Fall 2022 - Money, Sanctions and International Law
Sanctions and International Order

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October 19, 2022

Benjamin Coates, Wake Forest University

Since the interwar period “sanctions” have served as an ideological signifier for liberal internationalism. While a “blockade” or “embargo” seeks to isolate an enemy for purposes of national security or military victory, the term sanctions—conceptually and rhetorically—evokes a peaceful method of enforcing global norms through the multilateral punishment of international lawbreakers. (The popular question: “do sanctions work?” is actually asking: “can sanctions substitute for war?”)

But sanctions have rarely served to enforce international law without violence. Putting aside the question of effectiveness, most sanctions are not imposed by international institutions. Instead, individual states acting alone or in groups have deployed economic pressure in the name of universal values. This has meant in practice the development of new state capacities, legal regimes, and global hierarchies. In short, sanctions have been acts of creation as much as methods of enforcement.

The United States is currently and has been the chief practitioner of unilateral sanctions, reflecting its economic influence and global aims. Current sanctions against Russia are the latest example of America’s attempt to translate its financial power into political order. Joined this time by European allies, President Joe Biden has justified US support for Ukraine as a response to Vladimir Putin’s “assault on the very principles that uphold global peace.” Russia is cast not as a threat to US national security, but to the “liberal world order.” But if Russia’s actions are an attack on the world, they have not been met with a proportional response. Most of the world’s nations have not joined in the sanctions program. Instead of enforcing existing international law, sanctions against Russia gesture toward a new world order marked by rival hegemonic blocs.

To understand the origins of modern financial sanctions it is worthwhile to return briefly to the late 1930s and early 1940s. This was the first time the United States imposed targeted peacetime economic sanctions. At the time, just like today, autocratic states were violating the sovereignty of their neighbors. President Franklin D. Roosevelt wanted to deter and punish these “gangsters.” But his options were limited. 

Collective economic sanctions were the main tool for punishing aggression in the interwar period. They built on the experience of the Allied blockade of World War I which had deployed the “economic weapon” to deadly effect against German civilians. In 1935, the League of Nations had imposed sanctions on Italy after it invaded Ethiopia, without success.

The United States did not join in the sanctions on Italy. The country had rejected membership in the League of Nations in 1919. With most Americans convinced that US involvement in World War I had been a mistake, FDR knew that multilateral actions were a non-starter.

Thus, when in 1937 Roosevelt called for a “quarantine” to combat the “epidemic of world lawlessness,” he specifically rejected the language of “sanctions.” “Sanctions,” he told an associate, was “a word that must not be used any more.”[1]

Instead, Roosevelt considered unilateral financial action. In December, 1937, during Japan’s invasion of China, Japanese planes bombed and sank the U.S.S. Panay in the Yangtze River. Roosevelt asked his secretary of the treasury, Henry Morgenthau, Jr., to “give him an angle on how he could lay his hands on Japanese funds in this country.”[2] Morgenthau took the president’s request to Treasury’s general counsel, a former Columbia University law professor named Herman Oliphant. Working in secret, Oliphant drew up a memo explaining how FDR could freeze Japanese funds by invoking the Trading with the Enemy Act of 1917. Some modifications to this wartime statute had made its powers available to the president during peacetime if he declared the existence of a “national emergency.” In 1933, FDR had cited the TWEA to declare a “banking holiday” and that emergency declaration had never been revoked. The president thus had the power to seize Japanese assets immediately. “My God, I completely forgot about it,” FDR reportedly exclaimed.[3]

Because Japan was dependent on the United States for oil, metals, and other resources vital to its war machine, preventing it from purchasing these goods by freezing its assets would accomplish the major goals of economic warfare without the need for an embargo or blockade. Even though the Trading with the Enemy Act did not “refer to goods at all,” Oliphant explained, “the way we operate the control of funds and credits, the speed with which we operate it, the strictness with which we operate it, etc.” would allow the Treasury to cut off shipments of materials to Japan. Given Japanese dependence, this was a significant threat.[4]

What would justify the deployment of such a weapon? Wouldn’t it simply provoke war? Morgenthau argued that Japanese aggression required a response. “This may be the deciding factor in whether this world is going to have democracy or become all dictatorships,” he said. Blocking their assets would force the Japanese to “conduct themselves like gentlemen at the table of international nations.”[5] American financial controls could strengthen international order, Morgenthau suggested. Yet it was precisely the unilateral nature of the proposed policy that made it attractive to FDR.

As it turned out, FDR did not freeze Japanese assets in 1937, opting instead to accept a Japanese apology. But the draft policy remained safely stored in a Treasury Department safe, and, beginning in April 1940 it served as the legal basis for a series of Executive Orders that froze the funds of countries invaded by the Nazis, starting with Norway and Denmark. These actions aimed to prevent the Nazis from looting the countries they had invaded. By June 1941 the freezing program had expanded to cover the entire Continent, and in July Japanese funds were blocked as well.

This policy, known at the time as funds control or the “freezing” program, relied on a system of financial licensing. Without a license from the Treasury, affected nationals (which, ironically, included many refugees from fascism) could not access their bank accounts, transfer assets, or send remittances to Europe. Washington also imposed a “Proclaimed List” on Latin America that eventually ran to some 15,000 names. The US forbid transactions with anyone on the list, and since Latin American merchants relied on US banks to clear international deals, this amounted to an extraterritorial economic blacklist.

Funds control took the form it did because of the conjunction between domestic US legal architecture and global finance. The TWEA, recall, gave the president the power to freeze bank accounts in the United States, but not to unilaterally proclaim an embargo. (Indeed, neutrality legislation expressly prohibited that.) Growing American financial power, as Treasury officials noted, meant that freezing US accounts could have international ramifications. During the 1930s, European funds had floated across the Atlantic (often literally), seeking refuge from geopolitical storm clouds, while Japanese ships crossed the Pacific in search of oil and scrap metal.

Washington initially hoped to rely on the private sector to carry out the freeze voluntarily. In 1939, George M. Harrison, president of the Federal Reserve Bank of New York, had formed the Foreign Exchange Committee with top Wall Street financiers precisely for this purpose.[6] In April 1940, the Committee agreed to halt all trading in Danish and Norwegian accounts for 24 hours after the Nazi invasion of those countries. But banks feared that they would be sued if they refused to carry out preexisting contracts. They would agree to continue the freeze only if the Treasury Department took responsibility. However, the Treasury lacked the legal authority to order a freeze (“Why should I do something illegal?” Morgenthau wondered) and so FDR instead issued an Executive Order prohibiting transactions in Danish or Norwegian funds except under license from the Treasury.[7] The name of the first Order—“Protecting Funds of Victims of Aggression”— reflected Washington’s justification of its policy as serving global humanitarian goals.

Funds control was rarely referred to as “sanctions” at the time, but it bears important similarities to the sanctions against Russia today. Then, as now, sanctions effaced the line between peace and war. Then, as now, sanctioners acted in the name of international norms, yet relied on unilateral or alliance enforcement that leveraged the unequal global distribution of resources and the complexities of global financial networks. Then, as now, sanctions built new global hierarchies. In short, they highlighted both the fictions and realities of global order.

In the years since World War II the United States built its sanctioning capacity, deploying economic warfare against Cold War adversaries and occasionally in the service of humanitarian goals. Sanctions have become the country’s go-to policy choice, especially since 9/11. By the time of the Trump administration, Washington was adding nearly 1000 people and organizations to sanctions lists every year. Treasury’s blacklist currently sprawls more than 1950 pages.

When Russian forces massed on Ukraine’s borders in February 2022, President Biden turned immediately to sanctions. This was a natural result of the combination of two factors: the vast share of global trade is denominated in dollars and US domestic law permits the president to impose sanctions unilaterally. Russia seemed especially vulnerable in part because it had stashed billions of dollars in US accounts. Like Western Europeans in the 1930s, it hoped that parking assets in America would make them safe; instead it made them vulnerable.

The Russian sanctions are unprecedented in their scale and scope, yet they are neither comprehensive nor international. While Europe continued to purchase vast quantities of hydrocarbons from Moscow during the war, most countries outside of Europe and the United States have participated in Russia sanctions only grudgingly, if at all. Although the UN General Assembly has condemned Russia, the latter’s presence on the Security Council has made UN sanctions a non-starter.

Sanctions have damaged the Russian economy, with even greater impacts on the horizon as the effects of import shortages and lack of investment mount. But the economy has not imploded and Russia’s war effort continues. The response from the US and EU has been to gradually cut off more and more of the Russian economy from its main trade partners, with the EU’s latest oil sanctions a recent example. Yet US officials reportedly remain frustrated by sanctions’ continued loopholes and seek stronger action, including perhaps the use of secondary sanctions against countries that continue to trade with Russia. If the world will not cooperate willingly, perhaps the combined economic power of “the West” can force it to do so. The G7’s plan for a global price cap on Russian oil sales represents a move in this direction.

Observers have also called for a more concerted and collective effort to manage the global economy. This would include both targeted aid to emerging economies and also greater collaboration between G-7 economies to manage demand, production, and allocation. It could include efforts to replace pipelines for Russian gas with terminals for American LNG, but also coordinated central bank actions to ease debt burdens.

Notably, all of these proposals envision the financial great powers of Europe and North America as the central actors, adopting national- or bloc-level trade protectionism and supply chain management in order to become less reliant on Russian (and perhaps Chinese) resources. The goals are international in scope but the actors are confined mostly to NATO members. If the actually-existing world order is unwilling or unable to enforce sanctions that outcast Russia, then “the West” will construct a new world order around itself. Such an order, possessing the power to economically excommunicate a miscreant like Russia, might actually come close to fulfilling the narrative of sanctions as enforcer of global law. But even if imposed in the name of international order, sanctions enforced by a powerful group of states are hard to differentiate from economic warfare. Their success will therefore depend as much on brute strength as on global legitimacy.


[1] John McV. Haight, Jr., “Roosevelt and the Aftermath of the Quarantine Speech,” The Review of Politics 24, no. 2 (1962): 249.

[2] “Re Possible Control of Japan’s Credits and Purchasing Channels in United States,” 17 December 1937, in Diaries of Henry Morgenthau Jr., Franklin D. Roosevelt Presidential Library & Museum, vol. 103, http://www.fdrlibrary.marist.edu/_resources/images/morg/md0134.pdf.

[3] Id.

[4] Id.

[5] Id.

[6] Siegfried Stern, The United States in International Banking (New York: Columbia University Press, 1951), 60.

[7] “Meeting regarding Danish and Norwegian Balances,” 10 April 1940, in Diaries of Henry Morgenthau Jr., Franklin D. Roosevelt Presidential Library & Museum, volume 253, http://www.fdrlibrary.marist.edu/_resources/images/morg/md0339.pdf.


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