientists Henry Farrell and Abraham L. Newman’s novel account of our digital economy, merchants once more function as handmaidens to government power. The beaver pelt peddlers and colonial profiteers of yore are now early telecoms like MCI WorldCom, which laid the fiber-optic cables that the original internet ran on, and banks like J.P. Morgan & Co. and Citibank, which dreamed of a borderless global payments system.
The merchants achieved their aims. The internet allowed unregulated communication across the globe that seemed, for a moment, to abolish national borders. By the late 1970s, American banks had set up an international clearinghouse system that elevated the dollar to a global currency. An Italian firm could use it to pay its Japanese supplier, oiling the gears of globalization. What’s most striking is that both the telecoms and the banks, in Farrell and Newman’s account, were led by libertarian-minded characters set on creating systems that would evade political oversight. Yet the opposite happened: internet networks, financial infrastructures, and global supply chains initially set up by private firms ended up being weaponized by governments—one government in particular. How to explain this outcome?
The first reason is easily overlooked: the modern digital economy is constituted of tangible matter. Every selfie, cat video, and viral meme—and, as it turns out, every covert communication between criminal kingpins or the central bank dealings of a rogue regime—gets stored somewhere on a physical server. The cloud, in other words, does not live in the clouds. It sits in climate-controlled data centers, large numbers of which are clustered in otherwise unremarkable single-factory towns where the factory is the internet. These data centers are in turn connected by miles of glass threads as thin as a human hair, which are woven into thick cables buried underground and stretching across the ocean floor.
As it turns out, a disproportionate share of those data centers is found on American soil, in innocuous-sounding places like Ashburn, Virginia. This overlooked physical reality, Farrell and Newman claim, means that beyond its sheer size, its nuclear arsenal, or even the soft power of its cultural industries, the United States now wields a novel source of influence, which has only become apparent in the last two decades. Stranger still, this power came about largely by happenstance. The internet emerged out of a US government project based in Northern Virginia, devised to facilitate collaboration among university researchers. As private entrepreneurs entered the scene to manage the infrastructure the internet would run on, they set up shop in the same place. One such early provider, the Metropolitan Area Ethernet (MAE-East), initially operated out of a Northern Virginia parking garage. At one time, it was estimated to carry over 90 percent of the internet’s traffic. This early edge perdured over the decades that followed, but only recently has the United States started actively exploiting it.
The turning point came in the wake of the September 11 attacks, as US intelligence agencies grasped for ways to intercept the private communications of suspected terrorists and hostile regimes. They resorted to turning the screw on the merchants. National telecom companies like Verizon/MCI eventually granted the NSA access to all their international cable traffic. And because the internet converged on a handful of cable landing sites on US territory—which the NSA itself refers to in its classified documents as “choke points”—they represented a unique portal onto the world’s private communications. It was the type of power that can’t be reined in once unboxed. Privacy laws were quickly updated to allow for a broad harvesting of these data in the name of national security. The world entered a new era of government surveillance; the path had been laid by private companies.
Intelligence agencies were not the only ones to awaken to their newfound superpowers; the US Treasury Department had its own slow-moving epiphany. Until that point, Treasury had viewed any political interference in financial markets as threatening the United States’ credibility. But when it came to light that the September 11 hijackers had been sent money using regular wire transfers that passed through the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the system that the world’s banks use to speak to one another, Treasury abruptly abandoned its reservations. It demanded access to SWIFT’s data, and although similar requests had been denied in the past, this time SWIFT gave in. The United States suddenly gained an unprecedented real-time look into clandestine financial transactions.
It wasn’t just information. Less than a year later, in response to suspicions that Iran was relying on SWIFT to finance its nuclear program, American officials pushed for Iranian banks to be cut off from the global financial switchboard. SWIFT yielded to pressure once more. The effects were immediate. Since Iran is heavily reliant on exports of oil, which is traded in dollars, it could no longer collect payments for its goods, and was reduced to bartering. Its exports dropped by 75 percent. This was the turning point in the negotiations over its nuclear program: in exchange for lifting the SWIFT ban, Iran began making concessions. A deal was eventually reached.
What happened next brings to mind the theological riddle from the Middle Ages that asks whether an omnipotent being could create a boulder so massive that it couldn’t be moved. The conundrum found its answer. To its own surprise, the Obama administration proved unable to lift the sanctions it had imposed. Even once it allowed European banks to restart their dealings with Iran, the banks balked out of fear that the United States might change its mind. In the chummy world of global finance, reputation is everything, and a black mark is not easily erased. The difficulty of reversing course is a recurrent aspect of economic sanctions, and one that arguably limits their usefulness as bargaining chips. Ultimately, the bankers were proven right. The Trump administration soon broke the Iran deal and reimposed sanctions.
The sanctions against Iran created a playbook that the US Treasury Department applied with increasing frequency, first with North Korea, then Sudan, Belarus, Myanmar, and, most recently, Russia. Weaponizing financial plumbing has gone mainstream. In the first episode of Amazon Prime Video’s series (2018–23) expanding the universe of Tom Clancy’s Jack Ryan books, the titular protagonist is transformed from the history professor of the original novels to a tech nerd programming his own SQL commands to query SWIFT transactions emanating from Yemen.
When Putin invaded Ukraine in February 2022, the most widespread use of financial sanctions to date ensued. The United States and its European allies took two radical steps that only those who control the conduits of the global economy could pull off. They cut Russian banks out of SWIFT like they’d done against Iran a decade earlier, and they froze over 600 billion dollars’ worth of Russian foreign reserves. It turned out that the major part of Russian reserves, which Putin had expressly amassed to make himself invulnerable to US sanctions, existed only as entries in the ledgers of European banks. These banks were answerable to national governments. They were choke points that could now be pressed.
Jean-Baptiste Colbert, the 17th-century French finance minister under Louis XIV, is credited with the observation that “money is the nerve of war.” He meant that the state’s ability to tax its population is what pays for the soldiers and weapons needed to defend the state. Colbert understood that wars were ultimately won through fiscal policy. Today, the phrase has taken on a distinct meaning: wars may now be won by applying pressure to points of convergence in the global financial nervous system. Where those points lie determines who can press them. The front line has shifted to the conference room, with technocrats as the new shock troops. Not coincidentally, SWIFT has been called the “nerve center of the global banking industry.” The digital era was supposed to abolish space. Instead, political borders now seem to matter more than ever.
In 2014, Vladimir Putin grumbled that the internet was a “CIA project” devised to benefit the United States at the expense of other countries. In hindsight, he had a point: reading Farrell and Newman, it really does seem as though the whole thing was designed for the United States’ benefit. Yet what Putin overlooked is that if it had been planned, then it never would have been allowed to arise in the first place. It’s because the stage was set by merchants single-mindedly bent on profits that no one suspected its eventual weaponization by governments. Had they seen ahead, US friends and foes alike would have resisted the US-led digital economy in much the way that the United States today can be seen clutching its pearls over TikTok, a social media platform that, while Chinese-owned, remains best known for 15-second dance-move videos posted by teenagers. The modern digital economy emerged because no one could see ahead to the influence that it would eventually offer some governments over others.
Underground Empire pulls off the improbable feat of rendering the intricacies of digital plumbing not only comprehensible but also captivating. Henry Farrell used to run The Monkey Cage, a site devoted to translating dense academic findings into layman’s terms, and the experience shows. Despite this achievement, the authors find themselves intermittently apologizing for the technical aspects of their topic. SWIFT is a “boring but useful organization.” Financial payments systems are “simultaneously dull and arcane.” The location centers that undergird the internet are “dull-seeming but crucial.” Yet the tedium is the point. It’s precisely because these technical arrangements have all the sexiness of the flapper valve on a toilet that no one bothered much about them, until they attained their current scale, by which time it was too late to act against them.
A similar type of obliviousness must account for some of the lingering questions left in Farrell and Newman’s account. For instance, the book deals at length with the ways in which the US government keeps a careful eye over Taiwan Semiconductor Manufacturing Company Limited (TSMC), the chip manufacturer that is the AI revolution’s potential single point of failure (one contingency plan in the case of a Chinese invasion involves preemptively blowing up the TSMC factories before China can seize them). Yet the authors never explain how on earth it happened that the world’s most advanced chipmaker came to find itself on a contested island 80 miles off the coast of China in the first place. Here, too, the most plausible answer is that, until recently, no one was paying much attention. Just as with the sudden realization in the early days of the COVID-19 pandemic that they were reliant on others for such essential items as cotton masks, Western governments didn’t realize how little they controlled their own supply of the semiconductors that fuel the future. It is difficult to know today what will be essential tomorrow.
In their determination to paint governments as the great beneficiaries of the modern digital economy, Farrell and Newman occasionally come close to overstating their case. In particular, they speak of how multinational companies are now “caged by the demands of jealous states” aiming to reassert their authority over the private sector. Yet the relationship may be more of a quid pro quo. In 2011, the NSA’s secret budget included $394 million earmarked for payments to private companies, like Verizon/MCI, in exchange for data access. And just as governments are able to coerce multinationals to play ball, those firms have grown adept at playing governments against one another, appealing to the insecurities of each. In an attempt to challenge the Taiwanese stranglehold on high-end chipmaking, Pat Gelsinger, the CEO of Intel, has been actively fanning the flames of economic nationalism, calling for “urgent action” by the White House to avoid being overly reliant on “insecure, foreign supply chains”—all the while planning to revive a $10 billion plant in Chengdu, China. It worked. In August 2022, President Joe Biden signed the CHIPS and Science Act, which provides $54 billion in direct subsidies to assist the semiconductor industry. Intel is poised to be the biggest single beneficiary.
For all the novelty of weaponized interdependence, it is sometimes difficult to draw the line between this peculiarly 21st-century type of influence—which flows from fiber-optic cables, data centers, and dollar clearinghouses—and more conventional types of power. This is even true of SWIFT, which is reliably brought out as exhibit A for the weaponization of global finance, but which turns out to make just as much of a case for the continued relevance of old-fashioned diplomacy. SWIFT arose in the 1970s in response to an attempt by the US company Citibank to impose its own payments system on the rest of the world. It was, in other words, a response by European merchants to American overreach; the European VHS to Citibank’s Betamax. VHS won out, and Belgium was picked for SWIFT’s headquarters, a deliberate choice to counter American financial hegemony. This is what happens when others see ahead and try to hedge against the overconcentration of power in a single node. That is why the United States could not initially subpoena SWIFT in the way they did domestic firms.
When the US eventually got its way in the wake of September 11, it was through a diplomatic marriage of convenience. EU privacy laws prevent European governments from harvesting data indiscriminately; the United States faces fewer restrictions. So, in exchange for obtaining access to SWIFT data, US intelligence agreed to share actionable intelligence with their European counterparts.
If the weaponization of the digital economy is surprising, it’s because networks are not meant to be dominated by a few powerful players. The very selling point of networks lies in their decentralized nature, which promises greater resilience, and a more equitable distribution of power. Think of the initial utopian design behind the crypto economy: a vast decentralized network, immune to government interference, where relationships of power are replaced by incorruptible code.
Yet the theoretical beauty of networks can quickly be undermined by human incentives. Redundancy, though vital for resilience, is expensive. After a while, networks tend to converge on a few central nodes that offer the cheapest path across. Farrell and Newman note how an email sent from one part of Brazil to another is likely to bounce through fiber-optic cables to Miami rather than meandering along Brazil’s own copper wire network. In a parallel trend, new entrants gravitate to those nodes that are already well connected, which is why new data centers tend to cluster around existing ones. Both trends ultimately reduce reliance: the failure of a single point can undermine the entire network. Consider the global domino effect when a storm grounds flights at LAX for a few hours, and delays around the world ensue. It also amounts to a winner-take-all outcome that goes squarely against early hopes for a flat, egalitarian world. Crypto is a case in point. From that early utopian ideal, the crypto economy has grown into an oligopoly ruled by a handful of big intermediaries, each one an obvious target for regulation. As recent events have shown, the collapse of a single one of these large firms can jeopardize the whole system.
Network power relies on others buying in. For Instagram to exist, people must keep posting pictures of what they ate for brunch. For the US dollar to remain a global currency that puts US banks in charge, or for US-based data centers to hold the world’s secrets, the world must be willing to keep using dollars to settle their transactions from lira to yen, and keep storing their private data in places like Ashburn, Virginia. For a while, this seemed a safe bet.
Yet the eagerness that Washington has shown for exploiting its position for geopolitical advantage has spooked even its closest allies, who have been busily looking into ways of reducing their reliance on the US dollar, US banks, and the US-centered internet infrastructure. All of which illustrates a last poetic element at the heart of Farrell and Newman’s account: the power they describe is of a kind that decreases the instant it is utilized. You can either save it and watch it grow, or you can blow it all at once. During the Trump years, the United States veered towards the latter course, deploying economic sanctions to get its way around the globe.
That period holds conflicting lessons for the future. For all the talk by foreign government leaders about reducing their vulnerability to the United States’ whims, the dollar is still the global currency, and the critical junctures of the internet’s infrastructure remain on American soil. It is difficult to do much about centers of power once these are entrenched, just as it is hard for an emergent social platform to rival Facebook, even though no one likes it much. Users gravitate to those networks that offer the most potential connections. In the global economy, it’s unclear what the alternatives are. China has created its own version of SWIFT, but foreign banks are unlikely ever to adopt it; Beijing’s whims are even less predictable than Washington’s. And as long as the merchants are the ones running the internet’s plumbing, they will be drawn to the efficiencies that the US-based network can offer. For the time being, the United States will maintain its position at the center of the digital economy. It can keep spending, and every sign suggests that it will.
Krzysztof Pelc is the Lester B. Pearson Professor of International Relations at Oxford University. His most recent book is Beyond Self-Interest: Why the Market Rewards Those Who Reject It (Bloomsbury and Oxford Press, 2022).