Argument

Twenties/Twenties Hindsight

"Dollar diplomacy" makes a comeback.

The popular view of the 1920s as an isolationist decade, enshrined in textbooks since the end of World War II, is not unfounded. U.S. rejection of the Treaty of Versailles, suspicion of the World Court, and fairly high tariffs all provide evidence of an isolationist upsurge. But the 1920s was also a remarkably internationalist decade, not unlike our own time. As stock markets soared, U.S. capital and products washed over the world. No one used the term "globalization," and there was no World Trade Organization, but there were attempts to extend liberal capitalism internationally through "cooperating central banks" and professional financial advisors. No one had yet heard of International Monetary Fund conditionalities, but private banks often tried to leverage structural change through "controlled loans."

Today’s antiglobalization protesters in Seattle, Windsor, and Washington, D.C., may know little about the foreign policy of the 1920s, which historian Herbert Feis once characterized as "the diplomacy of the dollar." But in that decade, too, Americans organized against what they saw as collusion between financial and political elites. Then, as now, policy debates centered on what would happen to sovereignty and the distribution of wealth in a world where unelected bankers and financial advisors shaped the rules.

The period from the end of World War I to the onset of the Great Depression was marked by a remarkable outflow of U.S. capital, commodities, and culture. Although London remained the world’s leading financial center, New York City banks became the dominant source for new portfolio investment. A surge of fresh direct investment brought a significant U.S. challenge, even dominance, to many critical global industries: oil, airlines, radio, electricity, railroads, automobiles, film, copper, sugar, rubber, and more. Critics worldwide — from both the conservative right and Marxist left — wrote jeremiads about how U.S. styles of mass production and consumption were destroying local cultures and replacing them with a standardized, shallow, and feminized nonculture. Responding to this fear of "Americanization," countries such as Germany, France, and Mexico tried to impose restrictions on Hollywood films.

Guiding and assisting this 1920s version of globalization were the U.S. banking houses: Morgan, Kuhn Loeb, Brown Brothers, National City, and Dillon Read. Republican officials of the era may have refused to answer any mail from the League of Nations, but they communicated freely with U.S. international bankers who sought to work with financial institutions in other countries to reconstruct and stabilize the postwar world. Rising levels of international commerce and investment were extolled as the only sure "path to peace." In an era that lacked any mechanism for public international lending or foreign aid, prodding Americans to buy foreign bonds — a principal way to recycle U.S. wealth back into the world — seemed the highest foreign-policy priority. This approach of substituting dollars for diplomacy, spearheaded by what political scientists now call "nonstate actors," initially seemed less controversial than the visible international organizations and "entangling alliances" so distrusted by the American people.

But public quiescence would not last. The Protestant missionary leader Samuel Guy Inman fueled debate with his widely discussed 1924 Atlantic Monthly article, "Imperialistic America." The article, which the State Department tried to suppress, charged that U.S. loans and financial advisors were creating an "empire" in Latin America that would generate dangerous hatred against the United States. Meanwhile, Senator Henrik Shipstead thundered that the Dawes Plan to provide private loans for Germany would hold U.S. foreign policy captive to the interests of international bankers.

This mistrust of international loans resonated strongly after World War I when many people, including leading historians, charged that Woodrow Wilson had been manipulated into the war by international banking interests that had extended large credits to the Allies. The critics became more and more vocal, noting the presence of U.S. Marines to back the supervision of controlled loans in the Dominican Republic, Nicaragua, and Haiti. By the end of the decade, as markets faltered, banks became weak, and loans teetered on default, popular suspicion of banks and the diplomacy of the dollar had grown so great that no response could be organized to introduce needed liquidity into the international financial system. While campaigning for president, Franklin D. Roosevelt appropriated the widespread antibanking sentiment and promised to drive moneylenders from the temple. In office, Roosevelt refused to cooperate with the World Monetary and Economic Conference, convened in London in 1933 to address the escalating crisis.

Later generations lumped this dissent together with the isolationism they blamed for encouraging fascist aggression and causing World War II. But foreign-policy critics of the 1920s and early 1930s were less isolationist than they were part of a backlash movement opposing banker-led globalization. They expressed a widely held fear that the power of loans to shape international agendas would ultimately lead to the exploitation of other nations and would be incompatible with democratic values and practices. Today, globalization might generate similar opposing forces that political leaders can disparage — and then readily dismiss — as isolationist. Such a dismissal of dissenting concerns, however, carries substantial risk. During the early 1930s, a similar backlash became strong enough to render government-led international financial stabilization politically impossible precisely when it was needed the most.

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