Dollar Diplomacy

The concept of the U.S. government protecting U.S. commercial enterprises abroad and offering political loans to foreign governments is not unique to any specific time period. The term "Dollar Diplomacy," however, became particularly associated with the policies of President William Howard Taft (1909–13) that were designed to further U.S. interests in Latin America and China. Taft sought to use U.S. economic aid in order to coax underdeveloped countries to follow U.S. political leadership and at times accept a U.S. military presence.

Almost a century earlier in 1823 President James Monroe (1817–25) established what became known as the Monroe Doctrine. While Spain was involved in the Napoleonic Wars in Europe, a number of New World countries proclaimed their independence. Concern rose in the United States that Spain might attempt to reassert its colonialist control in countries of the Western Hemisphere following the war. Anticipating increased economic trade prospects with newly independent Latin American countries, Monroe held that the hemisphere was closed to further European colonization. Any efforts by European nations to reestablish political control would be considered a threat to U.S. security. President Theodore Roosevelt (1901–09) later broadened the Doctrine by asserting that the United States had the right and obligation to intervene when Western Hemisphere nations became so politically or economically unstable that they were vulnerable to European control. However Roosevelt's forceful intervention with several countries stirred considered hostility in the region.


As Secretary of War in Roosevelt's administration, Taft oversaw construction of the Panama Canal and establishment of the U.S. Canal Zone. In his later role as president, Taft and his advisors, including Secretary of State Philander C. Knox, became concerned over security of the canal and how to protect it from foreign encroachment. Heavily indebted to European nations, the overwhelmingly poor Latin American countries experienced continual economic and political unrest. Fearing that European nations might forcibly intervene in Latin American affairs while seeking repayment of outstanding loans, Taft and Knox sought to promote an aggressive program of economic and political stability.

Chief targets for Dollar Diplomacy included Colombia, Honduras, and Nicaragua. Dollar Diplomacy consisted of Taft and Knox lobbying private U.S. bankers to "invest" in these nations. The bankers would provide the countries with loans so they could pay off their debts to European nations. The U.S. was to control investment markets of the Latin American nations, thereby eliminating economic competition while incorporating the countries' economies into the political and economic world of the United States.

Taft began putting Dollar Diplomacy into action, but he ran into many obstacles. Colombia, heavily in debt to European banks but still bitter from the loss of the land surrounding the Panama Canal, refused U.S. economic advances without first settling the loss of Panama. Taft also lobbied U.S. bankers in 1909 to loan money to Honduras so that it could pay its debt of $110 million, which was primarily owed Britain. After Taft successfully persuaded J.P. Morgan (1813–90) and others to participate, Congress failed to approve the plan. Revolution erupted in Honduras, leading to U.S. armed intervention. Fearful of the political instability and Honduras' refusal to fully cooperate, the companies withdrew their loan offers and the proposal died. Nicaragua, holding an alternative canal route to the Panama Canal, antagonistically threatened the United States that it would sell canal rights to Great Britain or Japan. Taft sought to have U.S. bankers loan Nicaragua $20 million, but Congress withheld approval until after Taft left office. Dollar Diplomacy in Latin America was a failure.

Taft and Knox also attempted to apply Dollar Diplomacy to the Far East in 1910. Knox was convinced that European funding of major railway construction in China threatened U.S. access to free trade. Taft again arranged for financier J.P. Morgan to establish a syndicate of U.S. bankers to enter the project. Though loans were made, little profit resulted. Concern also arose over possible Japanese and Russian involvement in railroad construction in Manchuria. Taft arranged for U.S. bankers to form a six-nation consortium to fund the project. Both of Taft's efforts in Asia failed.

Taft had been unabashed in his efforts to expand the U.S. economy through international trade, reporting to Congress a $300 million gain in exports in 1910 and another $200 million in 1911. Taft even suggested that Congress establish U.S. banks abroad.

Dollar Diplomacy failed as a crudely designed foreign policy. Critics saw it as economic imperialism replacing territorial imperialism. Indeed Taft himself described it as "substituting dollars for bullets." The strategy's blatant nature brought the policy into disrepute and was bitterly debated at home and abroad. Many viewed with alarm use of government employees, such as diplomats and consuls, to establish new inroads for private U.S. commercial enterprise. The term itself became a derogatory description of international economic coercion. Following Taft in the White House, President Woodrow Wilson (1913–21) explicitly repudiated Dollar Diplomacy in 1913. The United States continued to pursue programs of political intervention by providing economic and military aid to Latin American countries, but with less blatant economic gain in mind.