United States Begins “Dollar Diplomacy” Summary

  • Last updated on November 10, 2022

During William Howard Taft’s presidential administration, financial intervention began to characterize U.S. foreign policy in China and the Caribbean.

Summary of Event

“Dollar diplomacy,” a term first used to characterize the foreign policy of President William Howard Taft, has since become a favorite expression of those who criticize U.S. foreign policy as being the tool of Wall Street capitalists. Such financiers, critics argue, have manipulated U.S. foreign affairs to assist them in initiating, expanding, and above all protecting their investments abroad, regardless of the impact of such intervention on the foreign governments and people involved. Although this characterization is partially correct, it does not do justice to the original concept and implementation of dollar diplomacy as conceived by the founders of the policy. Dollar diplomacy [kw]United States Begins “Dollar Diplomacy” (1909-1913) [kw]"Dollar Diplomacy," United States Begins (1909-1913)[Dollar Diplomacy, United States Begins (1909 1913)] [kw]Diplomacy," United States Begins “Dollar (1909-1913)[Diplomacy, United States Begins Dollar (1909 1913)] Dollar diplomacy [g]United States;1909-1913: United States Begins “Dollar Diplomacy”[02330] [c]Diplomacy and international relations;1909-1913: United States Begins “Dollar Diplomacy”[02330] [c]Economics;1909-1913: United States Begins “Dollar Diplomacy”[02330] Knox, Philander C. Taft, William Howard [p]Taft, William Howard;dollar diplomacy

Taft was unusually well prepared to manage the foreign policy of the United States in the Caribbean and Asian areas when he assumed the presidency in 1909. He had served in key diplomatic positions in these areas from 1901 to 1908. First as chairman of the Philippines Commission and then, by 1901, as civil governor of the Philippines, he had acquired valuable knowledge of the interests of the United States in Asia. When he was appointed secretary of war in 1904, he took on the duties of a roving ambassador. He had primary responsibility for the Isthmian Canal Commission, which dealt with the complex and, for U.S. policy interests, critical implications for the building of the Panama Canal. He had returned to Asia in 1905 and laid the diplomatic foundation for the settlement of the Korean issue with Japan. In 1906 he was again in the Caribbean, this time in Cuba. Following the fall of the regime of Cuba’s first elected president, Tomás Estrada Palma, Taft acted as provisional governor of Cuba.

The chief architects of dollar diplomacy were President Taft and his secretary of state, Philander C. Knox. Knox was a Pennsylvania lawyer sympathetic to big business but equally concerned with U.S. political and economic interests abroad. Knox and Taft believed that U.S. commerce would best be served in areas where political and economic stability reigned and that the best way to secure both was to employ U.S. capital and financial expertise where instability was the rule. U.S. intervention would be peaceful—dollars instead of bullets—and would bring benefits not only to U.S. business but also to the local populations. In 1910, Taft articulated his position and that of his administration:

There is nothing inconsistent in the promotion of peaceful relations, and the promotion of trade relations, and if the protection which the United States shall assure to her citizens in the assertion of just rights under investments made in foreign countries, shall promote the amount of such trade, it is a result to be commended. To call such diplomacy “dollar diplomacy” . . . is to ignore entirely a most useful office to be performed by a government in its dealings with foreign governments.

Knox echoed the president’s views. He declared, “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.”

The Taft administration employed dollar diplomacy in two areas: the Caribbean and China. In the Caribbean, Taft and Knox adopted as their model the program instituted by Theodore Roosevelt’s administration in the Dominican Republic. Because of the political disorder of that state and the fear of foreign intervention in its affairs, in 1905 Roosevelt had negotiated an arrangement by which the Dominican government secured a loan from U.S. banks to pay off its outstanding debts. In exchange for the loan, the U.S. president was allowed to appoint the head of the customs service, which, as in all Caribbean states, was the chief source of government revenue. This arrangement seemed to work perfectly. After the United States took over the collection of customs revenue, the Dominican Republic enjoyed a period of internal peace and financial solvency that lasted through most of the Taft administration.

William Howard Taft.

(Library of Congress)

Taking their cue from the success of the Dominican experiment, Taft and Knox applied the same principles to Nicaragua in what is regarded as the best example of dollar diplomacy at work. After supporting the overthrow of the powerful dictator José Santos Zelaya in 1909, the administration sent its veteran troubleshooter Thomas C. Dawson Dawson, Thomas C. to Nicaragua to assist the new government in restoring order. Dawson secured the adoption of a plan to install a U.S. collector of customs and float a loan by New York bankers with the tacit guarantee of the U.S. government. Although the U.S. Senate repeatedly refused to consent to the ratification of this accord, Taft appointed a collector of customs by executive order, and the New York bankers made several loans, taking as additional security a controlling interest in the Nicaraguan National Bank and the state railways. Despite these efforts to establish financial stability, however, in 1912 the majority political party of Nicaragua staged a revolt against the U.S.-supported president, Adolfo Díaz, Díaz, Adolfo and the Taft administration reacted by sending warships and Marines to keep Díaz in power. Dollars and bullets, rather than dollars only, were needed to ensure order in Nicaragua.

The Nicaraguan experience showed that, although Taft and Knox had sincerely believed that financial stability would ensure political stability in the Caribbean, they had held overly simple expectations of Latin American political behavior; they had assumed that ending unrest would be merely a matter of retiring debts and balancing budgets. Political rivalries, struggles for prestige and power, social inequalities, and resentment of U.S. intervention undermined the administration’s policy from the beginning. Even the model case of dollar diplomacy, in the Dominican Republic, had achieved stability not because of U.S. policy but because of an able president, Ramón Cáceras, Cáceras, Ramón whose murder unleashed a new wave of unrest that ended only in 1916 with the occupation of the capital city and other centers by U.S. Marines.

The other area that felt the effects of dollar diplomacy was China, but the Chinese situation was quite different from that of the Caribbean. Not only was active competition with other Great Powers more evident, but also the other foreign powers had far more influence in China than did the United States. In addition, Far Eastern policy in the United States under Roosevelt had depended on good relations with Japan, whose friendship was regarded as necessary to protect the newly acquired Philippines as a U.S. possession. Dollar diplomacy in China constituted reversing this policy by seeking advantages in competition rather than through cooperation with Japan.

Significance

The Taft-Knox method of increasing U.S. influence in China focused on pumping U.S. capital into that country. The tactics never changed. The administration demanded the admission of U.S. banking groups, on terms of equal participation with other powers, into every foreign loan floated by China; where the demand for funds was lacking, the administration sought to inspire it artificially. In the case of China, however, the New York financiers on whom the administration relied for the actual investments lacked both the interest and the accumulation of capital to provide loans of the size demanded. To raise the money, U.S. banks had to rely on loans they had floated in the money markets of England and France. This practice in many ways defeated the whole purpose of the U.S. investment in China.

In fact, dollar diplomacy in China did not mean pressure of capitalists on the government to protect their investments abroad, but pressure of the government on the capitalists to invest in an area where the administration believed future U.S. political and economic interests would be at stake. Because of the difficulty in securing U.S. funds and the opposition posed by the other major foreign powers, the Taft administration abandoned its aggressive financial policies in China in 1912 and reverted to the more moderate “open door” approach of earlier administrations.

Dollar diplomacy was by no means as successful as some of its promoters claimed or as sinister as some of its critics have portrayed it. However, in addition to promoting stability in some parts of the world, this form of foreign policy did much to cast the United States in the role of an imperialistic power in the era prior to World War I. Dollar diplomacy

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Anderson, Donald F. William Howard Taft: A Conservative’s Conception of the Presidency. Ithaca, N.Y.: Cornell University Press, 1973. A valuable addition to earlier works because the author had access to the Taft papers, which were opened to scholars and the public in 1960.
  • citation-type="booksimple"

    xlink:type="simple">Burton, David H. William Howard Taft: Confident Peacemaker. Philadelphia: St. Joseph’s University Press, 2005. Focuses on Taft’s foreign policy ideas and initiatives throughout his entire career as a statesman, including his experiments with dollar diplomacy.
  • citation-type="booksimple"

    xlink:type="simple">Coletta, Paolo E. The Presidency of William Howard Taft. Lawrence: University Press of Kansas, 1973. Includes an informative chapter on dollar diplomacy.
  • citation-type="booksimple"

    xlink:type="simple">Haley, P. Edward. Revolution and Intervention: The Diplomacy of Taft and Wilson with Mexico, 1910-1917. Cambridge, Mass.: MIT Press, 1970. This book’s introduction gives a clear, direct description of the motivation for and scope of dollar diplomacy.
  • citation-type="booksimple"

    xlink:type="simple">Minger, Ralph Eldine. William Howard Taft and United States Foreign Policy: The Apprenticeship Years, 1900-1908. Urbana: University of Illinois Press, 1975. Discusses Taft’s public service record, especially his diplomatic appointments in Latin America and Asia immediately before he became president.
  • citation-type="booksimple"

    xlink:type="simple">Munro, Dana G. Intervention and Dollar Diplomacy in the Caribbean, 1900-1921. Princeton, N.J.: Princeton University Press, 1964. One of the most complete and comprehensive treatments of dollar diplomacy available.
  • citation-type="booksimple"

    xlink:type="simple">Pringle, Henry F. The Life and Times of William Howard Taft: A Biography. 2 vols. New York: Farrar & Rinehart, 1939. The definitive biography of Taft. Chapter 35, in volume 2, discusses dollar diplomacy.
  • citation-type="booksimple"

    xlink:type="simple">Rosenberg, Emily S. Financial Missionaries to the World: The Politics and Culture of Dollar Diplomacy, 1900-1930. Durham, N.C.: Duke University Press, 2004. Examines the scope and significance of dollar diplomacy in early twentieth century U.S. foreign policy. Addresses the controversies surrounding the policy, including arguments that it fostered exploitation of other nations.
  • citation-type="booksimple"

    xlink:type="simple">Scholes, Walter V., and Marie V. Scholes. The Foreign Policies of the Taft Administration. Columbia: University of Missouri Press, 1970. Provides detail on the policy of dollar diplomacy in Asia and the Caribbean.

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