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Definition: dollar diplomacy from The Hutchinson Unabridged Encyclopedia with Atlas and Weather Guide

Disparaging description of US foreign policy in the early 20th century. The USA sought political influence over foreign governments (China 1909 and 1912; Haiti 1910; Nicaragua and Honduras 1911; Dominican Republic 1916) by encouraging American financiers to make loans to countries whose indebtedness could then be used to promote US interests.

Dollar diplomacy sometimes resulted in US military intervention (such as marines in Nicaragua 1912–25) to prop up client regimes. The term is particularly associated with the presidency of William Taft. In the latter 20th century similar policies are usually described as economic imperialism.

Summary Article: Dollar Diplomacy
From Encyclopedia of United States - Latin American Relations
  • Keywords
  • Honduras
  • Nicaragua
  • Diplomatic and Military Policy
  • Economics and Trade
  • Haiti

The term dollar diplomacy describes the U.S. foreign policy in Latin America and East Asia under Secretary of State Philander C. Knox and President William Howard Taft. It focused on extending U.S. economic power by providing loans to insolvent foreign countries. It was Taft who first coined the term during an address on December 7, 1909.

Dollar diplomacy allowed bankrupt foreign governments to obtain loans from private U.S. banks in return for direct U.S. financial supervision. Often private U.S. banking managers became the administrators of the loan, forcing the client nation to reorganize its financial system by imposing U.S.-style fiscal reforms, making them adopt the gold standard and implement western tax reforms.

In the developing world, especially the states of Latin America, the term has been used to denounce the role the U.S. government and U.S. corporations have played in using economic, diplomatic, and military power to open up foreign markets. While Taft may have introduced this new form of economic imperialism, its greatest exponent was Secretary Knox, who was a corporate attorney and one of the main founders of the massive U.S. Steel conglomerate. According to the Taft-Knox policy, U.S. loans or multinational loans in which U.S. business participated not only facilitated debt repayment but also assured prosperity for both sides. Knox's favorite slogan was “every diplomat a salesman.”

Proponents believed this arrangement would protect the United States from overproduction and supply poorer nations with much needed manufactured products. They believed this would afford economic progress, political stability, and spread U.S. civilization throughout the hemisphere. They argued that while the policy involved competition with Europe and Japan in terms of buying bonds, floating loans, building railroads, and establishing banks, it was a symbiotic relationship that was good for everyone.

In 1904 Theodore Roosevelt, Taft's predecessor, had sown the seeds for this policy with the Roosevelt Corollary to the Monroe Doctrine. Roosevelt, fearful of European intervention in insolvent Latin American states, stated that the United States had the “right and obligation” to intervene if Latin American nations could not stabilize their own economic affairs in the face of international debts. Roosevelt reckoned that a lack of U.S. action would open the door to European, especially British or German, intervention. Germany's belligerence during the Venezuela affair of 1902 and 1903 spurred Roosevelt to action.

Taft expanded the policy, using it as a justification for protecting the Panama Canal, purchasing Honduras's debt to British bankers, and intervening in Nicaragua by helping overthrow one government and providing military support for another. In one of the most brazen examples of dollar diplomacy, Taft sent troops to seize customs houses in support of Nicaraguan insurgents during their revolt of 1912. Once the rebels had won, Knox urged U.S. bankers to offer loans to the new regime in order to increase U.S. financial influence. Within two years, the pro-U.S. regime was also confronted by a rebellion. This time a different president had to send U.S. forces to Nicaragua. These troops remained in Nicaragua for more than a decade.

Another trouble spot was the Caribbean state of Haiti, where the State Department had encouraged U.S. investment. Several financial crises and revolts led to U.S. intervention to prevent European intervention; the U.S. government was concerned about its strategic interests in protecting the ongoing construction of the Panama Canal. Throughout the Taft years, the Caribbean and Central America remained a hot spot that required U.S. commitment of its military resources. Apparently, neither Knox nor Taft realized that along with financial investments came the need to protect them from anti-U.S. agents in Latin America and Europe.

Latin America was not the only region affected by dollar diplomacy. East Asia, specifically a weakened and splintered China, was also in theory a fertile ground for dollar diplomacy. In China, Knox secured the entry of a U.S. financial syndicate, headed by J. P. Morgan, into a European consortium paying for the construction of a railway from Beijing to Guangzhou. In the case of Asia, Knox once again misunderstood the value of dollar diplomacy. He saw four hundred million customers. In fact, almost none of these millions had the money or the desire to purchase U.S. products. As a result, the seeming success of dollar diplomacy failed to counter economic instability or the tide of revolution in places like Mexico, the Dominican Republic, Nicaragua, and China. Instead it dragged U.S. military forces into one quagmire after another.

Even though the basic Taft-Knox approach to foreign policy was formally ended by President Woodrow Wilson, the pattern of intervention continued throughout the century and became the excuse for numerous U.S. interventions in places like Cuba, Nicaragua, Haiti, and the Dominican Republic between 1909 and 1934, when the Good Neighbor policy of Franklin D. Roosevelt began to end the U.S.'s heavy-handed policies in Latin America. Some would argue, however, that the pattern did not truly end until free elections were held in Nicaragua on February 25, 1990.

See also Good Neighbor Policy; Knox, Philander; Roosevelt Corollary to the Monroe Doctrine; Roosevelt, Theodore; Taft, William H.; United States, circum-Caribbean Interventions, 1900–1934: Nicaragua; Wilson, Woodrow

  • Mulhollan, Page Elliott. Philander C. Knox and Dollar Diplomacy, 1909–1913. Austin: University of Texas Press, 1966.
  • Munro, Dana Gardner. Intervention and Dollar Diplomacy in the Caribbean, 1900–1921. Princeton, NJ: Princeton University Press, 1964.
  • Rosenberg, Emily S. “Revisiting Dollar Diplomacy: Narratives of Money and Manliness.” Diplomatic History 22, no. 2 (Spring 1998): 155-176.
  • Scholes, Walter V.Scholes., Marie V. The Foreign Policies of the Taft Administration. Columbia: University of Missouri Press, 1970.
Copyright © 2012 by CQ Press, an Imprint of SAGE Publications, Inc.

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