Dollar Diplomacy

Dollar Diplomacy 4030
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Eugene P. Trani

In his final message to Congress on 3 December 1912, President William Howard Taft looked back at the foreign policy followed by the United States during his administration and noted: "The diplomacy of the present administration has sought to respond to modern ideas of commercial intercourse. This policy has been characterized as substituting dollars for bullets. It is one that appeals alike to idealistic humanitarian sentiments, to the dictates of sound policy and strategy, and to legitimate commercial aims."

Taft's remarks gave formal definition to the term "dollar diplomacy," a phrase synonymous with the diplomacy his administration pursued between 1909 and 1913. During those years the goal of diplomacy was to make the United States a commercial and financial world power. It was a narrowly constructed view of foreign relations, arising in great part out of the natural alliances between the corporate lawyers who came to people Taft's administration and the bankers and businesses that were their clients. Thus, the Taft administration concentrated on assisting American businessmen in the protection and expansion of investment and trade, especially in Latin America and the Far East.

The idea of protecting American commercial interests around the world was not new and had been part of the diplomacy of the United States since its earliest days. Efforts to trade with British and Spanish colonies in the Western Hemisphere, defense of the rights of neutrals to trade in wartime, and support of the most-favored-nation concept were all predecessors of dollar diplomacy. Yet dollar diplomacy was the subject of much controversy during the Taft administration and in the years that followed.

Much of the contemporary controversy over dollar diplomacy stemmed from the fact that Taft, the handpicked successor of Theodore Roosevelt, had embarked on a policy that differed from the one Roosevelt had followed. Roosevelt was an expansionist and had supported the American move into world affairs. For a variety of reasons, Roosevelt believed expansion necessary for the United States, with benefits for the rest of the world. He viewed foreign affairs in strategic terms, with Europe as the center of world power. He felt an affinity for Britain and based much of his diplomacy on cooperation between Washington and London. To be sure, Roosevelt supported the expansion of American business throughout the world, but he was much more concerned with the balance of power and improving the Anglo-American relationship. As a result, Roosevelt mediated the Russo-Japanese War (1904–1905) and the conflict between France and Germany over Morocco in 1906.

Taft came to office with a different view. Ever the lawyer, he viewed foreign policy in terms of legal institutions. He thus came to support arbitration treaties. He had differences with Roosevelt over Europe, feeling that the United States had little or no interest in events there. Taft kept the United States out of the second Moroccan crisis in 1911, and, while supporting mediation, he was not willing to mediate the Italo-Turkish War (1911) nor the first Balkan War the following year. Taft believed that the most important relations with Europe occurred in developing nations where the United States and Europe shared interests.

Taft's view of the role of American business in foreign policy also differed from Roosevelt's. Taft long had been concerned with foreign trade. He recognized that by 1909 the United States was producing more goods than Americans could consume and therefore had to increase exports. It was perhaps symbolic that during the Taft administration, in 1910 to be exact, that the United States began to export more manufactured goods than raw materials, changing the focus of trade from industrial nations in need of raw materials to lesser developed countries that required finished products. In this regard the developing areas of Latin America and East Asia seemed particularly important. A concentration on economic opportunities in Latin America and East Asia, especially China, would have many benefits. Such a policy would help the American economy by solving the problem of overproduction. It would benefit recipient nations, bringing economic progress, which in turn would mean political stability; and stability would guarantee American strategic interests in underdeveloped areas. It was not surprising that in Taft's first annual message (7 December 1909) he stated: "To-day, more than ever before, American capital is seeking investment in foreign countries, and American products are more and more generally seeking foreign markets."

While Taft had ideas as to the diplomacy the United States should follow, he had no interest in serving as his own secretary of state, further distinguishing his administration from Roosevelt's. The man whom Taft chose to carry out his foreign policy, after refusals by Elihu Root and Henry Cabot Lodge, was Philander C. Knox, a wealthy conservative Pennsylvania lawyer then in the Senate. Knox had been attorney general between 1901 and 1904; and this fact, in the president's view, more than made up for his lack of experience in foreign affairs, since Taft wanted lawyers in his cabinet. Knox had been what is now known as a corporation lawyer, the Carnegie Steel Corporation being one of his clients. He was thus sympathetic to big business.

Knox shared Taft's views concerning the goal of American diplomacy—protection and expansion of economic interests. A State Department memorandum of 6 October 1909 pointed out that all developed countries were seeking trade and noted that trade was essential to American prosperity. There could be no more important task than expanded investment and trade. Diplomacy had to support American financiers and businessmen by finding opportunities abroad. The State Department appeared to anticipate the activities of the Bureau of Foreign and Domestic Commerce in the 1920s, when Herbert Hoover was secretary of commerce, although Hoover strenuously objected to the concept of dollar diplomacy, making it a priority following his election to the presidency to eliminate its effects, particularly in Latin America. But locating commercial opportunities abroad was not enough for Knox and Taft. As the 1909 memorandum indicated, the United States would insist that Americans compete with Europeans in the developing countries by buying bonds, floating loans, building railroads, and establishing banks.

So it was that the State Department during the Taft years turned to dollar diplomacy. The policy gained support throughout the diplomatic corps, a fact that was especially important as Knox concentrated on policy and allowed subordinates to run day-to-day operations. Francis M. Huntington Wilson, first assistant secretary of state, presided over the daily activities of the State Department and carried out a reorganization of the department into geographical bureaus. Huntington Wilson, Willard D. Straight, and Thomas C. Dawson, the latter two the initial heads of the Division of Far Eastern Affairs and the newly created Latin American Division, respectively, all shared the views of Taft and Knox on trade and investment.

When the administration talked about dollar diplomacy in Latin America, it was almost always referring to the Caribbean, which had strategic implications because of the soon-to-be-completed Panama Canal. Concerned over the general instability of the Central American governments, Taft and Knox set a goal of stable governments and prevention of financial collapse. Fiscal intervention would make military intervention unnecessary. As Knox told an audience at the University of Pennsylvania on 15 June 1910: "True stability is best established not by military, but by economic and social forces…. The problem of good government is inextricably interwoven with that of economic prosperity and sound finance; financial stability contributes perhaps more than any other one factor to political stability."

Such statements did not mean that Taft and Knox were unwilling to use military power in the Caribbean. They did use it. They thought that fiscal control would lessen the need for intervention. They believed that the United States and nations of the Caribbean would both benefit. For the United States, an increase in trade, more profitable investments, and a secure Panama Canal would result. For the local inhabitants, the benefits would be peace, prosperity, and improved social conditions.

Taft and Knox believed that the way to control the finances of the Caribbean countries was to take over customhouses, following the example of the Roosevelt administration in the Dominican Republic. According to the Taft-Knox doctrine, it was important to get the Caribbean nations to repay European debts by means of loans from American businessmen or at least from multinational groups in which Americans participated. In Nicaragua, Honduras, Guatemala, and Haiti, the United States pushed refunding schemes. The State Department believed that these sorts of reforms would end political instability in the Caribbean.

Nicaragua proved the classic case of dollar diplomacy in the Caribbean. While the American economic interest in Nicaragua was small, the country had been an alternate route for the trans-Isthmian canal. The United States was sensitive to activities in Nicaragua. The longtime dictator José Santos Zelaya had never been popular in Washington and was seen as the cause of much instability in Central America, the result of his efforts to dominate the area. When Knox took control of the Department of State, he ordered withdrawal of the chargé d'affaires from Nicaragua, began to press private business claims against the Zelaya government, and sought, albeit unsuccessfully, to discourage a Franco-British consortium from making a loan. In cooperation with Mexico, the United States also sent warships to stop Zelaya from filibustering in Central America.

In October 1909 the situation became complex with the outbreak of civil war in Nicaragua. Insurgency centered on the eastern coast in Bluefields, a city dominated by foreign businessmen and planters. These foreigners and conservative politicians in Nicaragua followed the lead of General Juan J. Estrada. Foreign money, some of it American, bankrolled the revolutionaries. While declaring itself neutral, there was little question as to which side the U.S. government supported. Formal neutrality disappeared when Zelaya executed two Americans captured while fighting with the rebels. The United States broke off relations, asserting that the revolutionaries represented "the ideals and the will of a majority of the Nicaraguan people more faithfully than does the Government of President Zelaya."

Washington made known that Zelaya's resignation in late 1909 was not enough. Huntington Wilson pushed for expulsion of the liberal party from power, hoping the rebels would take control. U.S. forces landed at Bluefields to make sure fighting did not damage American interests. Successes followed for the insurgents, and by the end of August 1910 they had taken the capital, Managua. The United States expected fiscal reform in Nicaragua, and refused to recognize the new government until it had agreed to American control of the customhouses and to the refunding of the debt owed to British bankers by means of a loan from American financiers. Dawson went to Nicaragua to negotiate the terms of recognition.

This did not end the difficulties, for the American demands were unpopular. The United States went ahead with its financial program, even though the Senate delayed action on the treaty (known as the Knox-Castrillo Convention) worked out between Washington and Managua in June 1911, which called for refunding of Nicaragua's internal and external debts and administration of the customs by a collector approved by American officials. While the Senate debated, bankers went ahead with the rehabilitation of Nicaraguan finances, making a loan with the national railroad and the national bank as collateral. American citizens also began to collect Nicaraguan customs and to serve on a mixed claims commission, all in anticipation of Senate action. Much to the distress of Taft and Knox, the treaty died in a Senate committee in May 1912, along with a similar treaty with Honduras.

Another revolution broke out in Nicaragua in July 1912, and this also brought American intervention. Approximately 2,700 marines landed to protect U.S. citizens and property and to suppress the revolution, which was over by early October. Although the majority of the marines was soon withdrawn, a legation guard remained as a symbol of intervention until 1925. The Taft administration went out of office in March 1913, convinced that the policy it had followed in Nicaragua was correct. Intervention had proved necessary, the administration admitted, but it was only for a short time and continued fiscal intervention would make further military intervention unlikely.

The Taft-Knox policy toward Nicaragua, and for that matter toward the rest of Central America, was unquestionably offensive to Latin Americans. Even a goodwill visit through the Caribbean by Knox could not overcome suspicions. Knox said the United States did not covet an inch of Latin territory, but such utterances were not accepted south of the Rio Grande.

In the years after 1912, political leaders in both Latin America and the United States attacked Taft's policy toward Central America. Elihu Root believed that dollar diplomacy rekindled Latin fears and suspicions of the United States that he had worked so hard to overcome while secretary of state from 1905 to 1909. In 1913, President Woodrow Wilson made clear that he would not support special interests trying to gain advantages in Latin America. The Bryan-Chamorro Treaty, finally approved in 1916, contained provisions similar to the second treaty Knox had worked out with President Adolfo DĂ­az of Nicaragua in early 1913. Even so, Wilson and Secretary of State William Jennings Bryan were much less interested in protecting U.S. businesses in Latin America than Taft and Knox. Dollar diplomacy as a policy was at an end in Latin America. Criticism of the policy continued. Like President Hoover, President Franklin D. Roosevelt renounced dollar diplomacy. Both presidents attempted to construct what became known as the Good Neighbor Policy in dealing with Latin America, and the concept of the Taft-Knox doctrine was all but dead by the time of the Hoover administration. In the long run, of course, American businessmen did increase trade and investment in Latin America, but it was World War I, not dollar diplomacy, that decreased European economic interests in that part of the world.

If the results of dollar diplomacy were meager in Latin America, where the United States was the dominant power, they were a disaster in China, the target for the Taft-Knox policy in East Asia. Of course, the situation in the Far East was difficult. In the late nineteenth century and the first decade of the twentieth century much change had taken place. With victories over China in 1895 and Russia in 1905, Japan had become the major power in the Far East. Theodore Roosevelt had supported Japan's new prominence in East Asia. He decided that Japan did not threaten American interests there. He saw the Japanese as a barrier to Russian expansion; a preserver of the balance of power in East Asia; protector of the Open Door; and stabilizer of China, a nation for which he had little respect. Roosevelt had backed Japan in its war with Russia and in 1905 had mediated the peace.

Roosevelt had hoped to arrange a balance of power between Russia and Japan after the war, but the Japanese victory was so decisive and other events in Japanese-American relations so important that he gave up on the Open Door in China, especially in Manchuria, which the Japanese began to close after 1905. Because of the need to protect the Philippines, which Roosevelt believed was the "heel of Achilles" of the United States, and the war scare that resulted from the Japanese immigration crisis, Roosevelt accepted Japanese expansion on the mainland of Asia. He came to feel that the Open Door was not worth war with Japan. The United States should do what it could to preserve interests in China, but should recognize Japan as the dominant power on the Asian mainland. In short, he gave a green light to Japanese expansion. One of the best expressions of this belief appeared in a letter to Knox on 8 February 1909, shortly before Roosevelt left office. He noted that Japanese-American relations were of "great and permanent importance." While immigration to the United States had to stop, the United States should "show all possible courtesy and consideration." The Taft administration had to understand that "Japan is vitally interested in China and on the Asiatic mainland." Since the Pacific coast of the United States was defenseless and "we have no army to hold or reconquer the Philippines and Hawaii," the country had to avoid war. Roosevelt felt that American interests in China were insignificant in American Far Eastern policy.

Even as his administration came to an end, forces were at work that would change Roosevelt's policy in East Asia. In 1908 Root had established the State Department's first geographic unit, the Division of Far Eastern Affairs. Headed by Willard Straight, the division opposed Japanese expansion in China, and this opposition was to dominate the division in the years between 1909 and 1941.

Roosevelt's East Asian policy thus was reversed. With urging from the State Department and because of a combination of motives—economic expansion, suspicion of Japan, faith in the future of China—the Taft administration decided to challenge Japan in China. During the Taft years, the Open Door Notes, which had frequently changed in meaning after 1900, assumed new importance in the Far Eastern policy of the United States.

In Far Eastern policy, department officials now proved important. Taft and Knox did not need convincing. Both believed China was the country of the future in the Far East and that if the United States desired influence with that emerging nation it had to increase its financial interests there. If the president and secretary of state had any doubts about such policy, they were overcome by State Department advice. Huntington Wilson, who had served in Tokyo, and Straight, who had been consul in Mukden, Manchuria, were both hostile to Japanese ambitions in China. They had tried unsuccessfully in the last days of the Roosevelt administration to enlarge the Open Door to include investment and trade. With Taft and Knox they had more success.

The Taft administration came to see investment in railway development and loans to the Chinese government as the means to increase influence in China. Knox demanded that American financiers be given the opportunity to join the

British, French, and German consortium in lending money to China to finance railroad construction in the Yangtze Valley, the so-called Hukuang Railway loan. When the demand met with European hostility, Taft appealed to the Chinese head of state: "I have an intense personal interest in making the use of American capital in the development of China an instrument for the promotion of the welfare of China, and an increase in her material prosperity without entanglements or creating embarrassments affecting the growth of her independent political power and the preservation of her territorial integrity." The State Department persuaded a group of investors to assume part of the loan. Knox grudgingly got his way, but only at the price of irritation in Britain, France, and Germany. In the long run, this project was a failure.

From the Hukuang loan the State Department turned to Manchuria. The result was the Knox neutralization policy, which more than any other proposal epitomized dollar diplomacy in China. In the fall of 1909, Knox proposed that American, Japanese, and European bankers lend China enough money to repurchase the Chinese Eastern Railroad, held by Russia, and the South Manchurian Railroad, in the possession of Japan. Manchuria would be neutralized and open to all commercial activities. Washington feared that southern Manchuria was being closed to non-Japanese influences. Knox realized that the Japanese would be difficult, but he thought the proposal would be supported in Europe. Britain, France, and Germany eventually decided to defer to the wishes of Japan and Russia, and in January 1910 the latter two nations rejected the plan. Only the Chinese showed interest, but that soon turned to concern when Russia and Japan agreed in July to cooperate in guaranteeing the status quo in Manchuria. Knox had only succeeded in driving the former enemies into a virtual alliance to prevent American interference in Manchuria. A companion proposal by Straight, who had left the State Department to head the American consortium planning a railroad that ran parallel to portions of the South Manchuria line, met a similar fate.

By the fall of 1910, Knox recognized defeat in his railroad plans for Manchuria. Throughout the rest of his term as secretary of state, he continued to work for increased American involvement in China, but through plans that did not contest the Japanese and Russians in Manchuria. He became involved in plans for a multinational currency reform loan, but the Chinese revolution that began in 1911 put an end to that scheme. The government that overthrew the Manchu then negotiated with a six-power consortium for a reorganization loan. Negotiations dragged on until the Taft administration left office.

Dollar diplomacy in China stimulated international controversy. The Taft-Knox policy succeeded in causing distress, irritation, and even anger in London, Paris, Berlin, St. Petersburg, and Tokyo. Knox's clumsy attempts to help China only weakened the empire, since Japan and Russia agreed on a policy. The policy aroused controversy in the United States, where bankers were reluctant to participate. Roosevelt opposed the policy, writing to Taft in late 1910 that the Open Door in China could only be maintained by general diplomatic agreement. He noted that "as has been proved by the whole history of Manchuria, alike under Russia and under Japan, the 'Open Door' policy, as a matter of fact, completely disappears as soon as a powerful nation determines to disregard it, and is willing to run the risk of war." Roosevelt was convinced that Japan was one such nation, and that the United States ought not to try to bluff the Japanese on the mainland of Asia, especially since Americans would never agree to fight a war there.

Wilson later withdrew government support from American investors planning the reorganization loan, charging that the loan violated Chinese sovereignty and threatened China with intervention. The American investors backed out of the loan, and the last of the dollar diplomacy schemes came to an end. In the long run, Wilson reversed his position, approving participation in a consortium in 1918. But Japan remained the dominant power in China until World War II, and Roosevelt's policy seemed valid in retrospect. Taft and Knox failed in their goal—to dislodge Japan from the Asian mainland.

There were other areas to which the Taft administration tried to apply dollar diplomacy, such as in Turkey. Breaking sharply with the traditional American policy toward the Ottoman Empire, which centered on protecting the rights of American citizens, the Taft administration attempted to share in the mining, irrigation, and railroad concessions then being negotiated by the Turkish government. Taft hoped that the United States would obtain a larger share of the commerce of the Near East. He was to be disappointed. The United States found the European powers too entrenched, and dollar diplomacy failed in Turkey. But Central America and China were the most spectacular examples of the doctrine.

The controversy over dollar diplomacy lasted well after 1913. Generally recognized by students of international relations as a failure, dollar diplomacy has engendered controversy concerning its motives and the people responsible for carrying it out. Some writers have argued that the policy was primarily economic, while others have contended that it was dominated by strategy, especially in Latin America. Others have defended the desire of the Taft administration to "do good" in Latin America and Asia, in some cases noting that its failure was probably owing more to diplomatic bumbling than imperialistic urges. The most recent writings of scholars have additionally argued that the logic of imperialism undermined the logic of "dollars for bullets," which ended up relying on military intervention to protect the interests of businesses and individual investors. In effect, dollar diplomacy created, rather than mitigated against, havoc. The most balanced account of dollar diplomacy, that of the historians Walter and Marie Scholes, has combined these motives and also noted that Taft's diplomacy anticipated U.S. foreign policy after World War II. Taft and Knox chose private capital as their instrument, whereas President Harry S. Truman used public capital. In both instances, the most important consideration was preservation of vital American interests abroad by helping underdeveloped countries establish viable governments and integrating them into the twentieth century.

Debate as to responsibility for the policy has taken two directions. Historians have argued over the roles of Taft, Knox, the State Department, and American businessmen. Straight has especially been the subject of debate. One account has convincingly argued that Straight's role in the Far East has been exaggerated. The most reasonable conclusion would seem that there was a common purpose among the advocates of dollar diplomacy.

Another direction of the debate over dollar diplomacy has been whether it was only one aspect of a continuous policy followed in the twentieth century by the United States—to expand American economic opportunities abroad. It is clear that Taft's predecessor, Theodore Roosevelt, and his successor, Woodrow Wilson, as well as the rest of the American leaders in the twentieth century, supported the expansion of American business, up to and including the Clinton administration's crafting of the NAFTA agreement and approaching foreign relations with China on economic, rather than human rights, terms, to the dismay of many Americans and their congressional representatives. Indeed, the term "dollar diplomacy" was revived by the media to describe the thrust of U.S. foreign relations during the 1990s. There has, however, been no extensive scholarly investigation into the validity of using the policy of the Taft administration to define the economic foreign policy being carried out by the United States at the beginning of the twenty-first century. No president, other than Taft, has made such a policy the principal goal of diplomacy. As a result, the term "dollar diplomacy" remains synonymous with the diplomacy of 1909 to 1913.


Bemis, Samuel Flagg. The Latin American Policy of the United States. New York, 1943. Although dated, the work is still valuable.

Cohen, Naomi W. "Ambassador Straus in Turkey, 1909–1910: A Note on Dollar Diplomacy." Mississippi Valley Historical Review 45(1959).

Coletta, Paolo E. The Presidency of William Howard Taft. Lawrence, Kans., 1973. Gives a comprehensive study of Taft's administration.

Collin, Richard H. "Symbiosis vs. Hegemony: New Directions in the Foreign Relations Historiography of Theodore Roosevelt and William Howard Taft." Diplomatic History 9, no. 3 (summer 1995), 473–497. An excellent historiographic article.

Drake, Paul W., ed. Money Doctors, Foreign Debts, and Economic Reforms in Latin America from the 1890s to the Present. Wilmington, Del., 1994.

Esthus, Raymond A. "The Changing Concept of the Open Door, 1899–1910." Mississippi Valley Historical Review 46 (1959). Important to see how the Taft administration tried to change the meaning of the Open Door policy.

Gardner, Lloyd C. "American Foreign Policy 1900–1921: A Second Look at the Realist Critique of American Diplomacy." In Barton J. Bernstein, ed. Towards a New Past: Dissenting Essays in American History. New York, 1968. Argues the importance of economic motives.

Hunt, Michael H. Frontier Defense and the Open Door: Manchuria in Chinese-American Relations, 1895–1911. New Haven, Conn., 1973. Disputes Straight's importance in the formulation of America's East Asian policy.

Israel, Jerry. Progressivism and the Open Door: America and China, 1905–1921. Pittsburgh, 1971. Stresses continuity in America's Far Eastern policy.

Kahn, Helen Dodson. "Willard D. Straight and the Great Game of Empire." In Frank J. Merli and Theodore A. Wilson, eds. Makers of American Diplomacy: From Theodore Roosevelt to Henry Kissinger. New York, 1974. Portrays Straight as architect of dollar diplomacy in East Asia.

Minger, Ralph E. William Howard Taft and United States Foreign Policy: The Apprenticeship Years, 1900–1908. Urbana, Ill., 1975. Gives extensive treatment to Taft's involvement in foreign affairs before he became president.

Mulhollan, Page Elliott. Philander C. Knox and Dollar Diplomacy, 1909–1913. Austin, Tex., 1966.

Munro, Dana G. Intervention and Dollar Diplomacy in the Caribbean, 1900–1921. Princeton, N.J., 1964. Cites the importance of strategy as the motivation of dollar diplomacy in the Caribbean, and is very comprehensive.

Nearing, Scott, and Joseph Freeman. Dollar Diplomacy: A Study in American Imperialism. New York, 1966. A socialist view in an update of a 1926 work.

Rosenberg, Emily S. Financial Missionaries to the World: The Politics and Culture of Dollar Diplomacy, 1900–1930. Cambridge, Mass., 1999. Goes beyond the defined period of 1909–1913.

Scholes, Walter V., and Marie V. Scholes. The Foreign Policies of the Taft Administration. Columbia, Mo., 1970. The best study of the diplomacy followed by Taft.

Smith, Robert. "Cuba: Laboratory for Dollar Diplomacy, 1898–1917." Historian 28(1966). A revisionist account of relations with Cuba.

Varg, Paul A. The Making of a Myth: The United States and China, 1897–1912. East Lansing, Mich., 1968.

Vevier, Charles. The United States and China, 1906–1913: A Study of Finance and Diplomacy. New Brunswick, N.J., 1955. A generally balanced treatment.

See also Consortia ; Economic Policy and Theory ; Intervention and Nonintervention ; Open Door Policy .

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