Patrick Grady
March 5, 2007

Global Financial Warriors
The Untold Story of International Finance in the Post 9/11 World
by John B. Taylor
W.W. Norton & Company
324 pages, $26.95

When John B. Taylor went to Washington, little did he know what challenges awaited him. He had already established himself as one of the world’s most respected experts in monetary economics and international finance, which was probably why he was appointed Under Secretary of the Treasury for International Affairs. With the office came a seat on the National Security Council’s deputies committee at the heart of decisionmaking on U.S. foreign and defence policy. And, of course, joining with his Stanford colleague Condileeza Rice to advise George W. Bush in the 2000 campaign did nothing to hurt the prospects of the man who developed the Taylor rule for monetary policy. No sooner had he settled into his job, however, than all hell broke loose in the form of the tragedy of 9/11 and that was the determining force that shaped his stint at the Treasury.

Global Financial Warriors is Taylor’s compelling personal account of his five years as the Commanding General of the economic and financial troops fighting the War on Terror from his headquarters in Washington to the finance ministries and central banks of Kabul and Baghdad. He also recounts war stories of the financial crises and international financial reform efforts on his watch. This book reveals an exciting new facet of what used to be the dull and arcane world of international finance.

After watching with horror the September 11 attacks on TV in Japan where he had gone with the Treasury Secretary for negotiations with the Japanese, a shell-shocked Taylor, who thought he had gone to the Treasury to take charge of G-8 financial negotiations and Third World bailouts found himself drafted into the War on Terror and on his way back to Washington on a C-17. And it wasn’t too long after that before he ended up in Afghanistan checking on the Treasury team responsible for financial reconstruction and trying to squeeze some customs duties for the fragile new government in Kabul out of a warlord.

One of Taylor’s other first tasks was setting up a War Room for the Task Force on Terrorist Financing to cut off the terrorists money and freeze their assets and to convince other countries to do likewise. A first strike was launched against the Al Rashid Trust, the Wafa Humanitarian Organization and 25 other individuals and terrorist funding organizations on September 24. Another early success was getting crucial financial intelligence from the Society for Worldwide Interbank Financial Telecommunications (SWIFT), an effort that was unfortunately exposed and sabotaged by the New York Times last June. Taylor believed that it was important for the Treasury to understand Islamic finance and hired Mahmoud El-Gamal from Rice University to be the Treasury’s first “visiting scholar” in this area. Taylor is proud to report that the 9/11 Commission gave an A for anti-terrorist financing efforts.

Taylor also was sent to Turkey prior to the invasion of Iraq to negotiate a financial package to alleviate the Turks’ concerns about the economic cost of a war and to gain their approval for the U.S. Fourth Infantry Division, which was already floating offshore in the Mediterranean, to attack Iraq from the North through Turkey. While the financial agreement was subsequently voted down in Parliament, Taylor consoles himself that uncertainty over Turkish intentions fed by a double agent code named “April Fool” may have kept may have kept much of the Republican Guard and regular Army tied up in the north.

The other non-traditional financial task undertaken by Taylor and his troops discussed in the book was financial support for the reconstruction of Iraq. This required a crack Treasury team to arrive in Baghdad soon after the U.S. Military to ensure the continued functioning of the Iraqi government and central bank. The financial system and currency had to be kept up and running to prevent a financial and economic collapse. Financial records had to be secured to make sure that the government could continue to function, making required payments to civil servants and pensioners and maintaining purchasing power. Recovering the $920 million in U.S. notes and 90 million Euros in small denominations stolen by Saddam’s son Qusay was a lucky break that gave the central bank needed reserves to help weather the difficult situation.

The innovative short-term fix to Iraq’s looming financial crisis was to convert the $1.7 billion Iraqi assets frozen in the United States during the 1991 Gulf War into 237 tons of miscellaneous denomination U.S. Treasury notes and to fly them to Iraq to be used for payments. The two Iraqi dinars already serving as currency were retained as legal tender and exchange rates with the dollar were allowed to be determined by the market. That there was no financial collapse following the fall of Baghdad is due to the heroic efforts of Taylor’s team. Another big achievement for the Task Force on the Financial Reconstruction in Iraq occurred on October 15, 2003 when the Coalition Provisional Authority introduced a new Iraqi dinar without Saddam’s picture. Taylor chronicles the many herculean operational and logistical steps required to make this happen.

A critical element in stabilizing Iraq’s finances was negotiating the “mother of all debt deals.” It was obvious to Taylor that there was no way that Iraq with only a $25 billion dollar economy could pay the $125 billion foreign debt run up by Saddam Hussein. Taylor describes his negotiating strategy, telling first how he had to get the US’s close allies like the British, Canadians, and Japanese onside before tackling the more recalcitrant Germans, French and Russians. A problem that had to be overcome was that the high 80-per-cent level of forgiveness required for “sustainability” was much higher than the de facto 50-per-cent maximum accorded by the Paris Club, which was the normal forum for state-to-state debt deals.

While most of Global Financial Warriors features Taylor’s starring financial role in the War on Terror, he also reports on the other big international financial issues that came up. He attributes a strategy of moving gradually and signaling intentions in dealing with the 2001-2002 Argentine financial crisis with preventing contagion and helping Argentina to recover more quickly.

History will probably judge Taylor’s biggest long-run impact on the domestic U.S. economy, which is being buffeted by a surfeit of cheap Chinese imports, to be his success in talking China off its fixed exchange rate of 8.28 yuan per dollar. While the initial announced increase in July 2005 in the yuan’s value was only 2.1 per cent, there has been a continued appreciation and on March 7, 2007 the yuan stood at 7.743 per dollar or 6.5 per cent more expensive than before the peg was abandoned. This improvement in the competitiveness of the U.S. economy relative to China, though still relatively modest, is at least a step in the direction of curtailing the growth of the large trade surplus that China is currently chalking up against the United States.

Economists are brought up on the lore of the epic battle between John Maynard Keynes and Harry Dexter White squaring off over the future of the world financial system at Bretton Woods. Even though economists may be disappointed that the world’s most talented economist was outmaneuvred there by the Soviet spy, American economists, at least, can take some comfort that the U.S. Treasury’s views for post-war financial institutions prevailed. Thus it is natural that a few like Taylor still come to government hoping to also leave their mark on the International Monetary Fund and the International Bank for Reconstruction and Development. Indeed he came to the Treasury disdainful of international financial bailouts and already on record as saying that the IMF should be abolished. His rules-based approach to monetary policy suggested the desirability of limits on IMF bailouts and clearly stated criteria for exceeding the limits. His academic colleagues expected more of him than he was able to deliver in these times that try men’s souls.

However, one particular area where Taylor did succeed in clipping the wings of the IMF is on debt restructuring. To deal with the endemic problem of debt restructuring, the IMF put forward for a Sovereign Debt Restructuring Mechanism (SDRM) that would involve the establishment of an international bankruptcy court with a powerful role for itself in making the key decisions. On the other hand, Taylor and everybody from President Bush on down were suspicious of such a centralized approach and favoured the use of “collective action clauses” in borrowing contracts that would set out in advance the rules for debt restructuring. Taylor takes much pride that they were able to block the IMF proposal and to encourage key borrowers to adopt the clauses. The IMF Board ultimately approved a rules-based framework with limits and the new approach. It is ironic though that nice theoretical notions of appropriate limits weren’t often applied to bailouts during Taylor’s tenure in Washington. Instead, judging from Taylor’s narrative, the War on Terror and global financial and political realities were usually the key driving factors.

Global Financial Warriors is essential reading for those wanting a behind-the-scene’s look at the critical role of international finance in the War on Terror. It's also a useful book for those interested in an insider’s view of key developments in the more traditional areas of international finance. And Taylor’s title is not just hype. Financial practitioners really have been transformed into warriors in the War on Terror.