Diplomacy of the Dollar--1947

VOLUME 179

NUMBER 1

JANUARY, 1947

90th YEAR OF CONTINUOUS PUBLICATION

by HERBERT FEIS

IT is unpleasant to have a rejected expedient turn into a necessity. This is now happening in the conduct of American lending abroad. Early in the century the American government fell into ways that attracted the name of “dollar diplomacy.” Their purpose was to secure favorable opportunity and safety for American investments abroad. Their consequence was to produce a conviction that we were seeking to control the lives of the smaller American republics. This we denied and disavowed — presently signaling our sincerity by withdrawing not only our Marines, but our financial advisers from their comfortable berths.

The reform in our practices was meant as proof of our wish fully to respect the independence of all other countries, even the smallest among them. We adopted the opinion that foreign lending and investment was a private business activity; that decision as to whether or not any particular transaction was undertaken was a matter of concern only to the borrower and lender; and that American financial ventures abroad should not become tangled up with our political relationships. These attitudes marked the end of the American impulse to expand our territories in this hemisphere or elsewhere. They reflected our sense of security, identified with our geographic isolation. They expressed a belief that we were more likely to have genuine political friendships by abstaining from the use of our financial power as an instrument of diplomacy than by using it. We maintained these opinions during the great financial expansion that followed during the bondselling twenties, attempting little political guidance, purpose, or support. Clearance with the State Department was a routine formality — enough to give assurance to the vendors of the bonds but not enough to compel them to take thought.

The outcome was in part good and in part much to be regretted later. There was a marked growth of trust and friendship between ourselves and the other American republics. The countries of the Orient, particularly China, and of the Middle East became more friendly in their invitations to American than to other foreign capital and enterprise. Fear faded that the dollar might be in reality an emblem on the flag of imperialism; it was accepted as a useful and unscheming messenger of economic coöperation. American capital was flung out of the oil fields of a few foreign countries, particularly Mexico and Bolivia, and banned from various other activities. But by and large it was welcomed. Its acceptance was evidenced by the spread of American branch plants throughout the world — by new oil and mining enterprises in South America and Saudi Arabia and the Pacific Southwest, and by the extension of American aviation and communications companies. And the democratic countries of Western Europe and the British Commonwealth were drawn toward us by the opportunity to sell bonds to our private investors without being required to pay a political commission.

But then there was the portion for regret. We financed the recovery of Germany. The loans were made before Germany had made clear its will to try again to dominate the Western world. Great Britain made the same mistake, contributed to the same calamity. Our finance also greatly helped Mussolini to acquire his reputation as a constructive dictator; it provided him with the means for strengthening his grasp upon the Italian people. Of Japan we were always afraid; and the American government intervened to make sure that private bond buyers did not become its partner in expansion. Still, branches of American private industry contributed to the development of their Japanese affiliates.

Copyright 1946, by The Atlantic Monthly Company, Boston 16, Mass. All rights reserved.

In short, the well-intentioned nations of the world responded to our policy of financial neutrality decently. The aggressive nations used it to strengthen themselves for attack. In their spasms of antagonism, how completely did they turn into vile accusers!

The U.S.S.R. was a sardonic witness of these ingratitudes. It seemed discreetly to doubt the sincerity of our idealism. It is written in the Communist book that the foreign financial activities of the capitalist states are a desperate device entered into to avoid internal collapse, and inevitably followed by a demand for political control. The U.S.S.R., immediately after the Revolution, had expropriated all foreign property, American included, within its territories and repudiated all foreign obligations. Its later discussions of financial relationships with the American government in 1933, in connection with our recognition, were unreal. We were trying to get compensation for previous investments while the Soviet government was trying to get new funds. The outcome was an obscurely phrased document that was soon ignored. Thereafter the U.S.S.R. quietly arranged to obtain short-term credits from American industrial enterprises, while it continued in the press to blame our selfishness and predict the disintegration of our system.

After the advent of the depression new private foreign ventures were few; and these were by American corporations already well established abroad. The foreign loans that were made came out of the government’s purse. They were on a small scale and were arranged through the Export-Import Bank for the purpose of sustaining American commerce. The government generally tried to maintain the same attitude towards the activities of that institution that it had toward private ventures. It was permitted to operate with only occasional instruction in political purpose.

True, the Bank was spurred on in its loans to the other American republics by the judgment that these would contribute to the creation of the inter-American peace system that was being organized. True, it sometimes postponed loans until debtors settled then earlier obligations to private lenders. True, also, the Bank evaded or pared down loan requests from Germany, Italy, and Japan for credits to pay for American products; and in the disposal of these requests it was guided by the State Department. The imperatives of policy had occasionally to be invoked in order to deal with the pressure of those who had cotton and pork to sell. In the record will be found instances in which the American government flirted with the notion that if it responded to the demands of the Axis countries for raw materials they might adopt more peaceful ways. But these flirtations were short-lived and experimental. In summary, before the war, the small foreign financial activity of the American government was kept roughly in accord with our broad political sympathies. But it was not constantly animated by political design or manipulated to serve particular diplomatic negotiations. A group of officials who were primarily interested in the growth of American commerce directed the use of small sums to that end, taking into account general radiations of friendship or hostility. Such was the diplomacy of the dollar during the thirties.

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To Americans the misbegotten results of certain past foreign financial activities were saddening. But they would, it was thought, be wiped out by the defeat of the Axis. Thereafter, it was anticipated that we would be able to resume the path of financial aloofness; that we would be able, without worrisome concern over political strategy, to direct our lending power to the congenial opportunity of world-wide economic improvement. In the peaceful and orderly world of which we dreamed, there would be no need to weigh closely the ounces or tons of benefit that our loans transferred between nations.

But we are moving along the opposite course. Our loan policy has become a working element in our political battles and a means of winning adherents to a program of international trade — which does not entirely lack political significance. The real centers of decision have not been the Export-Import Bank or the Treasury or the Department of Commerce, but the State Department.

Our present tendency is not, however, a relapse into the renounced American pattern of the past. The purpose and conditions governing our present behavior are greatly different. Now our loan operations are conducted by the government itself, out of public funds. Counter to our desires, yet deeply, we are engaged in a vast struggle against other nations — a struggle in which power seems more persuasive than reason; or in which, at least, pleas not supported by some form of inducement or threat go unheeded. Our resources, our ability to aid or refuse aid to other countries, are being used by the government in this struggle.

This sense of compulsion to do so is a measure of our immersion in the world’s affairs. We are no longer merely the world’s banker. We are enmeshed in its disorders and difficulties. We have decided that we cannot escape by a new withdrawal into isolation — political or economic. We have reluctantly accepted the necessity for participating in, and seeking a basis of order for, the confused struggle among the nations of the world. We are engaged in four interwoven lines of effort simultaneously. First, to create effective arrangements for the maintenance of peace; second, to strengthen our strategic position and political understandings; third, to prevent the spread of Communism over Europe and Asia; and fourth, to reweave the pattern of trade among nations that prevailed before the depression — a pattern shaped by liberated, unmanaged, and universal competition. Compared with the past, we are indeed heavily laden with purpose.

The achievement of these entwined aims, we are grimly beginning to realize, is not merely an exercise in persuasion. Our command over capital is an aid to that art. We are using it regularly to do the work done during the war by the Lend-Lease program. We are favoring the countries which we trust; using loans to prove our good will to rulers inclined to bargain; encouraging countries that are wavering in their allegiance to our purposes or our interests; denying those we fear; and asking all to sign their name to that paper structure of vows that we have been erecting in the international trade field. The last, in particular, has become standard practice; there is a risk that it may be elevated out of proportion to our other aims.

A few citations from the loan record will illustrate these generalizations. Loans have been made to the other American republics for economic development; the useful results are scattered over the southern part of the American Hemisphere in the form of rising new iron and steel plants, smelters, roads, and agricultural undertakings. Large loans have been made to Great Britain and France, and smaller ones to Belgium and Holland. These were impelled by the wish to support countries that had free political institutions and were defended as essential to the restoration of international trade. Some opponents of these loans remained unmoved by these purposes, until frightened by the thought that refusal would cause Western Europe to draw closer to Russia. We have promised loans to Italy, though we know they are not likely to be repaid; our willingness to do so emerges from a vague sense of basic historical kinship, extensive racial connections, and the fear that out of desperation Italy might turn to the U.S.S.R. for support.

A large check for the Chinese government has long been drawn but is not yet signed. We have wished our resources to serve as a means of restoring China once internal reconciliation has been achieved; not as a fund to be dissipated in unending internal battle.

Loan discussions between the U.S.S.R. and ourselves have long been the subject of many phantomlike reports. But the American government has been of the opinion that it would be unwise and unjustified in making a loan until some of the main issues that divide the U.S.S.R and ourselves are satisfactorily settled. I do not know whether the terms or conditions we have advanced in the course of discussions were wisely selected or reasonable. But this much seems plain; that it would not be sensible to help the U.S.S.R. until it moderates its self-willed use of the veto in the counsels of the United Nations and accepts some effective form of international control over atomic fission. These, rather than the terms of settlement of such wrangled questions as the Trieste regime or the Hungarian reparations, or the principles of trade, should guide our final decision.

Our loan operations thus far in Central and Eastern Europe have also been marked with uncertainty and restraint. We have wished to help all the countries in this region to restore tolerable economic conditions. Loans have been granted to Poland and Czechoslovakia despite misgiving over their intimacy with the U.S.S.R. We have been employing all the resources of our diplomacy to re-establish political freedom within these countries and to encourage them to be independent in foreign affairs. The loans were part of a well-advised effort to build an economic bridge across the present political chasm. In return we sought and received pledges of support for the general program of trade principles which we have been sponsoring.

Our instinct has been against a financial ban upon the U.S.S.R. and those countries in whose affairs at present it plays so large a part. But it will not be possible to finance them with satisfaction until and unless existing major causes of dispute and suspicion between them and us are reduced. This cannot be induced by loans alone. When there is a clear and faithful wish between nations to live in peace and mutual tolerance, financial aid may cement and reward that wish. Where hostility is strong and the conflict of national ambitions and institutions profound, loans will not long heal the breach. Hatred and rivalry soon make mock of the effort. The United States must not fall into the error of thinking that because it possesses financial power it will be spared the necessity of making the utmost exertion of other kinds to find the terms of peace and security.

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SO MUCH for the tangle of policy in which our loan activity now finds itself enclosed. Can this be avoided by assigning the task to an international organization? Our responsiveness to this thought is proved by our leadership in the creation of the International Bank for Reconstruction and Development.

This Bank was devised with the intention of converting international lending into a shared responsibility. Henceforward, the hope ran, it would be freed of the bewildering complexities of politics. It would not be subject to the exclusive judgment of any national state as to how its own advantage or welfare was affected, and would cease to be suspect as an instrument, open or concealed, of national domination. It would not be restrained or deflected by rivalries among the powers. The development of production and trade in all parts of the world was to become an international enterprise which would draw nations together in common benefit. The purposeful political tint of international loans was to be bleached out. So did eager aspiration course while the statutes were being drawn.

Here then was contemplated not only the end of the diplomacy of the dollar, but of the pound and the franc and the mark and the ruble. This is a conception most earnestly to be encouraged. There should be a source of capital that can stand aside from, or above, national sentiments, interests, and rivalries. The conditions of all nations will be improved if there is a strong international bank to which each can turn — without the necessity of negotiating with any single national lender. Therefore it is imperative that the Bank be free of the need to take account of every secondary, transient dispute and rivalry that exists in the international political sphere. Otherwise the ironical result would be that a borrower would have to please all participating lenders, not merely one, before it was granted a loan. It should be bravely launched on the supposition that countries are going to succeed in reconciling their present angers and live at peace. In this matter overcaution would prove to be a worse fault than overtrust.

But even if this point of view is adopted, the Bank will not be able to act smoothly anywhere, and will not be able to act at all in many parts of the world, if the great powers continue to be bitterly divided over vital issues. How can the national representatives who will direct the Bank ignore such matters as rivalry in the development of atomic weapons, or fiercely waged propaganda warfare over social systems?

The American government is supplying a large fraction of the funds of the Bank (and also of the Fund) and, like all other members, has a veto power over all loan operations undertaken in its market. Its representatives are not likely to approve loans that would operate directly to its disadvantage, or support foreign governments that seemed hostile and unwilling to compromise for the sake of peace. We should not ask that the Bank shape its decision to satisfy any exclusive or frightened purpose of our own. Our contribution must be regarded as one made to an international cause, and we should be eager to have it used that way. But we can properly ask, and will be compelled to ask, proof that the beneficiaries have sincerely renounced the use of force and conspiracy in the conduct of their international relations.

Other contributors will in like fashion keep close watch over the bearing of the Bank’s operations upon their own position and purposes. This means that the Bank’s operations will be able to develop on a significant scale only if the major powers adjust their main differences, if they achieve a trustful balance permitting a settlement of issues by negotiation. Otherwise its loans will, in a sense, only leak out between the crevices of politics.

The world spins round and the dollar spins with it. Our present policy may be called “the diplomacy of the dollar.” It is a sign that we dare not refrain from using any element of power in the present struggle.

It is a gloomy sign — in the light of the closest historical parallel. That is to be found in the years that preceded World War I. Then Europe, not the United States, was the world’s banker. Then the foreign loan activities of Britain, France, Germany, especially within Europe and Asia, were all entangled with their anxious rivalries, deals, and alliances. Capital gradually lost its creative purposes and possibilities; financing became a form of barter for promises — often wavering. Loans became footnotes to treaties. Many of the bonds issued during this period were scraps of paper scattered behind in a game of hare and hounds. The United States is now involved in much the same sort of game. How can it guide its part in this trackless chase so that it will not have the same tragic outcome as the earlier one?

The American government is justified at the present time in taking into account, when deciding to grant or refuse a loan, the political behavior and claims of the recipient. It need not be afraid to avow such an intention or ashamed to put it into practice.

But while refusing to nourish the violent national spirit in others, we must not fall into the contrary error. We should not refuse loans merely because the vested economic interest or opportunity of some American group might be adversely affected, nor bargain for small advantages. We should not oppose loans merely because the borrower is closer in political sympathies to some other country than to ourselves, or directing its economic life or trade policies on different lines from ours.

Being our own judge, we must weigh our own conduct and demands searchingly. If the diplomacy of the dollar is tied up with a pushful, willful political and military policy, it will cause quarrels to become more embittered. If it is devoted to building an empty structure of vows — which express our ideals without calling upon us for any risk or sacrifice — borrowers will be cynical and evasive. If it is used to gain the privilege of establishing military bases in distant lands, regarded as menacing by other powers, it will provoke suspicion and hostility. We must prove that in this, as in all other branches of foreign policy, our prime and unrelenting aim is to bring nations together in peace, based on justice and mutual tolerance. The motto on the international dollar should be “reconciliation” not “domination.” Then let us bluntly require all who seek to borrow to make that motto their own.