Financial Imperialism

By Frederick C. Howe

[The Atlantic Monthly, October 1917]

Dollar diplomacy is the American equivalent of financial imperialism. It is a phrase which came first into use in this country during the administration of President Taft, in connection with the activity of the State Department in the promotion of loans, contracts, privileges, and concessions in Central and South America, and especially in relation to the Chinese six-power loan negotiated by the bankers of Europe in 1912. The propriety of the enlistment of the State Department and our diplomatic service in the promotion of overseas interests, and especially the policy that our government should pursue in the protection of investors and concession-seekers in weaker countries, was much discussed prior to the entry of the United States into the war, owing to the rapid shifting of the centre of the world's finance from London to New York.

Dollar diplomacy, or financial imperialism, should not be confused with international trade or international banking. International trade is a function of the commercial classes. It differs from domestic trade only in that it is carried on across national boundaries. And international banking is but an agency of international trade. Trade and commerce, the exchange of goods and merchandise, are to be encouraged. They promote better relations. When free from favoritism, the 'closed door' and other privileges, they advance the cause of peace.

Dollar diplomacy is an activity of finance rather than of trade. It is carried carried on in all the creditor countries by a few great banking houses having close connections with the government. It consists of a variety of related activities, among which are (1) the lending of money, often to weak or dependent countries or to rulers of doubtful legitimacy; (2) the building of railroads, canals, and public utility enterprises; and (3) the development of mines, plantations, and other resources. Closely allied with the lending of money and the securing of concessions is the sale of munitions, which in all the European powers is carried on with the cooperation of the great banking and exploiting houses which are identified with the making of munitions.

Stated briefly, dollar diplomacy is a merger of finance, economic development or exploitation, and the foreign office. In all the greater powers of Europe it has been an agency for the promotion of imperialistic ambitions and conquest. Almost all the territory annexed by Great Britain, France, and Germany in the last fifty years has been taken over in connection with the activities of the exploiting classes. For it is the financier rather than the trader who demands the flag for protection.

Financial imperialism had its origin in surplus wealth seeking investment. As the rates of interest fell in England, France, Germany, Holland, and Belgium, accumulated capital sought investment in countries needing development, where higher returns were to be secured. It flowed first into the United States, Canada, Australia, and India. Here it was peaceful and the returns were reasonable. Later, surplus wealth began to venture into the undeveloped places of the earth; into Turkey, the Balkans, North and South Africa, Persia, South and Central America, and China; where local banking was generally under the control of the great financial houses of Europe.

For many years England, France, and Holland were the only lending and developing countries, and they for the most part kept in separate spheres of influence. England and France were primarily interested in lending money to other governments, building railroads, opening mines and plantations. English capital has financed her colonies and dependencies. Vast sums have been placed in South Africa in connection with gold and diamond mining; in Egypt, India, and Mexico. The total over-seas investments of Great Britain amounted to $20,000,000,000 in 1913, a sum equal to the foreign investments of France, Germany, the United States, Holland, and Belgium combined.

France, like Great Britain, is primarily a money-lending country, and the great banks at Paris are largely devoted to foreign investments. Her surplus wealth has gone to Russia, the Balkans, Turkey, Tunis, Morocco, and Mexico. French imperialism, unlike that of Great Britain, is participated in by all classes; for the loans of France, amounting to about $9,000,000,000, are made up from the savings of millions of peasants and the middle classes, who purchase foreign securities in small denominations of $30 and $50 through the great investing banks of the capital.

German imperialism is of a somewhat different kind. Germany wants raw materials, especially iron ore, copper, oil, and lands for the raising of wheat and cotton. And her agents have been searching out concessions to supply her with these necessities in Morocco, Turkey, Asia Minor, and China. She wants to sell munitions, iron and steel products, and the output of her industries. She has penetrated into many of the countries of South America, where her financiers own or control the public utility corporations in many of the large cities. She controlled or was ascendant in the banking operations of Bulgaria, Roumania, and Turkey, and was also very influential in Italy and Greece. The sale of munitions is intimately connected with the activities of German overseas finance, while the Foreign Office is quite frankly identified with all these interests. The over-seas investments of Germany in 1913 amounted to about $6,000,000,000.

Financial imperialism is thus only incidentally identified with trade and commerce, although it is frequently confused with it.

The modern movement toward financial imperialism had its beginning in Egypt, into which country Great Britain and France poured immense sums of money. The penetration into Egypt began with the purchase of the control of the Suez Canal by Disraeli in 1875. During the next few years over $400,000,000 was loaned by the investors of Europe, mostly English and French, to Khedive Ismail, a spendthrift prince who contracted colossal debts for private and public enterprises. Foreign contractors overcharged him from eighty to four hundred per cent for construction work, and his creditors often got as much as twenty-five per cent on their loans. Out of a single loan of $160,000,000 in 1873 only $100,000,000 ever reached the exchequer. And this was but typical. Interest rates were usurious, as were the discounts and commissions loans was wasted. To meet the charges against the indebtedness the Egyptians were taxed to the limit. Their crops were seized. Starvation was not uncommon. There was internal protest. Representatives of the foreign press clamored for protection. The lenders insisted that the loan was insecure. English and French officials intervened in local administration, and in 1882 an English fleet was dispatched to Alexandria and the English occupation began.

This was the beginning of financial imperialism on a large scale. The scramble for the division of the earth among the great creditor nations followed. It was a scramble, not for territory to colonize, not for trade as such. It was a struggle for spheres of influence and opportunities for exploitation. Growing out of the English occupation of Egypt controversies were started which have kept Europe in a state of tension ever since. Here began the estrangement of Turkey from Great Britain, which country had long been dominant in Turkey. It led ultimately to the ascendancy of Germany over the Sublime Porte. There was long-continued friction between England and France over Egypt, culminating in the Fashoda incident. The struggle for the control of the Mediterranean began at this time, as did the absorption of territory in Africa. France and England finally reached an understanding by which French influence became predominant farther west, in Tunis, and as a result of the activities of the money-lenders Tunis, lost her independence. French, English, and German interests later turned their attention to Morocco as a rich field for exploitation.

The Morocco incident, which nearly precipitated war in 1911, was primarily traceable to the conflict of bankers and concession-seekers in that country. The Sultan, who was a weak and spendthrift prince, was induced to borrow colossal sums of money on which he paid usurious interest. In seven years the indebtedness of the country was increased from $4,000,000 to $32,500,000. On this loan extortionate commissions were charged, while the bonds were taken at a very low rate. The customs revenues were set aside to meet the interest demands, and the internal taxes imposed upon the natives to meet the burdens of the indebtedness led to disaffection. In addition to the activities of the bankers, German and French concessionaires secured rights for the iron ore deposits in the Sus Valley, which were claimed by the Krupps and Mannesmanns of Germany. These grants were of great value, by virtue of the fact that Germany was desirous of increasing her supply of iron ore. Other concessions for docks, railroads, banks, and other privileges were being sought by the several nations, and in 1911 England, France, and Germany were on the verge of war over the diplomatic controversies which were traceable to the attempts of these governments to protect their subjects, their privileges, and their concessions in Morocco.

The experience of Egypt, Tunis, and Morocco is the experience of Persia, Turkey, Asia Minor, South Africa, Central America, Mexico, and China. In fifty years almost the whole undeveloped world has fallen under the dominion of the greater powers.

In connection with foreign loans and concessions a new doctrine, that of 'spheres of influence' came to be recognized. This is the second step toward ultimate conquest, the first being peaceful penetration. Spheres of influence are not set aside for colonization. They are not primarily for trade and commerce. Spheres of influence are for two objects: (1) the exclusion of the concession-seekers and money-lenders of other countries; and (2) the reduction of the debtor country to more complete dependence on the demands of the power claiming such territory as its exclusive 'sphere.' This makes exploitation easier. It permits the lending country to act with a free hand. It also frees it from complications with other powers.

The final step in financial imperialism is conquest, sometimes peaceful and by treaty, more often by force. Very frequently the financiers have compelled the borrowing country to spend a great part of their borrowings in munitions which were purchased from companies controlled by the financiers who negotiated the loan. How completely the foreign activities of the European powers had been absorbed in the promotion of high finance and exploitation is indicated by the expansion of England, France, and Germany during the generation which coincided with the outpouring of capital from these countries. During these years over 100,000,000 people were made subject to these three powers, and 10,000,000 square miles of territory were added to their possessions. The only thing that protected Central and South America and Mexico was the Monroe Doctrine, which came in conflict with the accepted doctrine of Europe, that the flag follows the investor.

The lending of money was the primary cause of the entrance of England and France into North Africa. The struggle for concessions explains the penetration of these countries and Germany into Persia, Turkey, South Africa, and Mexico. The Russo-Japanese War is now asserted to have been directly traceable to the refusal of the Czar and his ministers to abandon very profitable timber concessions in Manchuria in which the royal family were interested; while it is quite generally admitted that the South African War was traceable to the activities of the gold- and diamond-mine owners seeking special privileges in the Transvaal. Persia was divided and placed under the joint suzerainty of Russia and England, partly as a political expedient to control the route to the East; and partly as a result of the struggle between Russian, German, and English interests to control the transportation systems and resources of that country.

The home governments of the European powers were all involved in financial imperialism because of the doctrine, first enunciated by the British Foreign Office, under Lord Palmerston, about the middle of the last century, to the effect that the flag of the creditor nation follows the investor. The issue arose over the claim of an alleged British subject against Greece, which was disputed by the government of the latter country. The claim was referred to the British Foreign Officer and a British battleship was sent to enforce the claim. Out of this action and the principle enunciated by Lord Palmerston the doctrine of extra-territoriality became identified with international law. It is a principle that is not applied as between the greater nations. It is applied only by a strong against a weak nation, and it is usually called into action on some apparently reasonable pretext, such as the protection of foreign residents in the country.

Under this doctrine, which has been accepted by all the greater powers, with the exception of the United States, and which has been greatly amplified in the intervening years, the occupation of territory all over the world has been justified. As a result of this doctrine, endless conflicts have arisen between the greater powers; for if the foreign office is justified in protecting a loan or concession against the action of a borrowing or concession-granting country, it is also bound to protect its own citizens from any other power. And during the last fifty years endless diplomatic controversies have arisen between all of the powers of Europe over conflicting rights in every section of the globe. When finally the history of this war is written, it is probable that the irritations and conflicts growing out of disputed claims and concessions in Turkey, Asia Minor, Morocco, Persia, and elsewhere, and with them the struggle to control the Mediterranean will be found to be among the primary causes of the war. Political considerations, the expansion or protection of empire, are involved in all these territories; but these considerations followed and grew out of the economic conflict which began in the eighties of the last century and has been going on ever since.

At the time of the Morocco incident, when Germany sent the Panther to Agadir, and Lloyd George delivered the celebrated Mansion House speech, many persons in England and France predicted war as a result. This was the first open rupture, although the diplomacy of Europe had been engaged in a secret warfare for twenty years over the rights of their respective investors and exploiters, especially about the Mediterranean and in Africa. It is highly probable that, when the impartial historian gathers together the hidden secrets of the foreign offices of Europe, he will date the beginning of the struggle in the year 1911 rather than 1914, when the governments of Europe realized that diplomacy had reached an impasse, and the speeding up of armaments and army enlistments were voted by Germany, France, Russia, and Great Britain. The beginnings of the many controversies which ultimately became nationalistic in character are to be found in these titanic conflicts of high finance. Mr. H. L. Brailsford, an English writer, has described the conflict as the 'War of Steel and Gold'—steel being one emblem of imperialism and gold the other.

The European war has shifted the burden of over-seas finance to the United States, and our financiers have eagerly embraced the opportunity. We are becoming the great creditor nation of the world. Over $2,000,000,000 has already been loaned directly by our bankers to Europe, to South America, to China; and Africa; and as much more credit has been extended in other ways. Surplus wealth, so-called, has made its appearance here, and the lure of high interest rates has attracted the money of America out of the nation into other lands. With the appearance of surplus wealth and the beginning of over-seas investments the demand arose for a 'firmer foreign policy' in dealing with weaker nations, and a closer cooperation of the State Department with the banking and concession-seeking classes. This demand is in direct ratio with the size of our overseas claims. There is no doubt that the primary motive behind the demand for intervention in Mexico was the fact that American investors claimed privileges, concessions, and investments in that country in excess of $1,000,000,000, or an amount greater by more than $200,000,000—according to Consul Marion Letcher—than the property and possessions of all the Mexicans combined. The protection of such investments involves a great navy for the enforcement of our demands. This explains in part the rapid growth of navalism in the United States in recent years.

Up to the present time President Wilson has declined to lend his sanction to the European doctrine that the flag follows the investor, or that our diplomacy can be used for' financial penetration.' He has declined to sanction the Old World idea of extra-territoriality when weaker nations are involved. One of his first acts upon taking office in 1913 was to refuse the support and protection of the United States to American participation in the Chinese 'six-power' loan—a refusal which led to the withdrawal of American bankers from the group. As a countervailing gain this action secured for us the affection and confidence of China, for the action of our government relieved China from the demands of the syndicate of bankers of the other great powers, and enabled her to make a loan on much more favorable terms. It is quite possible, too, that the assistance given China by the President at that time saved that country from bankruptcy and possible dismemberment by the powers which were seeking to enforce a loan far in excess of China's needs; for among the terms insisted on was the demand that the customs and excise taxes, the administration of the salt monopoly, and the control of the auditing department of China should be placed in the hands of foreign advisers, who were to administer the revenue system of the country for the payment of the interest and principal of the loan, as has generally been the practice where loans were insecure or the government unstable. Had these terms been acceded to, and had China been divided into spheres of influence as further indemnity, it is not impossible that she would have fallen under the dominion of the great powers of the world just as have Egypt, Persia, Tunis, Morocco, and Turkey.

One of the most serious questions to be determined by the peace conferees on the termination of the war will be the rights of weak and dependent peoples, who during the last fifty years have fallen under the dominion of the greater powers. Shall they, too, be given their liberty? Shall autonomy be assured to Egypt, Tunis, Morocco, Tripoli, Persia, Turkey, China, and the African states, under some sort of a joint protectorate? Shall they be permitted to administer their internal affairs and exclude foreign concessionaires with as much freedom as a greater power? Shall a tribunal be created to represent the lending and the borrowing nations and to insure cooperation of interests, including the dependent and concession-granting countries? Or shall the old game of scramble, struggle, secret diplomacy, and, finally, armed intervention and conflict, be resumed? A proper recognition of the rights of these peoples will demand new international formulae and a new kind of international equity, which has been sadly lacking in the dealings of creditor nations with their weaker sisters since the advent of surplus wealth and the doctrine of Lord Palmerston already referred to.

So long as the financial and concession-seeking interests are as powerful at home as they are to-day, they will be clamorous for a continuation of the old game. They will insist on protection. They will urge their claims as they have in the past. They will not willingly submit to disarmament if it means that the many billions of investments by English, French and German people are left to such protection as is offered them by the borrowing and concession-granting countries.

The United States has not yet become seriously involved in the scramble for privileges and concessions, nor are our loans to weak or revolutionary governments of any considerable amount. Such over-seas investments as have already been made (except the loans recently made to the Allied powers) are for the most part in Mexico and Central America; and we are able to deal with the issues there with a comparatively free hand. But with Europe unable to extend aid as she has in the past, with the United States almost the only nation in a position to extend it, to develop concessions and accept contracts for the building of railroads, opening of mines, and the like, we shall be confronted with the necessity of formulating a policy. What will this policy be? Shall we blindly accept the diplomatic traditions of Europe—of secret diplomacy, the doctrine that the flag follows the investor, and with it all the consequences of complications and wars which have followed this doctrine all over the world? Or shall we rather adopt the doctrine that the investor must take his own risks; that, if he ventures forth into foreign fields, he has no right to demand that this country should police his investments, or that we should interfere with other governments, and as a last resort should send American marines to collect his debts? Should not democracy establish the doctrine that the flag is a symbol of freedom rather than of slavery; that it will safeguard liberty rather than destroy it; and that other peoples—no matter what their stage of development may be— have an equal right with ourselves to establish and maintain their own governments free from outside interference?

It seems to me that this country ought to reaffirm, and if necessary strengthen by Congressional action, the principles laid down by President Wilson in connection with the Chinese loan, and definitely declare that the State Department is closed against concession-seekers and those who would make use of it for the promotion of their private interests, whenever their demands involve any intervention in the domestic concerns of other people. The United States, it should be established, is not a collection agency; we are not in the insurance business. Moreover, our efforts about the green cloth of diplomacy should be directed toward establishing and securing freedom of all nations, be they in Europe or elsewhere; and especially of those nations which have lost their freedom through the activities of individuals and corporations engaged in high finance. Political freedom is not a privilege of the great nations alone. It is the right of small and dependent peoples as well. And the subjection of nations, countries, or peoples in the interest of exploitation has less to defend it than any other justification of imperialism thus far put forth. Yet, as stated before, in fifty years' time one hundred million people have fallen under the dominion of England, France, and Germany as a result of activities, intrigues, or military conquest, traceable to financial imperialism and the identification of the foreign offices and diplomatic service with concession-seekers and financiers.

That some provision will be made, and should be made, at the peace conference for the development of backward peoples and their protection there is no doubt. Students of this subject have suggested various kinds of tribunals to control and allot the opportunities for investment which the undeveloped peoples of the world offer. Such a tribunal should contain representatives of the debtor countries, which should be protected from forced loans or coerced concessions. All financial dealings should be with the full and free consent of the debtor country, whose sovereignty should be safeguarded as fully as that of a greater power. The terms of the loans must be fair; provision must be made to guarantee that the money is not wasted; that the interest can be paid; and that the political integrity of the country is not lost as a result of its necessities. This is the first consideration.

The jurisdiction of such a tribunal should be extended to all the countries now under foreign influence, including Egypt, South Africa, Persia, Turkey, Asia Minor, Morocco, Tunis, Central America, and possibly China, if China should so elect. All existing spheres of influence should be internationalized in the same way, and opened to the investors of all countries. The tribunal should possibly have powers of policing and of emergency administration, and the greater powers, including our own, should pass whatever claims they have to control such territories to this tribunal for settlement. This would involve an end of 'spheres of influence' and the closed door. Instead, the investments and concessions would be approved, and then opened to all comers on equal terms, the loans or participation in the financing of the concessions being allotted according to the prior interests of certain countries in the territory—or, far better, according to the wealth or population of the greater nations.

This procedure is now followed in the financing or underwriting of railroads, mines, and industries in all countries. It has been worked out in part in China and Morocco. Russia and Great Britain divided the Persian loan of 1912 in this way, and England and France have had somewhat similar understandings as to Egypt and Africa. And if the principle of the open door for trade and commerce, of equal opportunity to all nations to trade with dependent countries on equal terms, is provided for, we shall have gone a-long way toward insuring the permanent peace for which the whole world is crying. For each of the greater powers has made use of priority of conquest to exclude its competitors from their spheres of influence. And, in order to make their claims impregnable, they have not only destroyed all semblance of political liberty of the exploited countries, but have sown mines of jealousy, hatred, and war in every chancellery in Europe.

Back of the immediate causes of the European war lie big economic conflicts which have been going on for a generation. They are on a titanic scale and involve almost every important financial and economic group within the greater powers. And the peace which comes must be an economic peace. There can be no permanent quiet among the great powers so long as the strategic waterways, the opportunities for trade and commerce, for foreign investment and exploitation, are under exclusive monopolistic control, with the foreign offices, the diplomacy, the press, and the ruling classes in each of the countries bent on the protection by force, if need be, of the privileges which the ruling classes enjoy. For the classes which rule the European powers are the classes which own or profit by these privileges, whether in the realm of finance, of exploitation, of concessions, or of trade.

Freedom is the corrective of these monopolistic conditions. Freedom is the principle on which all the democratic countries can unite. And freedom, in international affairs means freedom, of the straits and waterways; it means freedom or equality of colonial trade, freedom in the matter of concessions, and with freedom the relinquishment of all special privileges, monopolies, closed doors, and exclusive spheres of influence, which have been acquired, usually by force or intrigue, during the past fifty years. And along with freedom in the economic field, there should be a new Declaration of Independence which would grant political liberty to all the subject-peoples of the world.

© J. Fred MacDonald, 2013

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