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Battered but unbroken (Fortune Classics, 2001)

Editor’s note: Every week, publishes a favorite story from our magazine archives. On the tenth anniversary of the September 11, 2001 attacks, we’re republishing the main essay from a special report in the October 8, 2001 issue of FORTUNE. 

Terrorists brought down capitalism’s towering symbols — but not capitalism itself. 

By Bill Powell

FORTUNE — They started hauling the bodies out about 36 hours after the attack. A day and a half to let the fires burn, to sift through the rubble and ash that was once the citadel of American capitalism and was now the first battlefield of a new century’s first war, just to begin the dreadful accounting, to begin clearing the dead off that battlefield. During those same 36 hours, the reaction nationwide to the most lethal attack ever directed at U.S. soil slowly began to turn, from speechless, stunned terror toward anger, toward thoughts of revenge, toward a call to war.

As FORTUNE readers receive this issue, that mood may well have begun to change again. For now the fresh graves are being prepared. Now the funerals have started. Now thousands and thousands of families are gathering to mourn unimaginable loss, and the images wash over us, again and again. Twenty-three thousand were killed or wounded at the battle of Antietam, but they were soldiers, not innocent civilians, and we did not watch their funerals on television, 24 hours a day.

We are now in the midst of one the grimmest periods in American history. Amid the wreckage and the grief, the government and key institutions in the U.S., including corporations, need to start coming to grips with the ways the country has been changed by history’s most successful and audacious terrorist attack.

Because much has changed. History will likely regard the 12 years between Nov. 9, 1989–the day the Berlin Wall collapsed, foreshadowing the demise of the Soviet Union–and Sept. 11, 2001, as an era of American frivolity and self-absorption. An era when many people in the U.S. decided the outside world, the world beyond our borders, no longer mattered–certainly not in a life-and-death sense, as when an “evil empire” threatened nuclear destruction. It was the economy, stupid.

Those dozen years were, in truth, something of a silly season, and the silly season is over. Sept. 11, 2001, ended it. George W. Bush now presides over a country about to fight a highly unusual war. Just how daunting and different this war will be is evident from a simple fact: As this article is written, there is talk in Washington of a declaration of war against an enemy…that has yet to be identified.

As if that weren’t test enough, Bush must also cope with the unpredictable–and potentially far-reaching–economic fallout. Before Sept. 11, much of the world was already on the brink of recession. That recession, in the U.S. at least, is now all but unavoidable; lost output from the attack–a virtual shutdown in travel, the disruption of retail activity, and the staggering damage in Manhattan itself (which accounts for 2.5% of overall U.S. GDP)–could run as high as $30 billion, or 1% of annual growth, according to Mark Zandi, chief economist at That virtually guarantees that the U.S. economy will contract in the third quarter.

Things need not deteriorate from there. The goal now is to put in place policies that will lead to a speedy recovery. The question is, Will traditional responses to a slowdown–more interest rate and tax cuts–work at this harrowing moment? Right now it is impossible to tell whether the events of Sept. 11 will, economically speaking, play out like a natural disaster–a one-time hit to the economy like the 1994 Los Angeles earthquake–or whether it will cause more lasting damage, as Iraq’s invasion of Kuwait and the Gulf war did.

Much depends on mood, on psychology, on confidence. And that reality now can hardly be reassuring. Confidence, in economic terms, was already waning–significantly–before Sept. 11. The University of Michigan’s survey of consumer confidence, conducted just before the assault, plunged from 91 to 83–one of the sharpest declines ever recorded. The darkening mood reflected the sharp spike in the U.S. unemployment rate–from 4.5% to 4.9%–and Wall Street’s latest selloff.

Of course economic confidence matters, but not as much as the confidence that our government can protect us from plots and battle plans that had once been the preserve of Tom Clancy’s novels and bad Hollywood movies. That confidence has also now eroded. And for all the extraordinary planning and discipline it took for a terrorist group to execute these attacks, the cruel truth is that Boeing jetliners that are hijacked and then slammed into buildings are not necessarily going to be the worst that this 21st-century war brings. Now that the battle has been brought to our shores and an imaginative and fearless enemy has shown how vulnerable the U.S. is, few in the intelligence community believe that enemy won’t be back. And it’s entirely plausible that the weapons they wield in the future will be far more sophisticated than jetliners. That’s why the unthinkable must not only be thought but acted on.

As preoccupied as Bush’s national security team is with plans for identifying and retaliating against those responsible for Sept. 11, the inescapable reality is that they must also devote enormous resources to defending against 21st-century attacks: chief among them the potential for biological warfare and, of particular importance to U.S. businesses, assaults on the nation’s military as well as commercial computer networks–so-called cyberterrorism. The plain fact, experts say, is that we are woefully unprepared in both areas. “It requires a level of seriousness and commitment in both government and business that, sadly, simply hasn’t been there,” says Paul Strassman, a lecturer at the National Defense University and an expert in cyberterrorism.

Consider: In the autumn of 1997 the Naval War College invited several private-sector participants to take part in a cyberterrorism simulation. It makes for chilling reading today. First, the NWC’s partner in developing the war game was none other than Cantor Fitzgerald, the bond trading firm devastated by the all too real attack on Sept. 11. Second, it involves a scenario spilling out of conflict in the oil fields of the Middle East that now seems eerily plausible, if not yet entirely likely. That’s followed by terrorist assaults against oil fields in the Persian Gulf and U.S. military installations, accompanied by a devastating cyberassault on the computer networks of U.S. financial institutions as well as power grids in the New York area–assaults intended to inflict further psychological and economic damage on the U.S. In the simulation the terrorists succeeded spectacularly.

The bankers and military planners who took part in that exercise came away convinced that it was no mere exercise. The danger from weapons of “mass disruption,” as cyberterrorism has been dubbed, “is very real,” says Strassman. He and other experts dismiss any doubts that radical Islamic states like Iran, or even loose-knit terrorist groups like Osama bin Laden’s Al Qaeda (“the Base”), could produce cyberwarriors sophisticated enough to do significant damage to America’s network infrastructure. To date, says Strassman, the nation’s “reaction has not risen to the magnitude of the challenge.”

The question is not, Could it happen? It’s, What should we do, given our vulnerability? The report issued after the NWC war game included, among other recommendations, a proposal that the government fund “backup facilities that could be defended against physical threats: contingency trading sites, contingency data-storage centers, dedicated communications systems.” The response from the assembled bankers was nearly unanimous disapproval. Not because the proposal wasn’t intelligent. The opposition was rooted in the fear of more regulation and control from government. Their response was “no new regulations, please,” the NWC’s report says.

That attitude, while unsurprising, may have to go by the wayside in the wake of Sept. 11. A thorough review of how government and companies can work to combat cyberterrorism is one of many “that was then, this is now” policy discussions that needs to occur, experts in the field say. Tom Talleur, a cyberwarfare expert with years of experience in both government and the private sector, says he suspects that hacking, possibly into airline computer systems, was a part of the planning for the Sept. 11 attacks.

If that proves to be true, the pressure for change, in ways companies might not always like, will intensify significantly. It’s one reason a former senior government official told FORTUNE last week that part of the economic implications of the war we are now in would be an increase in a myriad of what he called “frictional costs” to business. Many are security related and more mundane than protecting computer networks. For example, the workers who man the baggage scanners at New York’s airports get all of 12 hours of training before starting work and earn just above minimum wage. Plainly, that’s got to change. In fact, security measures across the nation’s transportation infrastructure are likely to become more burdensome–shipping things by air, sea, or rail will just take more time. And, as ever, time is money. That’s life in the post-Sept. 11 world. You might call it a Terrorism Tax. There are going to be a lot of them.

That a cyberterrorism exercise run by the Naval War College was centered on oil and Middle East terrorism can hardly be surprising. Anyone paying attention for the past three decades knows what a potentially lethal mix Islamic fundamentalism and oil can be. Now, unless Bush turns out to be at least as skilled as his father was in managing a crisis in the region, that potential may be realized.

In pursuing a response to the horrific acts of Sept. 11–the “acts of war,” as he himself called them–Bush will prove whether he is up to the job of President in the one area in which widespread doubts about his competence dog him both at home and abroad: the conduct of foreign affairs. The coming war against terrorism will unfold against a global backdrop of sentiment toward the U.S. that will complicate his task. It ranges in some quarters from irritation to deep anger at America’s sole superpower status and clout in the world. This resentment of what the U.S. has come to symbolize exists not only in the hearts of those Palestinian children who danced gleefully when news of the strikes arrived. The chaotic, arguably incoherent, but nonetheless growing antiglobalization movement is, in its own way, a part of it. And there are, in truth, friends and allies too who believe the monstrous acts of the terrorists cannot completely be divorced from America’s role as globo cop. Even King Abdullah II of Jordan, one of the friendliest of the moderate Arab states, told a TV interviewer that it was possible the attack would not have occurred if the U.S. had been able to resolve the Palestinian-Israeli crisis.

The Middle East is now Bush’s crucible. It will define him and his Administration, and his advisors appear smart enough to know that what happens next cannot be seen, either by friends or enemies, simply as a unilateral strike that quenches a burning thirst for vengeance. What happens next will have enormous geopolitical and economic consequences that will ripple through the daily lives of all Americans and throughout the world.

If, as appears likely, the wealthy Saudi terrorist Osama bin Laden is the central figure involved in the attack, a critical question will be, Did nations in the region hostile to the U.S.–Iraq and Iran in particular–aid and abet the operation? If compelling evidence surfaces that they did, it will be a prescription for a full-scale war in the Gulf with all sorts of implications. Yes, it would mean the end of Saddam Hussein, with who knows what type of regime coming in his wake. Another war against Saddam would surely further inflame radical Islam. Its shock troops could–can you have any doubts now?–seek to inflict further damage on the U.S. and Israel, or the Gulf monarchies they view as Washington toadies.

The economic consequences of this scenario are awful. Though Iraq accounts for just 3% of the world’s oil supply, another war against Saddam would not necessarily cut just Iraqi crude off the market. Saudi Arabia and Kuwait remain deeply vulnerable to supply disruption. Even with demand for oil sinking as a result of the global slowdown, a major supply disruption in the Middle East–particularly if Saudi Arabian production were to be curtailed–is an economic nightmare scenario. That always has been, of course, but it is especially true today given how weak the major economies already are. As Daniel Yergin, chairman of Cambridge Energy Research Associates, says, “Obviously certain political and military scenarios could drive [oil] prices up.” And that could easily be the shock that tips the world into an ugly, prolonged slump.

That is not the only scenario out there. Perhaps the best Bush can hope for now is that it turns out bin Laden’s organization masterminded and financed the Sept. 11 assault on its own. (Though some of his assets had been frozen abroad, few doubt his ability to pay for this operation.) If, in turn, the governments of Afghanistan and Pakistan–both thought to have harbored bin Laden and his cells–are able to help the U.S. find him and destroy his network, an all-out war could be avoided. “The key question here,” says John Mitchell, a former British Petroleum executive, “is going to be the nature of the reprisal. If it is clearly based on evidence and clearly focused on its target, it will be relatively easy for the Arab oil governments to acquiesce or even support the reprisal.”

The war-gaming now going on in Washington and at NATO headquarters in Brussels should have at least one salutary consequence at home: It should trigger a new debate about energy policy, one that, in truth, the U.S. should have had long ago. It will not be framed as nasty Alaskan oil drillers vs. nature-loving tree huggers. Again, that was then–before Sept. 11. This is now, and while environmental concerns still matter, the energy debate may soon take place in the context of national security–in particular, in reducing our dependence on oil from the Middle East. The Administration will welcome this, since these concerns in part drove the energy plan Vice President Dick Cheney unveiled this summer. But Bush, in order to get the long-term production incentives in place that he wants–including more drilling in Alaska and more nuclear energy–will have to seek conservation measures as well. There really are some relatively simple and not all that expensive things the U.S. could do–including making the nation’s cars and SUVs more fuel-efficient. Asking for some sacrifice, from industries and consumers alike, in the name of those who have perished hardly seems like a radical idea now. It too should be part of the Terrorism Tax that we may now be obliged to pay.

Dealing with energy in terms of security is a long-term project. It will not play a role in what happens to oil prices–and thus the global economy–in response to whatever military scenario transpires. The immediate challenge for economic policymakers worldwide is to make sure what had been a global slump doesn’t turn into something much deeper and more prolonged. That effort, in fact, started right after the attack, when the beleaguered Bank of Japan began pumping liquidity into that nation’s collapsing markets at a rate not seen since the country’s financial panic in 1997. Other central banks, including the Fed, followed, and by the end of the day some $120 billion had been funneled into the system–a sure sign that governments would not allow terrorism to usher in a global depression.

The quick moves by the Fed and other central banks were critical. They underscored the perception in the markets–confirmed by steep falls in interest rates when bond trading resumed on Sept. 13–that even deeper rate cuts are now likely both in the U.S. and in Europe. Monetary policy in the wake of the attacks is almost certainly going to be more stimulative than it had been. “That’s the biggest [economic] positive in all this,” says Richard Dekaser, chief economist at National City Bank in Cleveland.

It may not be the only one. Andrew Bischel, head of SKBA Investment Management, a small money-management firm, believes both the President and Congress have discarded the idea of a Social Security “lockbox”: the notion that this year’s estimated $150 billion Social Security surplus–itself a creation of accounting legerdemain–needs to be protected at all costs. Far more important now, says Bischel, is the possibility of moving up some of the future tax cuts contained in the bill passed this year, as well as the possibility of both payroll tax cuts and a capital gains cut. The key point, says Steve Wood, economist at FinancialOxygen, a capital markets group, is that “we have a very substantial budget surplus. There is room for a lot of fiscal stimulus without pushing us into deficits.”

Some industries, of course, are going to get hit hard no matter what. Sept. 11 turned what had already been an awful year for the airlines–with forecasted losses ranging anywhere from $1.5 billion to $3.2 billion–into a disaster. Patrick Murphy, an aviation consultant, says the worst year ever for the industry was 1992, when it lost $4 billion. “We could challenge that record this year,” he says. Tourism will also no doubt get hammered, as it did during the Gulf war. And, plainly, the insurance industry will post some of its biggest losses ever–estimates now range up to $30 billion.

It’s possible, of course, that in the coming months not all the economic repercussions from the assault will be gloomy. The law of unintended consequences doesn’t always produce negative consequences. For example, some of the massive overcapacity in telecommunications could now be used if businesses rely more on voice, data, and videoconferencing rather than travel. And though shell-shocked New Yorkers aren’t thinking about such things yet, it’s worth pointing out that the spending that followed the 1994 earthquake lifted the Los Angeles area out of a four-year recession. Bush has already announced that at least $40 billion will be coming from Washington to help New York rebuild.

How bad things do–or don’t–get nationwide depends, as ever, on American consumers, whose spending accounts for two-thirds of GDP. They alone stand between a mild recession and possibly much worse. That’s exactly the position they were in before Sept. 11. The economy was reeling from a sharp decline in business spending, a steep selloff in stock prices, and rising unemployment. But the world after Sept. 11 is unfamiliar territory. Who knows how millions of households will react to America’s latest war? During the Gulf war, they cut back spending significantly, as they did following Richard Nixon’s resignation in 1974. Gene Sperling, a former economic advisor to the Clinton Administration now at the Brookings Institution, says pundits shouldn’t be unduly glum lest they “feed a negative cycle.” Others talk about shopping as “an act of patriotism”–a signal to the enemy that they will not disrupt America’s favorite pastime–and that selling stock should be avoided for the same reason: to deprive the bad guys of another victory. In fact, Wall Street sources confirm that the Federal Reserve and government officials have been quietly urging major financial institutions not to dump stocks when the market opens on Sept. 17.

Whether that negative cycle takes hold is indeed the critical economic question. Better that the government can deal with this crisis from a position of economic strength, not weakness. The first clues as to how both individuals and institutions are reacting will have come when U.S. equity markets reopened. The fact that in the immediate aftermath of the attacks the U.S. dollar dipped but then stabilized showed that fears America will lose its precious safe-haven status may have been overwrought.

Still, legitimate concerns about the dollar remain. The U.S.’s massive current account deficit had already turned market sentiment against the dollar before Sept. 11. The dollar had been weakening against the euro and even the Japanese yen, despite the disastrous state of Tokyo’s economy. If there is a war in the Middle East, oil prices will spike higher and the dollar could continue to weaken. Other safe-haven currencies like the Swiss franc might seem more attractive. The Fed would then be in a bind. To offset possible inflationary pressures from a weaker dollar, it might have to keep rates higher than it otherwise would like. Again, everything hinges on how the U.S. retaliates and how events in the Middle East proceed from there.

The question of how markets and economies will now fare, while obviously important, recedes at a moment when the physical symbols of the American economic system–the fabled canyons of Wall Street–continue to crumble days after an attack that killed thousands of the citizens who helped make that system the greatest wealth-producing machine the world has ever known. They are gone, but the system in which they thrived rolls on, battered but unbroken. Even Cantor Fitzgerald, the government bond trading firm that had almost its entire New York staff wiped out on Sept. 11, opened its other offices around the world when its markets began trading again on the 13th. The message was clear. Terrorists had brought down two of global capitalism’s towering symbols, not capitalism itself. Surely the enemy who inflicted this punishment knows that.

Four days after the attack, other New Yorkers had also returned to work, however dispiritedly. But the city was still a ghost town, haunted by the spirits of friends and neighbors lost. They died terrifying, unimaginable deaths. We will be dealing with the consequences for what will seem like an eternity–because wars against terrorism are like eternal wars, rarely, if ever, decisively won. As this is written, thousands of the bodies still lie beneath that infernal rubble. And “the future,” as the poet Rainer Maria Rilke once wrote, seems to “speak ruthlessly through them.”

Additional reporting by Anna Bernasek, Justin Fox, Richard Tomlinson, Janet Guyon, Jeremy Kahn, Richard Behar, Christine Chen, Cait Murphy, David Stipp