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Empire Without Tears: America's Foreign Relations 1921-1933
Temple University Press
1987
2. The Uses and Impact of American Economic Power, 1919-1929
I
The decade of the 1920s, at least the seven or eight years between the recession in which Harding found the nation and the stock market crash that marred Herbert Hoover's first year in the White House, has long been recognized as an era of striking economic growth in the United States. Industrial production rose 70 percent between 1922 and 1928. In the same period the gross national product (GNP) rose 40 percent, per capita income 30 percent, and real wages 22 percent. The growth was notable because it occurred not in what would later be called euphemistically a "developing country," but in a nation that was already the world's leading industrial power. If Calvin Coolidge actually insisted that the business of America was business, the large majority of Americans benefitting from a mass economy that turned out enormous quantities of affordable consumer goods were quite content. This was "people's capitalism": Business leaders allowed wages to rise, took their profit in the volume of sales, and displayed social consciousness. Businessmen were the folk heroes of the decade. In their Rotary Club speeches and songs, they stressed their service to the community. Public relations men like Bruce Barton sold Jesus to the people as the greatest advertising man of all time—just as Moses was the greatest real estate promoter. 1
Generally, businessmen found the government of the United States cooperative to a greater degree than ever before, eager to promote the interests of American business at home and abroad. Historians have labeled the America of the 1920s the "cooperative" state or the "promotional" state, while recognizing that many—perhaps most—of the innovations of the twenties began during the world war. Moreover, in capitalist America the historian would be hard pressed to find an era in which government did not seek to cooperate with and promote the interests of American business—especially in its dealings abroad. What might be different about the 1920s was the "associational" activity—and philosophy—the theory and practice of government business cooperation for the general interest that sometimes blurred the lines between public and private sector operations. The use of Thomas Lamont, the Morgan partner, on a series of quasi-governmental missions beginning in 1920 is the most striking manifestation of the new process.
Although in the 1920s government seemed unusually responsive to business and the public uncommonly worshipful, there remains the fact that the business community did not speak with one voice. On a few issues like collecting debts owed by the Allies to the U.S. government and nonrecognition of the Bolshevik regime in Russia, there was near unanimity. On a host of other issues, suppliers often differed from producers, exporters from importers, and international bankers from most everyone else. At least in part as a result of these divisions, the peace movement probably had more influence over foreign policy issues than did the business community.
Perhaps the central tension not merely within the business community but also within the government, and unresolved in the minds of some individuals, derived from the desire to maximize American economic opportunities at a time of growing awareness of economic interdependence among the leading market economies. The earliest indications of the problem came in the shaping of war debts and tariff policy. During and immediately after the war, Allied governments borrowed more than $10 billion from the United States. At the peace conference the debtor nations had proposed cancellation of the debt, arguing that the money had been spent in the common cause and that they had contributed lives for which there could be no repayment. Wilson, alert to the certainty of congressional opposition, refused. Presumably for the same reason, he rejected Allied suggestions that their debts to the United States be linked to reparations due them from Germany. Lamont and others argued that refusal to cancel or scale down substantially would affect European reconstruction adversely and inevitably depress the American economy, but to no avail. Renewed British efforts in 1920, including an offer to waive repayment of money they had lent—in excess of what they owed the United States—as part of a general debt settlement were rejected by Wilson.
Hughes and Hoover understood the economic issues, the interdependence of European and American prosperity. Lamont did not leave that to chance. Politically, however, the issue was too difficult to handle. Congressmen heard their constituents clamoring for tax relief. They had no desire to undertake the burden of explaining the value of the tax increase that cancellation would require. The argument that the average American would benefit more from cancellation, which would presumably stimulate exports, and increase corporate profits and employment rates in the United States, required more faith in the system than congressmen dreamt of finding in their districts. Indeed, the dominant pressures exerted by businessmen on their representatives were in favor of increased tariff protection. Protection of industries and markets developed during the war took precedence over strictures about interdependence and cooperation. As a result, the first major economic action of the new administration was the Emergency Tariff Act of May 1921—immediate relief to business from the low tariff policies of Wilson's southern Democrats—and increased difficulties for Europeans who had to sell in American markets to get the dollars with which to repay their debts.
Clearly Congress restricted the freedom of action of the Harding administration, like the Wilson administration, in achieving a sensible resolution of the war debts question. On the other hand, there is nothing to suggest that, left to their own devices, Hoover and Hughes would have favored cancellation. The refunding arrangements for which they eventually won congressional acquiescence—and which ultimately resulted in a de facto cancellation of 50 percent of the debt—represented the limits of their own obeisance to the gods of interdependence. They, differing little from most organized business interests, wanted to see a reconstructed European market—without accepting a significant tax burden and without risking the enhancement of Britain's competitive position. They wanted a financially stable Europe, which they perceived as the key to a peaceful Europe, without jeopardizing their vision for a stronger domestic economy. Hoover was persuaded Europeans could repay much of their debt and, for all his understanding of interdependence and the need for cooperation, was still committed, ultimately, to a world economy in which the United States was dominant. In short, the war debt problem of the 1920s derived less from ignorance than from a desire to maximize America's competitive position while attempting to create a world economic order based on cooperation and an equitable distribution of benefits. The would—be architects, Hoover foremost among them, were unwilling to choose between goals foreign leaders would insist were irreconcilable.
Throughout the 1920s, American pressure on its former allies for debt payment and Allied, especially French, demands on Germany for reparations troubled the economic relations of the industrial world. The French were willing to use force to collect from Germany, and the Germans kept borrowing from American banks to meet their payments while revitalizing their economy. In 1925 and again in 1929, major new funding arrangements allowing Germany to avoid default were devised by American businessmen. Charles Dawes and Owen Young, architects of the Dawes (1924) and Young (1929) plans, were ostensibly private citizens, but both were appointed by the government of the United States. The government had much to do with the implementation of both plans, especially with stimulating American bankers to provide the necessary loans. The most obvious point is that the American government, in the course of the world war, had undertaken the role of international lender on an unprecedented scale, which role required it to become involved in the financial affairs of Europe to an unprecedented extent. Hughes, Hoover, and Andrew Mellon, the secretary of the treasury, were intensely concerned about the stability of the franc and the mark. However Inuch it tried to avoid Involvement in European affairs, the United States government could not. Some American leaders accepted the expanding involvement willingly, others grudgingly. But there was no turning back.
II
American trade statistics in 1921 were not impressive. The wartime economic boom collapsed in 1920 as the nation struggled ineptly with the problems of converting to a peacetime economy. Imports dropped off sharply, followed soon thereafter by a decline in exports. Nonetheless, the auspices were good. Europe had begun the task of reconstruction after a devastating war. In Asia and South America, major development projects were underway. Everywhere there was a strong demand for American machinery and industrial products. The obvious dilemma was how to provide would—be foreign customers with the dollars they needed to purchase American goods without allowing them to sell more of their own goods in the United States. The United States was enjoying a favorable balance of trade and there was little inclination to tamper with that pleasant statistic.
Lamont and other bankers had warned that insistence on raising tariffs to restrict imports and collection of war debts would leave Europe without the means to purchase American goods for reconstruction. If the international bankers had their way, war debts would have been canceled or greatly reduced, import restrictions would have been rolled back, and the government of the United States would have lent money to European governments for purposes of reconstruction. Lamont may well have been the most powerful private citizen in the country, but he could not sell his program in Washington. He was one war ahead of his time.
Despite tariff increases in 1921 and 1922, imports began to rise again in 1922, sending dollars—although not nearly enough to finance the potential export trade. The short age was covered by tourism and loans from the private sector Foreign travel by Americans increased greatly in the 1920s, with approximately 80 percent of the fares going to foreign carriers. At the peak in 1929, nearly 400,000 Americans traveled to Europe, Asia, and South America. In addition to supporting British, French, and other non-American ocean liners, American tourists spent billions of dollars abroad in the 1920s. Still, Europeans, Japanese, Chinese, and Latin Americans needed more dollars. As demand drove interest rates up, Lamont and his colleagues were increasingly willing to bridge the gap. Between 1919 and 1929, foreign loans floated in the United States totaled approximately $7.5 billion—more than the total provided by all other capital—lending countries combined. And so the American export trade grew.
In the early 1920s and as late as 1924-1925, agricultural sales to Europe were unusually high, reflecting the temporary needs of that war-ravaged continent. Thereafter, agricultural exports declined continually, especially wheat and pork. In general, the war had rescued American farmers from the deteriorating competitive position in world markets evident since the Populist era. On the other hand, raw cotton remained the leading American export item throughout the 1920s and well into the 1930s. The striking exception to the larger trend was the export of fruit, which continued to increase, doubling between 1923 and 1929.
As European farmers reclaimed lands and replaced livestock, the importance of Europe as a purchaser of American exports declined. From 1921 to 1925, Europe purchased 53 percent of what the United States sold abroad. By 1929, the European share of the American export trade had dropped to 45 percent. The decline can be attributed entirely to reduced agricultural purchases, since Europeans continued to buy approximately one-third of the finished manufactured goods exported from the United States.
It was, of course, in manufactured goods that American exports soared. In 1914, the infant automobile industry exported cars and parts valued at $34.6 million. In 1920 total sales were valued at over $303 million. A sharp drop in 1921 proved temporary, and sales soared again in 1925, reaching a total of $541.4 million by 1929. Machinery sales abroad increased from $168 million in 1914 to $607 million in 1929. The export of petroleum and petroleum products rose from $161 million to $561 million over the same period. Iron and steel sales increased over 200 percent. Even in rubber products, American exports were up over 600 percent, thanks to the manufacturers of rubber tires. As productivity increased, as the automobile industry led the nation to prosperity in the 1920s, exports, especially automobile-related exports, increased the American share of the world's imports. The United States had become the world's leading exporter, responsible for 15.6 percent of the world's total in 1929.
Europe, especially Great Britain, Germany, and France, continued to be the best market for American goods. Canada was second only to Britain as a customer. In the 1920s, for the first time, Japan rivaled France for fourth place on the list. Led by Japan, Asia began to increase in importance as a market, purchasing approximately 12 percent of American exports over the years 1926 to 1930, compared to 5.6 percent for 1910 to 1914. And everywhere the trader went, representatives of the Departments of State or Commerce—or both—did what they could to ease the way.
On occasion, the government of the United States took initiatives designed to overcome the apathy of businessmen in countries like China. For several decades, publicists had waxed eloquent about the potential of the China Market, but trade continued to be disappointing, averaging about 1 percent of American exports in the five prewar years of 1910-1914. The last effort of the Wilson administration, the recreation of the four power banking consortium designed to lend money to the Chinese government, had seemed promising. But Lamont, who had negotiated the agreement at the behest of the U.S. Department of State, disappointed his government in the years that followed by finding myriad excuses for denying loans to China. No more or less a patriot than the next businessman, he and his Morgan partners were more interested in the highly profitable, low-risk loans they could extend to Japan than they were in stimulating Chinese-American trade or the investments of American industrialists—in other people's profits. J. P. Morgan and Company, he might have said, was not, after all, an eleemosynary institution.
Frustrated by the inactivity of the consortium and the marginal improvement in American exports to China, Hoover promoted several China trade acts designed to facilitate trade and investment. These acts provided federal incorporation for participating companies and exempted them from most federal taxation. More than 70 out of approximately 500 American firms functioning in China took advantage of the law, but neither trade nor investments ever reached the levels of which publicists and officials dreamed. In the 1920s China lacked the stability and the Chinese people lacked the purchasing power necessary to attract substantial American investment or to buy very many Fords.
In a very different way, the U.S. Departments of Commerce and State were more successful in helping American businessmen. Import restrictions were the province of Congress; the executive branch could take little credit or blame. Exports were facilitated modestly by commercial attaches and diplomats and by legislation which allowed associational activities, free from antitrust prosecution, for companies in the export business. Perhaps most important were the efforts to assure American industry access to strategic materials like oil and rubber.
Immediately after the world war, there was a widespread perception of an oil shortage. The Wilson administration had fought hard to protect the nation's interest in oil supplies and the opportunities of American companies to exploit oil resources in the Middle East, East Asia, and Latin America. The Harding and Coolidge administrations shared these concerns. Certainly Hughes and Hoover were agreed that the United States had a strategic interest in remote oilfields and that an assured supply of oil was central to the vitality of the American economy. The oil companies, on the other hand, were less interested in supplying American needs than in maintaining and expanding their worldwide marketing outlets. Nonetheless, oil company executives and diplomats, with assistance from the Department of Commerce, worked together to gain concessions in Venezuela, Iraq, Bahrain, Kuwait, and the Dutch East Indies. Representatives of the American government appeared in nominally unofficial capacities at a series of international conferences touching on concession disputes; American diplomats argued with their European, Latin American, and Middle Eastern counterparts; and Hughes and Hoover attempted to impose guidelines on oil industry executives who entered into actual agreements. No one could fault the American government for the energy it expended, nor was there any doubt that the men in Washington were confident their activity was in the national interest, as opposed to the particularistic interests of the oil companies.
Rubber was another commodity that worried Herbert Hoover. In 1922 the British were troubled by falling prices that adversely affected their colonial holdings. They devised the Stevenson Plan, a system of price supports, to reduce production and restrict exports. The United States was the consumer most affected: 70 percent of the world's rubber was used in American industry, especially the automobile industry. For six years Hoover and the British sparred, much to the irritation of both sides. Hoover protested to the British, supported Firestone's effort to develop an independent source of supply in Liberia, persuaded bankers not to lend money to the rubber or any other cartel, and fought unsuccessfully for legislation to exempt companies buying from cartels from antitrust legislation, allowing them to form buyer combinations. The British did not yield to Hoover's pressure. They demanded tariff reductions Hoover could not deliver as the price for increasing rubber production and ending export restrictions. What Hoover could not accomplish, Dutch-controlled rubber plantations did achieve. The Dutch refused to participate in the Stevenson Plan and began to capture previously British markets. In 1928, the plan was dropped.
Commodity cartels were clearly a danger to the United States, which had become the world's principal consumer of primary materials. Americans were the largest users of every important metal and an extraordinary range of other raw materials. Here was another way countries like Britain, France, and Germany could obtain dollars with which to purchase American goods or put pressure on the United States for concessions on tariffs or war debt payments. These nations tried to control the sources of the raw materials, either on their home soils or in their empires, driving up prices and squeezing American consumers. Like the Wilsonian free traders before him, Hoover considered government supported commodity cartels an outrage and fought them with every means at his disposal.
After the world war, the United States became the world's leading exporter and ran Great Britain a close second in the race for leading importer. Of raw materials, the United States was the world's largest consumer and importer. Unquestionably Americans had an enormous impact on the economies of other countries and were in turn affected by the practices of other countries. The American economy was very much a part of the world economy and in the boom years of the 1920s, prosperity in the United States was dependent in part on assured access to raw materials and to markets for American products. It was therefore important to develop a foreign economic policy that would sustain a world economy in which the United States fared so well. Obstacles to markets or raw materials had to be eliminated, and dollars had to be available to those who would buy American goods.
The government of the United States was not successful in creating a coherent, sensible foreign economic policy. There were ideological obstacles that limited the role the government could play, as with the unwillingness to have the U.S. Treasury lend Europe money for reconstruction. There were political problems that precluded an optimum solution to the war debts problem or the creation of an ideal tariff. As always, special interests resisted a government purporting to act in the general interest, as when bankers subverted efforts at loan controls. And, of course, there were problems of ignorance and inexperience, of failing to comprehend the nation's new role as creditor. But Hoover certainly, Hughes, and Frank B. Kellogg, his successor at State, at least arguably, understood the need for Washington to play a larger role in world economic affairs, to provide direction at home and leadership abroad.
III
In the course of the 1920s, many billions of dollars were transferred from the United States to other parts of the world. Among the various methods were imports, remittances (usu ally cash sent to relatives in the old country by recent immigrants), tourism, and investments, both direct and portfolio. All these were ways of keeping the dollar in motion, keeping the world economy operating by giving foreigners the means to purchase the produce of American factories and farms. The government played an important role in two of these activities, imports and investments. Tariff laws restricted imports, providing the United States with a handsome balance of trade surplus—and the rest of the world with deficits. Tariff reduction was anathema to Republican stalwarts and thus not readily available to aspiring economic planners. Portfolio investments, specifically in the form of loans, became Hoover's principal target, as he tried to use the visible hand of the Department of Commerce to adjust the mechanisms of a market economy.
Capital flowed out of the United States from 1919 to 1929 in quantities without precedent in the world. Approximately $12 billion dollars went abroad, mostly in the form of loans —and most of that long-term loans to debtor nations. Demand for American capital was intense throughout the decade despite high interest rates. Europeans needed dollars to purchase American goods needed for reconstruction, and they borrowed regardless of cost. The rest of the world, which traditionally turned to European bankers, had no alternative in the 1920s but to queue up in Wall Street.
Despite sometimes chaotic, often unstable conditions in some of the borrowing countries, investment bankers were willing to float loans, and Americans were willing to subscribe. Lip service was paid to the patriotic duty to lend as outlined by government, industrial, and banking sources eager to sustain export markets. What really attracted bankers and investors was the chance for unusual profit provided by high interest rates. Investors knew there was some risk involved, but most borrowers had good repayment records and there was very likely an expectation that the power of the United States government would chasten any potential defaulter. For the bankers, the commissions came with the sales of the bond issues, and the least scrupulous worried little about how wasteful the loans might be or whether they would be repaid. They were still playing with other people's money.
The system that developed was inherently unstable. The whole international economic system of the 1920s came to depend on the outflow of long-term loans from the United States to maintain a balance between the supply of and the demand for dollars. A major default could change American investment patterns and bring about the collapse of the world economy. A form of loan control designed to protect the investor and permitting only such loans as promised to be most productive might have helped avert disaster. Of course, a more conservative loan policy would have meant fewer dollars available to purchase American goods—unless the tariff was revised to allow more imports. Joan Hoff Wilson has argued that "only strong loan control in conjunction with lower tariffs, increased imports on the part of the United States, and cancellation of the outstanding intergovernmental debts would have changed the world financial situation before 1929." 2 While not claiming such policies would have averted the Depression, Wilson does suggest that it would have been less severe.
Herbert Hoover came close to understanding these questions and worked stubbornly, but with limited success, to gain control over foreign loans. He does not seem to have recognized the need for integrating economic, political, and military policy. Nonetheless, he did have a vision of creating a more productive and peaceful world through the sensible use of American capital. Loans should never be allowed for the purpose of building a nation's military establishment, either directly or by making it possible for other funds to be diverted for military use. His principal concern, however, seemed to be the effectiveness of a given loan. Would it contribute to the development of a country, to the development or reconstruction of its industrial infrastructure? Would it contribute to social stability, a condition he deemed essential to progress? Would it improve living standards, or consumer consumption? Would the money be used to strengthen the borrowing nation's productive capacity? If the answer to these questions was positive, Hoover also wanted assurance that the loan was sound, that investors were likely to be repaid and were informed about the risks. Finally, he wanted the loans to have clauses restricting the ways in which the money could be spent. In particular, Hoover wanted "buy American" clauses that would require recipients to use American supervisory personnel and purchase materials in the United States.
Opposition to Hoover's approach was pervasive. Bankers generally welcomed government involvement in international loans only when the government was intervening to collect on bad debts; they were not interested in being told in advance which loans were likely to end badly. Even the most enlightened international bankers, men like Lamont and Benjamin Strong, governor of the New York Federal Reserve were opposed to federal controls, especially restrictive clauses. Andrew Mellon, secretary of the treasury, was willing to use loan controls as a club with which to collect debts, but was not otherwise interested in meddling with the bankers. Hughes and Kellogg were interested in loan control as a political tool, provided the Department of State exercised the control. Ultimately, Hughes's position prevailed.
The idea of guidelines for foreign loans had come up mg the Wilson administration. The Harding administration developed a set during 1921 and announced them in March 1922. Hughes was less interested in how loans were to be used abroad than was Hoover—other than being determined that they would not be used in a manner detrimental to American interests as he perceived them. In particular he was interested in using loan control as a way of reinforcing nonrecognition in bringing Mexico, the Soviet Union, and the banana republics to heel. Against the opposition of the bankers, the government announced that all foreign loans open to public subscription required prior submission to the Department of State, which would indicate whether the loan was objectionable. No law required the bankers to obey the secretary, but failure to comply and receive the State Department's primatur would hamper efforts to float a loan. On the other hand, State Department approval, despite Hughes's insistence to the contrary, implied the soundness of the loan and a government obligation to assist in the event of default. Hughes was aware of the latter complication, and very uneasy about being used by the bankers. He suspected political approval of loans was being deliberately misused by bankers to help sell bond issues to the public.
Ultimately, the role of the government in loan supervision proved to be surprisingly extensive, although the results were at best mixed. In the Caribbean, Big Brother had unusual powers. America's protectorates in Cuba, Haiti, and the Dominican Republic were required by law to obtain Washington's approval for new borrowing. The Department of State exercised a tight rein on these nations, but failed to prevent extraordinarily wasteful loans to Cuba, providing substantial wealth for the usual combination of investment bankers, corrupt officials, and landowners. It was difficult, and probably impossible, to ensure honest and practical use of the money once lent. Where Americans did have some control over local spending, they were generally too much concerned with the interests of the bankers. Efforts to preempt corrupt practices by blocking a loan to Panama resulted in Panamanian authorities turning to Canadian bankers. The Department of State was more successful with schemes in Guatemala and Honduras, apparently blocking efforts by American bankers that were manifestly exploitative.
Other examples of intensive American government involvement in loans and the world economy abound, most of them of greater political consequence. The infant Republic of Austria, a state created after the war without adequate regard for its economic viability, desperately needed funds for reconstruction. At the initiative of the British government, Lamont of J. P. Morgan and Company and Morgan's British partners, Morgan, Grenfell, working with Strong of the New York Federal Reserve and the Bank of England, worked out the necessary financing. American government officials watched over the negotiation and, eager for stability in Central Europe, approved the loan.
Efforts by Lamont and other American bankers to finance Japanese imperialism in Manchuria met occasional opposition from the Department of State, but the bankers had little trouble redesigning the loans to make them palatable. Japanese officials and financiers had grand schemes for developing East Asia using Japanese brains and American money. The Department of State preferred not to permit American capital to be used to the detriment of American entrepreneurs competing with the Japanese. The bankers, however, were interested in the profits assured by dealing with Japanese government-created entities like the Oriental Development Company and the South Manchuria Railroad. Their patriotism and will to assist their government did not extend to the point of sacrificing arrangements in their own interest to the interest of their countrymen.
Having placed itself in the position of having to pass on the desirability of foreign loans, the American government found itself in the awkward position of having to take a stand that would offend the Japanese government, whose goodwill it coveted rather more than that of Haiti or Guatemala. Always the ingenuity of the bankers prevailed. In 1922 the Department of State objected to a National City Company loan to the Oriental Development Company, fearing its use to further Japanese dominance of Manchuria, Mongolia, and North China. After the failure of other ploys, the Japanese government offered assurances that the money would be used exclusively in Korea, and the Department withdrew its objection. Efforts by the South Manchuria Railway to borrow in the United States were consistently thwarted, but the bankers simply lent money to other Japanese entities, where it was "laundered." Unquestionably in the 1920s American capital was used to extend Japanese control over Manchuria and to develop the Japanese overseas empire. The American government attempted on several occasions to prevent this, but failed.
In Europe American loans played their most important role, staving off what in retrospect appears to have been inevitable disaster. The central problem was that of German reparations, of which France was to collect the lion's share. The inability of the Weimar Republic to maintain payments led to a French and Belgian armed occupation of the Ruhr that lasted nearly two years, beginning in January 1923. In December 1922 Hughes attempted to head off armed intervention, suggesting the creation of an international commission of experts on which American financiers would be willing to serve. The British were interested, but the French, playing dog in the manger for most of the 1920s, had to learn the hard way. Passive resistance by the Germans in the Ruhr, the near collapse of German currency, and the sharp fall in the value of the franc led to greater French understanding. Lamont helped by refusing to float a currency stabilization loan for France until French authorities were prepared to behave more sensibly. Had he wanted to arrange the loan, it was clear that the Department of State would object. The bankers and the government, cooperating with their British counterparts as well, won their point. In late 1923, a commission was established chaired by Charles B. Dawes, a Chicago banker. In April the commission issued its report, known thereafter as the Dawes Plan. Its key provisions were a reasonable schedule of reparations payments by Germany and a $200 million loan to Germany to stabilize its currency and allow it to make the required payments.
With help from Hughes, who arranged to be in London at the time of a fifteen power European conference on the Dawes Plan, the plan was adopted in the summer of 1924. It took another year, until August 1925, to get French troops out of the Ruhr. Of the $200 million loan, $110 million or 55 percent was floated in the United States. And the American government stayed close to the issues, using its theoretical control of foreign loans to ensure the success of the Locarno Conference of October 1925, in which mutual guarantees of the Franco-German border were given and a sense of security, the "spirit of Locarno," allowed to rise however briefly over the continent.
The capital involved throughout this operation was private. American citizens participated in the arrangements without official government appointment. Nonetheless, the interest and the hand of the American government was apparent throughout. Indeed, Morgan and Lamont had reservations about the loan which Hughes volunteered to delay if necessary to allay their concerns.
Loans to the Weimar Republic flowed easily and steadily from the United States from 1924 to 1929. The public alone bought nearly $1.5 billion in German stocks and bonds, and American banks offered large advances to German banks. The German central government, state governments, and city governments floated loans in the United States. Major industries—iron and steel, electrical and chemical plants, railroads—all came to the United States to borrow. With American capital, the Germans rebuilt and expanded their industrial infrastructure. Some Americans were uneasy about the resurrection of German power, troubled by the strength of unrepentant German nationalists; but they comforted themselves with the knowledge that most Germans were peaceloving—and luxuriated in or dreamed of the profits the loans had and would continue to provide.
By late 1925, the Department of State noted that first claim to many of the assets Germany was offering as collateral for loans belonged to those nations owed reparations. As new loan issues were presented for clearance, the Department began to indicate its reservations to the bankers. The bankers reported that they saw no cause for concern: The Germans were paying their debts. Hoover was troubled by what he perceived as the danger of a major German default disrupting the American economy and pressed the Department of State. Kellogg, Hughes's successor, was unwilling to question new loans publicly, but in 1927 warned the German government that he would be forced to act if German borrowers did not show more restraint. The German government was at least minimally responsive and the capital flow diminished, although it did not stop before 1930.
Despite growing apprehension in Washington, the peaceful reintegration of Germany into the world community and the world economy seemed to have been accomplished by 1928. A rehabilitated Germany had joined the League of Nations and signed the Kellogg-Briand pact renouncing the use of force. The time seemed appropriate for an end to the postwar occupation and a final disposition of the reparations question. The American government concurred. It was eager to participate as a means of protecting its enormous stake in Germany, but unwilling to attend officially and risk having to confront the war debt issues. Once again a prominent businessman was selected as the American government's unofficial representative. Owen D. Young, chairman of the board at General Electric, a key figure in the commission that produced the Dawes Plan, accepted appointment by President Coolidge to head the new committee in January 1929. Young, were he acting on his own, would have included discussion of the war debts, but both Coolidge and president-elect Hoover instructed him to the contrary. Hoover was markedly displeased with the report of the Young Committee, but with help from Lamont, Young was able to persuade Hoover not to oppose the plan publicly. Again with Lamont's help, Young sold the plan to the essential European nations, all of whom had finally ratified it by May 1930, in the last hours before the collapse of the world economy, already signaled by the crash of the stock market in New York months before.
Looking back in early 1930, the loan supervision policy and the cooperative, "corporatist" relationship between Washington and Wall Street seemed to have worked reasonably well. Certainly the major international bankers had little to complain about. Unquestionably, they had accumulated great wealth. Those who, like Lamont, had worked closely with their government, were persuaded that they had transcended the interests of their firms and served not only the nation, but the well-being of the world. Lamont had worked with foreign governments, bankers, and industrialists, especially the British, in shaping public policy, in creating the foundation of a strong, reasonable, and enduring world economy. American capital was fueling the expansion of the economies of all the great and some not so great nations and it was all being done without resort to force, without tears.
In Washington there was rather less satisfaction. Hoover and Hughes and many of their subordinates were aware that the bankers were most cooperative when fortunes were to be made supporting the government's perception of the national interest. When pursuit of the national interest threatened profits, even Lamont proved to be strikingly evasive, even dishonest. Obviously Morgan and Company's preference for lending money to Japan rather than to China irked government specialists in American-East Asian relations, few of whom could match his access to the president and cabinet-level officers. But most important was the steady development throughout the decade of a government role in international loans—an awareness of the importance of these loans and of the inadequacy of market forces to serve American interests. The Departments of State, Commerce, and the Treasury had to collect information about the economies of dozens of nations around the world and make scores of decisions about the feasibility of loans. Officially or otherwise, the government of the United States had to participate in every major political or economic conference in the world to protect its interests. And as Hoover, in 1928, looked out over a world at peace and promised a chicken in every pot, a car in every garage, neither he nor his colleagues could have been too dissatisfied with the results of their efforts.
IV
There was, of course, another major outflow of capital that distressed Hoover intensely: direct investments leading to the development of American owned factories abroad. Hoover feared the United States was creating a monster that would take markets away from American industrialists and jobs away from American workers. Corporate boards, however, were less interested in Hoover's theories than in profit. More than $4 billion in direct investments were made in the 1920s. Direct investment in Europe doubled, and by 1929 there were more than 1,300 wholly owned or American controlled organizations there.
Many of Hoover's fears were realized. The largest investments were made in the most highly developed countries, where American companies became multinational corporations in the effort to expand their markets. Europeans wanted American products because of advanced American technology, but their governments erected tariff barriers to hold back the flood of foreign goods. In general they did not stop the flow of capital and technology, as American businessmen established branches abroad or wholly owned subsidiaries, or entered into joint ventures with local entrepreneurs. Much the same sort of development occurred in Canada and, to a lesser extent, in Argentina and Australia.
Companies selling processed foodstuffs, electrical equipment, automobiles and tires, and office equipment were most prominent abroad. Cars were produced in Canada and Europe by the Big Three for local sales. They eliminated the native industry in Canada. General Motors, through its control of Opel, dominated the German market. In England Ford built the largest automobile factory outside the United States. Ford also built assembly plants in Japan, Latin America, and Turkey. IBM and Remington-Rand built factories all over Europe. General Electric and IT&T were prominent in Europe, especially in England and Germany. In Canada, General Electric controlled the largest electric company and American subsidiaries produced more than two-thirds of Canada's electrical equipment. But outside the textile industry, there seemed enough jobs for anyone who wanted work in the United States. European governments rather than Washington were troubled by the invasion of American multinationals.
American oil companies invested huge sums in marketing operations, perhaps as much as half a billion dollars in Europe, and at least another quarter of a billion in Canada, Latin America, Asia, and Africa. In France, for example, the law penalized the importation of refined oil, so Jersey Standard built refineries in that country and sent in crude oil extracted elsewhere. In addition, American-based multinationals gained control of important public utilities all over the world. IT&T, created in 1920, was the dominant corporation in communications. By 1929 it had larger investments in communications than any competitor, foreign or American, and had more employees overseas than any other American firm. The American and Foreign Power Company, organized in 1923, controlled the power and light facilities of Shanghai, China's largest city. Although investment in railroad construction overseas declined, it soared in air transportation, with Pan American Airways activities in Latin America in the lead. American drugstores, five and dime, and grocery chains spread over Canada.
Most of this activity occurred with minimal involvement by the government of the United States. For the most part, major corporations that had little need for official assistance were involved. When government assistance was requested, it was often routine, and rarely of importance. The striking exception to this rule was the support Pan Am received from the U.S. Department of State. Viewing Latin America as a preserve to be controlled by the United States, the Department was eager to break European monopolies where they existed and consistently encouraged investment. Control of the air links was considered especially important if the United States was to gain regional superiority, and the Department wanted Pan Am rather than European airlines to dominate. The strategic value of controlling the airways received at least nominal consideration.
Over on the other side of the world, the Department of State was eager, as was Hoover at Commerce, to have American investors finance China's industrial infrastructure. The problem there, however, was not so much foreign competition as the indifference of the major international bankers, including Lamont. Corporations interested in communications, like Federal Telegraph, found Lamont and the consortium an obstacle rather than a help in raising funds for operations in China. The bankers were perfectly willing to allow Japan to dominate what they saw as high-risk investments in China, while they and most major corporations sought to put their money where they had reasonable assurance of friendly, stable governments. Efforts by the U.S. government to push investment in China were unsuccessful. In general, the multinational corporations had their interests, and the government of the United States had its interest. Although the interests overlapped on occasion, leading to professions of patriotic zeal on the part of businessmen and of concern for profits on the part of bureaucrats, they were never identical.
When it came to obtaining supplies, especially materials of apparent strategic importance, business and the government worked more closely together. As noted previously, Hoover was always ready to fight against supplier monopolies or cartels. The Department of State was always ready to demand access to oil or other raw materials essential to American industry. The traditional American demand for equal opportunity received at least ritual support from American diplomats everywhere.
The pattern of investment overseas for purposes of access to primary materials differed from that designed to develop markets. In particular, capital went to less developed countries rather than to Europe. It was heavily concentrated, however, in the Western Hemisphere, in Canada and Latin America. On the other hand, no continent was free of a direct investment by multinational corporations based in the United States. Even the colonies and dominions of the great European powers were penetrated. Moreover, whether involved in agriculture like United Fruit or extractive industries like mining or oil, the corporation that invested directly in less developed countries generally had a much greater impact on the local society than did the opening of an automobile factory in Europe or Japan. The great novelists Joseph Conrad in Nostromo and Gabriel Garcia Marquez in One Hundred Years of Solitude have depicted the rise of company towns in physically remote areas of Latin America, their contributions, and the problems they caused.
Mining operations attracted more capital than agriculture in the 1920s. The greatest increases in American investment were in Latin America, as the Guggenheims went after nitrates, copper, lead, zinc, and tin in Chile, Peru, and Bolivia, replacing British capital with American. The Guggenheims also challenged the British in Malaya and Northern Rhodesia (now Zambia). In Canada, the largest mining company, the International Nickel Corporation, producer of 90 percent of the world's nickel, was American-controlled. American capitalists even attempted to develop the mineral resources of Soviet Russia as Armand Hammer negotiated for asbestos concessions and Averell Harriman for manganese—without support from the United States government, which did not recognize the Soviet regime.
Although mining interests persisted in their efforts to extract profits from Mexico in the face of revolution, nationalist hostility, and nationalization of subsoil rights, oil men looked elsewhere, especially to Venezuela and the Middle East. Standard Oil of New Jersey gambled on the failure of the Bolsheviks, invested almost $9 million in Russia immediately after the war—and lost it all. In the Middle East, the Department of State was heavily involved in efforts to assist American companies competing with Europeans for concessions. Requiring more oil for their worldwide marketing outlets, the Americans persuaded the Wilson and Harding administrations of the danger of an oil shortage, of the importance to the national interest of Middle Eastern oil. Hughes offered diplomatic support in exchange for assurances that all American companies would have access to the new fields. The oil men agreed, but once the major companies won a share from the Europeans, they were quick to forget, quick to shut out other American companies. The most flagrant example of this tactic came in the Mesopotamian oil fields, where the American group of oil companies never had any intention of honoring its commitment to Hughes.
In agriculture, two companies stand out. Most important was United Fruit, which developed an enormous stake in Central America during the 1920s. Of all American corporations operating in foreign lands, United Fruit probably had the worst reputation for meddling in the internal affairs of host countries and disrupting the local society. Stated most simply, the company was far wealthier than the countries in which it functioned, and its operations sometimes overshadowed all other activity. In Costa Rica, United Fruit had a larger budget than the national government. In Honduras, revolutionaries obtained their funds from the company, which with another American fruit grower produced the bulk of the government's revenue. It bought huge tracts of land. Dependent as it was upon local conditions, dependent as local officials were on the company's operations, there was enormous potential for corruption. In general, United Fruit needed no help from the American government: It could buy whatever it needed locally—at least in the 1920s. The other agricultural operation of note was Firestone's development of its own source of rubber in Liberia in response to British efforts to restrict supplies in 1922. Firestone was eager for government support, received encouragement from Hoover, but never was able to persuade the Department of State to provide the desired diplomatic offensive.
In sum, the multinational corporations that mushroomed in the 1920s were an important part of the greatly expanded role of the United States in the world economy. Although their assets were multinational, most of the capital came from the United States, and the profits were distributed largely in the United States. However reluctant American officials were to meddle in the affairs of these corporations, they could not hide from the implications of corporate activities. However much the corporations resented government interference, good relations with Washington were worth cultivating in the event of complications with host countries. Washington generally preferred to leave the businessmen alone and the businessmen generally preferred to work alone, but there were shared interests in American prosperity, in American self-sufficiency in strategic materials, in enlarging the role of the United States in various parts of the world. A diplomat interested in China or the Middle East knew that his work would be perceived as more important and receive greater support from the public, Congress, and his superiors if an economic stake was developed in his region.
The relationship between the American government and the American-based multinational corporation seemed innocent enough in the 1920s. For the most part, Washington left dirty deeds to the private sector, and provided unexceptional, routine assistance. Only in the case of Pan Am in Latin America is there clear evidence that the government role was crucial.
Clearly, the impact of American trade, investments, and tourism on the world economy in the 1920s was enormous. No other nation even approximated the United States in economic importance. The British, who kept first place among importing nations, lost their preeminent investment role in Latin America and Canada, and were being challenged throughout Europe and the rest of the world, including their colonies, by American capitalists. The Americanization of the world was under way.
American products were appearing everywhere. Automobiles, electrical equipment, communications equipment, office equipment, and farm machinery were in great demand. Less obvious in the short run, although foreseen by Hoover, was the transfer of American technology abroad. Innovations that contributed to the rapid development and primacy of American industry were demonstrated in American-built factories in Europe, Japan, and Canada: mass production, standardization of parts, scientific management. The direction of development in preindustrial societies was influenced by American investments and travelers. In addition to their depredations, multinational corporations contributed significantly to public health programs, transportation, and housing as a means of providing a healthy and reliable work force. The Guggenheims had a good reputation for building schools in remote areas. Mira Wilkins has argued: The "Central American bananas, Chilean copper, and Venezuelan oil became valuable resources only because foreign companies were ready and able to take large risks, to supply sizable amounts of money, and to offer technical knowledge and skills" 3 —and those firms were largely American. No one would suggest that the corporations involved went abroad for charitable purposes. The point is that in their pursuit of profit they affected every society they touched, and some of these in very important and sometimes mutually beneficial ways.
The flood of American tourists affected the structure of industrial societies as well as less developed countries, stimulating the shipping industry, the hotel industry, and all the trades and services that exist to separate the affluent traveler from his or her money. Moreover, the income from the tourist traffic eventually moved through the local economy, providing a stimulus to the larger economy. At least $500 million and probably closer to $1 billion passed from American into foreign hands in the 1920s, as the citizens of the world's leading power flocked abroad to enjoy their new status.
In addition, the direction in which American money flowed sometimes determined which nations would progress and which would decay, which peoples would prosper and which suffer. Unconsciously, Americans were engaged in a form of triage. Investment capital was needed all over the world, and not enough was available. Those who could persuade the bankers to lend or the multinationals to build might gain wealth, power, even a chance to live. Those who failed faced stagnation, even death. In East Asia, for example, the bankers, working on the soundest of investment principle, chose to lend to Japan and not to China. As a result, Japan prospered, expanded its empire, tightened its control over parts of China. In China, the economy continued to decline, millions were underemployed, millions of others died from starvation or more directly from floods. American bankers did not create Japanese imperialism, but they found it profitable to strengthen it. American bankers were not responsible for civil wars, inadequate flood control, or food supplies in China, but they might have been able to ameliorate those conditions and did not. When the United States became the primary source of capital in the world, decisions as to how that capital would be used affected the lives of hundreds of millions of people all over the world—of whom most Americans were never aware.
The American government played a very modest role in all these activities. Some Americans thought about a larger government role, of formulating a coherent, integrated foreign economic policy. Hoover, Lamont, and Young, though not in agreement among themselves, offered a range of ideas for Washington's intervention in the world's economic affairs. A few, like Hughes, had vague ideas about coordinating economic and political foreign policy. Little came of these thoughts in the 1920s because of conflicting interests, domestic political obstacles, and ideological rigidity. When a man like Lamont offered a program in the national interest," it was always clear that the program was in the interest of his firm, and not always clear that it was indeed in the national interest. Other businessmen contested his views and few congressmen, farmers, or workers would have rallied to his support. Interest groups in the United States rarely unite on a conception of the national interest. Politically, congressmen were uninterested in tampering with tariffs that protected their constituents or with plans for canceling war debts that were likely to raise a furor among taxpayers. Ideologically, few American leaders were ready for the government of the United States to provide peacetime loans for reconstruction or development. As for government regulation of the flow of capital abroad, even the enlightened Lamont became apoplectic at the thought.
In the absence of a consensus among American leaders in and out of government on a specific program for foreign economic policy, the government muddled along in the usual way, promoting and assisting business as best it could. With a professional Foreign Service and high-powered Department of Commerce, that assistance was better than ever before. When major problems emerged abroad for which Congress or the American public was presumed unready to accept responsibility, the American government participated quietly, often unofficially, occasionally using a private citizen to disguise its role from its own people.
During the 1920s the government of the United States did not control the flow of American tourists abroad or the amount of money they spent. It did not control the investments of the scores of multinational corporations that spread their operations all over the world. It did seek some control over foreign loans floated in the United States, but this activity was of marginal importance. At no time in the 1920s did the government exercise effective control over American economic activity abroad. Economic policy was rarely an effective instrument of foreign policy. That is not the same, however, as saying that overseas economic activity had no impact on foreign relations. Regardless of the level of governmental involvement, American overseas economic activity had enormous influence on the world economy and the affairs of individual nations. In many parts of the world, American trade, investments, and foreign economic policy constituted the most important relationship with and for the United States.
Endnotes
Note 1: Bruce Barton, The Man Nobody Knows (1924) Back.
Note 2: Wilson, American Business and Foreign Policy, 122, italics added. Back.
Note 3: Wilkins, Maturing of Multinational Enterprise, 127. Back.
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