Dollar Diplomacy

Dollar Diplomacy
Dollar Diplomacy

During the 30 years before the Great Depression, the United States used a policy of loan-for-supervision, also called dollar diplomacy, with countries that it perceived as unstable. Dollar diplomacy was the U.S. policy encouraging private loans to countries in exchange for those countries' accepting financial advisers. This became a way for the government to advance its policies in the face of fiscal and institutional constraints such as Congress.

It was believed that the professional advisers would help the targeted countries (China, many in Latin America, Persia, and Poland) reorganize their finances and create an infrastructure that would bring stability and allow for a large volume of trade. Along with the increase in trade would come a rise in the standard of living of the people in the targeted country and in the process increase the markets for U.S. goods.

In the aftermath of the Spanish-American War and the control the United States gained over the Philippines, Cuba, and Puerto Rico, opposition grew to the point that policy makers assumed that the United States could not make any more territorial gains by force.

Yet many people, including anti-imperialists, believed that the United States had an obligation to create commercial ties to developing countries. Even after World War I, when U.S. policy was viewed as isolationist, the United States did not try to avoid foreign entanglements.

At first policy makers tried to tie in commitments from the U.S. government to secure the loans, but this required the approval of Congress. Therefore, to avoid Congress the policy was changed to use financial experts to help stabilize a given country, and the U.S. government's involvement was reduced.

It was the job of the experts to introduce reforms to the host country's financial structures. These included putting the country on a gold standard, creating a central bank, and using strict accounting practices. These reforms were seen as being modern and scientific.

Unfortunately, not all the countries receiving this help found it to their liking. In a number of cases dollar diplomacy was viewed as just another form of imperialism. In most cases the advisers did not speak the language of the countries they were assigned to, nor did they know the cultures of the countries.

There was also the issue of the advisers' salaries. They expected to be paid based on U.S. standards of pay, which meant they were lavishly paid by local standards. To the locals these men seemed more interested in their own well-being than in that of the local population.

There was also disagreement in the United States about dollar diplomacy. As the years passed more people saw it as imperialism and exploitation in a different guise. Antibanking factions saw the policy as nothing more than a way for bankers to make more money for themselves and that the U.S. policy was being held hostage to these profits.

As the arguments against dollar diplomacy grew sharper and the quality of the loans deteriorated, the government tried to extract itself from the financial entanglements, which in turn reduced the confidence in the loans. By the early 1930s the government was working hard to detach itself from international economic affairs. It did not want to accept any of the responsibility for either international economic stability or losses of the bondholders.