The Unintended Consequences of Delegation

The story of American foreign relations as it is traditionally told is the story of presidential dominance. From Aaron Wildavsky's “two-presidencies” thesis to Arthur Schlesinger's notion of the “imperial presidency,” the consensus is that the president and the attendant foreign policy state have increased their dominance of American foreign affairs throughout the twentieth century.Footnote ²⁸ Generally, this development has been understood as a matter of divergent incentives. Given that members of Congress represent single geographic districts, they are unlikely to get much of the credit (or the blame) for decisions made in the conduct of American foreign relations.Footnote ²⁹ In a more recent look at the relative powers of Congress and the president, Canes-Wrone, et al. find support for the notion that the president is, indeed, more influential in foreign than in domestic affairs, and that such incentives “encourage members of Congress to delegate more policymaking authority to the president in foreign than domestic affairs.”Footnote ³⁰

Delegation, then, is likely to be more common and delegated authority is likely to be broader in foreign affairs. Imperialism is no exception to this rule. After all, spending state resources on people outside the boundaries of the nation—indeed, on people constitutionally barred from voting—provides no electoral benefits to members of Congress. Hence, it makes little sense, at least in the short term, for members of Congress to invest time or expertise in directly managing American empire. Furthermore, as McCubbins and Page argue in their classic article on delegation, Congress is more likely to delegate under conditions of uncertainty and when there is significant conflict among members—two conditions that certainly held when the institutions for colonial governance were designed.Footnote ³¹ According to this literature, however, when Congress delegates responsibilities to its agents, it can build in oversight requirements to prevent shirking or bureaucratic drift.Footnote ³² Thus, for scholars working in this tradition, the politics of structural choice—the working out of the initial powers and constraints of an institution—are crucial. Yet as a result of its focus on the decision to delegate (as opposed to the results of that delegation), the delegation literature makes some important, yet possibly problematic, assumptions.

First, the bureaucrats in such models, although always assumed to have their own divergent set of interests, are rarely accorded much agency of their own. Such models primarily focus on the ways in which bureaucrats react to a particular system or set of incentives designed to solve the problems of congressional oversight. Even scholars such as Terry Moe, who have criticized aspects of this approach, accept that an organization's development and behavior are largely a function of its institutional design—even if, in Moe's well-known argument, that design dooms an agency to failure.Footnote ³³ The second assumption is that members of Congress will always know how to design a reasonably effective set of incentives and reporting requirements to maintain effective oversight and keep bureaucratic drift within acceptable limits. The third, and perhaps most important, assumption is that these institutions, once created, remain self-reinforcing—change is expected only when some exogenous process upsets the equilibrium. As reasonable as these assumptions may appear, they preclude the possibility of endogenous institutional adaptations driven by the “agents” to change the rules from within.Footnote ³⁴ Under certain conditions, however, I argue that congressional delegation may motivate an entirely unintended set of institutional adaptations.

It is important to be clear about when and under what conditions this process of institutional adaptation may unfold. This claim assumes that members of Congress would be unable to anticipate these actions, an unreasonable assumption for routine matters of governance, but one more likely when experience is limited. When Congress confronts a genuinely new governing responsibility, such as the management of overseas territories, members may simply lack the knowledge to design effective arrangements for oversight, leaving openings for bureaucratic agents to pursue their own agendas through unanticipated actions. This is not to suggest that Congress did not try to protect its interests in designing the institutions of imperial governance; indeed, as I show, it saddled the imperial bureaucrats with significant restrictions on their authority and power. It is merely to suggest that members of Congress are “boundedly rational satisficing” actors who operate according to Herbert Simon's axiom that human decision making is usually “concerned with the discovery and selection of satisfactory alternatives; only in exceptional cases is it concerned with the discovery and selection of optimal alternatives.”Footnote ³⁵ Thus, confronted with an “ill-structured problem,” or a problem with unclear goals, as American imperial governance most certainly was, Congress may simply design institutions to protect its known interests even though, in retrospect, these may not effectively constrain the activities of its bureaucratic agents.Footnote ³⁶ In the context of American empire, as I will show, the downstream consequences of Congress's institutional design of the Philippine colonial state put into motion a process of institutional adaptation that would make the subsequent development of American imperialism more difficult to control. Understanding this process requires careful attention to institutional adaptation and the strategic responses of institutionally situated actors to the political contexts of their environments.Footnote ³⁷

State-Building Through Partnership

How might bureaucrats make policy with low administrative capacity and weak public support? One option I suggest in this article is the formation of collaborative relationships with actors outside formal state institutions. Liberal states—the United States in particular—are likely to have rich civil societies that contain a number of strong and influential nonstate actors and organizations, offering opportunities for bureaucrats to harness this already-existing capacity for their own ends by collaborating with powerful private interests. Such public-private collaborations have occurred with surprising frequency throughout American history and in a wide variety of policy environments, from the anti-vice crusade of Anthony Comstock to the enforcement of prohibition and equal opportunity employment laws.Footnote ³⁸ American imperialism, I argue, constitutes yet another case of borrowing capacity from private actors, and an especially clear case at that. The inability to secure significant funding from Congress to pursue an imperial foreign policy was not a detrimental obstacle, because money—the most clearly observable and measurable form of capacity—was borrowed from Wall Street banks.Footnote ³⁹

Despite its relatively common appearance in American state development, this pattern of state building is somewhat alien to our theories, which still assume that state building means the creation of formal bureaucracies along traditional Weberian lines. After all, borrowing capacity and mobilizing outside support is not the same thing, and recognizing this requires us to complicate our understanding of liberal state development. As Elisabeth Clemens argues, these efforts to “borrow” rather than directly build state capacity must be recognized as “expressions of power, but in the form of the exercise of government within particular institutional arrangements, rather than the cooptation of supporters or strategic pursuit of some electoral logic.”Footnote ⁴⁰ In other words, state building through partnership implies that private actors are central players in the administration of policies and not merely supportive constituencies used to build support for public programs.Footnote ⁴¹ At the same time, state building through partnership requires that bureaucrats remain independent from private interests and retain their own unique preferences, which they then pursue through these partnerships. The partnerships, in other words, are dependent on both sides realizing demonstrable gains from cooperation. In this way, state building through partnership represents something quite distinct from older theories of bureaucratic “capture.”Footnote ⁴² Furthermore, the shift away from the hierarchical organization of traditional state agencies to the contractual model of private agreements makes political oversight significantly more difficult as the line between public and private authority becomes blurred, which may provide important political gains to state actors.Footnote ⁴³

But how were these partnerships formed? Why would powerful private interests lend state actors access to their own capacity or resources? A number of recent and well-received studies of institutional development and adaptation argue that the answer to these questions can be found in the entrepreneurial behavior of state actors who facilitate partnerships among groups both within the state and between the state and society.Footnote ⁴⁴ The political entrepreneur, defined variously as “strategic, self-activated innovators who recast political institutions” or “someone who sees a prospective cooperation dividend that is currently not being enjoyed,” stitches together various interests by crafting policies or institutions that meet a variety of goals.Footnote ⁴⁵ Furthermore, these entrepreneurs are likely to sit at the center of multiple cross-cutting networks, giving them access and influence with other groups.Footnote ⁴⁶ Although the frequent rotation in and out of office by members of the American state has often been seen as a signal weakness, such limited tenures mean that state actors—especially high-level officials—are likely to have strong and enduring relationships with major societal interests.

Yet a strategy of state building through partnership also has a number of unique pitfalls. For one, the ability of state actors to “borrow” private capacity is dependent on the maintenance of the partnership. Should either state or private actors renege on their commitments, or should external factors dramatically alter the costs to either party, the partnership could very quickly crumble. Furthermore, the costs to exiting the partnership may increase over time. As these organizational commitments and mutually beneficial compromises lead to further interlinkages among less foundational institutional arrangements, the costs to change or to abandon the partnership rise precipitously. Such a situation may lead to suboptimal outcomes as state actors are forced to act in ways that are politically controversial, or at least highly visible, to meet commitments made earlier to their private partners.Footnote ⁴⁷ This suggests that while state building through partnership may offer state actors powerful short-term increases in capacity and a way around restrictions on their power, it may also prove to be less stable than traditional state-building strategies.

Observable Implications, Evidence, and Case Selection

The theories outlined above, if correct, contain a number of observable implications. First, if state building through partnership is dependent on entrepreneurial behavior, then the actors responsible for the initial arrangements ought to sit at the center of cross-cutting networks that span the public-private divide. Second, if the arrangements are genuine partnerships and not examples of coercion by public authorities or capture by private actors, then we should observe gains to both parties. Third, if it is true that these partnerships are difficult to control, then we ought to see some measure of congressional “regret.”Footnote ⁴⁸ That is, if Congress has not granted implicit approval to pursue these actions, then we ought to observe Congress try and fail to limit the authority being exercised by the partnership.

Through a method of process tracing, the historical narratives to follow examine the creation and spread of the Dollar Diplomacy partnership—principally, its roots in the Philippines, its spread to the Dominican Republic and Nicaragua, and its collapse in the early Wilson administration. I chose these cases because each illustrates important developments in this public-private relationship. The case of the Philippines was the most ambitious example of American formal empire, and this was the formal colony where private bond sales were used earliest and most extensively. The Dominican Republic was the first case where the public-private receivership system of colonial control was applied, as well as the first to collapse, and Nicaragua was the first partnership formed with no congressional approval. Honduras is included as negative case: it was an attempted Dollar Diplomacy partnership that failed to be established. The blurring of public and private authority in the governance and expansion of American empire also necessitated that the data provided range far wider than government reports, thus the historical evidence (see the Appendix) comes from a wide variety of internal memoranda and personal papers.

It should not be supposed that these were the only significant cases of American imperial development. Colonial officials in Puerto Rico and Cuba also used private bonds to finance development, although, as will be explained, this strategy was adopted in these territories several years later than in the Philippines. Furthermore, in reaching out to private partners to achieve the ends of American imperial expansion, American colonial state officials drew on a tradition that had been used in American overland expansion throughout the nineteenth century.Footnote ⁴⁹ Yet the political logic of settler expansion differed considerably from the later overseas empire. As all members of Congress and the executive were keenly aware, today's settlers were destined to be become tomorrow's voters. Consequently, the federal government provided generous subsidies to support settlements, including the maintenance of postal routes, the construction of public buildings, and payment of official salaries, but it left these responsibilities to the relevant executive agencies like the post office and treasury.Footnote ⁵⁰ Unlike the American West, however, Congress put up legal impediments to private direct investment—the investment that fueled expansion in the West—in America's overseas colonies, and these very restrictions motivated colonial officials to reach out to private partners.

Finally, the reliance on public-private partnerships did not apply to all areas of American empire; Guam, American Samoa, the Virgin Islands, and the Panama Canal Zone were ruled directly by American military governors during this period. It would be far too ambitious to account for all of these forms of imperial rule in one essay. The goal of this article, then, is merely to illustrate one mechanism, albeit a central one, that structured American imperial expansion and colonial rule, and to illustrate how public-private partnerships, even in the unlikely arena of American foreign affairs, have been used to dramatically increase the capacity of state actors when they are blocked by congressional restrictions.

The Philippine Organic Act

As the first governor of the Philippines and secretary of war, respectively, William Howard Taft and Elihu Root laid the early foundations of American colonial policy. For the most part, they drew their inspiration from Progressive policies that were already at work at home. Education, improved infrastructure, and sound money, they thought, would stimulate trade with the United States and transform the islands from a backwater in Spain's quickly crumbling empire into a showcase of American progress. “Nothing will civilize them so much as the introduction of American enterprise and capital here,” the future governor had written to Henry Cabot Lodge the year before.Footnote ⁵⁴ Consequently, the Organic Act, as drafted by the War Department over the summer of 1901 and introduced to both houses on January 7, 1902, devoted large sections to mining and forestry laws, and to the creation of a new currency and banking system.Footnote ⁵⁵ The Commission further recommended that Congress reduce “by at least 50 per cent the United States duty on tobacco, hemp, and other merchandise coming from the Philippine Islands into the United States” and grant the Commission broad powers to distribute public lands up to 5,000 acres.Footnote ⁵⁶

Despite the many entreaties from the Commission, the bill reflected the preferences of an unusual alliance, but one that would plague insular authorities for decades. Representatives from states with significant tobacco and sugar-beet interests were concerned about possible competition from the Philippines while anti-imperialist Republicans and Democrats, led by George F. Hoar (R-MA), objected to the sale of public lands or the granting of mining or timber franchises. The final Organic Act permitted the Commission to sell or lease not more than 40 acres of land to individuals or 2,500 acres for corporations. The most significant defeat, however, was over tariff legislation. The Philippine Tariff Act of 1902 adopted on March 8 only allowed for a 25 percentage point reduction in Dingley tariff rates. As one colonial official cabled Taft in Washington on hearing the news, “This is prohibitive and if expressive of ultimate policy most unfortunate.”Footnote ⁵⁷

The Commission's disappointment was understandable. Consider just how restrictive these limitations were. Congress had, for all practical purposes, prohibited direct American investment in its own colony by restricting land ownership and, through its refusal to significantly lower the Dingley tariffs, had made the export of raw materials from the Philippines to the United States largely unprofitable. By granting it no appropriations, by restricting its ability to attract investments, and by refusing to lower American tariff rates in any significant way, Congress had seemingly undermined the imperial policy of colonial bureaucrats.

Taft had earlier warned Root that it would be “like running on one wheel to develop this country without power to offer investments to capital.”Footnote ⁵⁸ Now, it seemed, the Commission would be forced to do exactly that. Congress had delegated complete administrative control over the Philippines to the Department of War, acting through the Commission, but it had limited its ability to attract capital through high tariff laws and public lands restrictions. The difficulties were mounting—American public opinion had grown increasingly tepid toward America's imperial experiment in Asia, American capital showed little interest in sinking its money into an undeveloped market, and Congress had proven decidedly hostile to many of the colonial officials' plans for the islands. Although the Organic Act had granted the Commission unprecedented powers to govern the islands, it had effectively denied the colony access to the domestic American market and made the attraction of American industry significantly more difficult. “The truth is,” Taft later acknowledged, “that capital finds itself so profitable employed in [the United States] that it is only after the greatest effort that it can be induced to go as far as the Philippine Islands.”Footnote ⁵⁹

To make a success of the imperial experiment, it was becoming abundantly clear that the colonial state would have to play a much more active role in economic development than anyone had expected. In a lesson that would have profound effects on the development of American imperialism, insular authorities would learn to take advantage of Congress's radical delegation of authority to make up for its lack of resources.Footnote ⁶⁰ Rather than simply offering lands for sale or favorable terms for infrastructure development, as had been done in the American West, the Commission would need to borrow money for development, and to do that the colonial state would look to New York.

Bonds for Imperial Development

The relationship between the colonial state and Wall Street began with an attempt to establish a new currency for the Philippines. Congress had left internal finances largely in the hands of colonial officials, which gave them access to a steady stream of customs income that was not dependent on congressional appropriations. Furthermore, unlike Puerto Rico, which used U.S. dollars, Congress allowed the Philippines to retain its own currency. Although these must have seemed like minor concessions to members of Congress, they would prove to be of crucial importance in forming relationships with private capital.

Shortly after taking control of the islands, Root and Taft recognized the need to put the Philippines on a solid financial footing, preferably a gold standard, which could easily be exchanged for dollars. On the recommendation of Secretary of the Treasury Lyman Gage, Root had retained Charles A. Conant, a well-known business journalist and vocal proponent of imperialism, whose book, The United States and the Orient, had established him as an authority on monetary issues.Footnote ⁶⁶ As a former reporter and analyst for the Journal of Commerce, Conant also had influence and contacts in the New York financial community. Conant, who would later become known for his currency reforms in Puerto Rico, Cuba, and the Dominican Republic, recommended that the Philippines have a silver peso pegged to the dollar, thus easing trade between the Untied States and the Islands, but also avoiding any shock that might accompany the introduction of a foreign currency.Footnote ⁶⁷ Such a dual currency, it was also thought, had the added advantage of minimizing opposition from silver-state representatives whose constituents stood to profit from the coinage.

During the debate over the Organic Act, Conant mobilized support from the financial press and wrote several articles himself for such Wall Street publications as Bankers' Magazine, as well as more mainstream outlets like the Atlantic Monthly. Footnote ⁶⁸ Although the currency provisions of the Organic Act were jettisoned during congressional debate, when the currency measures were reintroduced a year later, Conant, now employed by the Morton Trust Company of New York, sent word to silver interests in financial circles that, with the value of silver bullion in decline, their interests would be hurt by delaying the passage of the bill.Footnote ⁶⁹ It is not known how much influence Conant's lobbying had on the effort to pass the bill through the Senate, although the deadlock seems to have been cleared up fairly quickly, and the final measure authorizing the dual currency was adopted in March of 1903. Congress had given an executive agency permission to coin its own money and to develop its own monetary system, a power expressly forbidden to any state in the Union. It is important to be clear on this point: The Philippine currency was not U.S. currency with slightly different markings—it was a separate currency backed by its own gold reserve fund.Footnote ⁷⁰ To provide the gold reserves for this new currency, the act authorized the Commission to issue and sell $10 million in bonds on Wall Street, and this task was given to Col. Clarence Edwards at the War Department's colonial office—the Bureau of Insular Affairs (BIA).Footnote ⁷¹ Insular authorities, however, were not entirely sure how Wall Street would react to these new Philippine bonds. The colonial government, after all, had no credit history, and failure to make a full bond sale would contribute to the already tenuous financial position of the colonial state.

Fortunately, the sale was a success. Working through the Guaranty Trust Company, Edwards managed to easily offer the $6 million worth of bonds at a favorable rate.Footnote ⁷² The importance of Edwards's ability to negotiate Wall Street bond markets was not lost on his superiors. “I think Edwards has done very good work in getting 31/2 per cent interest on balances with the Guarantee [sic] Trust Company,” Root wrote to Taft, “and if, as I hope, we can sell the certificates of indebtedness at a little premium, we will be borrowing the money to carry the operation through without its costing anything at all.”Footnote ⁷³ In all, three million silver certificates were successfully floated, giving the colonial state sufficient funds to carry out its currency operations. Following the success of their first bond offering, BIA and Commission officials again returned to Wall Street to float $7 million worth of bonds for the purchase of a Catholic monastic orders' extensive land holdings in the islands.Footnote ⁷⁴

For cash-strapped insular officials, the successful sale of bonds on Wall Street indicated that development funds could be successfully raised from private sources. It was clear by this point that, without substantial adjustments to the tariff, American capitalists would not rush to invest in the islands. But if the colonial state could finance significant infrastructure improvements, it might be able to make the islands more attractive to Americans. “It seems to me,” Taft wrote to Edwards following the currency bond sale, “that the premium which you obtained is marvelous and indicates that the credit of the Philippine Government is such that we shall not have much difficulty in floating the bonds in more important matters.” And this, Taft concluded, meant that “the idea that we are to remain in the islands for an indefinite time in the future is deeply fixed,” a perception that would be sure to improve the colonial state's credit among the bankers.Footnote ⁷⁵

The insular government's success on Wall Street was remarkable—at the time, the prevailing interest rate in the islands on the best commercial security was many times higher—and it requires some explanation.Footnote ⁷⁶ While Edwards's careful planning and Conant's many connections on Wall Street likely contributed to the successful offering, these personal factors alone surely do not explain why some three million certificates could be sold at a good rate by an entity with no previously established credit. A further answer lies in an ambiguity easily exploited by Edwards; namely, the official status of Philippine government bonds. Few investors would normally purchase bonds from a fragile Asian government, but they would be willing to buy them if they thought the U.S. Treasury backed them, an impression that colonial officials were anxious to encourage. Indeed, as a result of BIA pressure, both the Secretary of Treasury and the Postmaster General had ruled that Philippine government bonds were acceptable as security for deposits of public money.Footnote ⁷⁷ As a matter of law, however, the U.S. government did not guarantee these bonds, but the savvy investor could reasonably assume that the U.S. Treasury would bail out the colonial government if it ever reached the point of default. Governor Taft, testifying before the House Committee on Insular Affairs in 1903 on the friar land bonds offering, admitted as much:

Later that year, Attorney General Philander Knox attempted to add a penumbra of legal authority to the issue. “Although the loan is not legally guaranteed by the United States,” he held, “the issue is obviously made over its faith and credit and by its aid and recognition.” At the most basic level, he concluded, “The interest and credit of the United States are deeply and essentially concerned in these matters.”Footnote ⁷⁹ Opinions like these could only improve the insular government's credit on Wall Street—and infuriate the opposition in Congress, who charged them with orchestrating the profits of bankers on the backs of Filipino taxpayers.Footnote ⁸⁰

Nevertheless, colonial bureaucrats were supremely confident in their ability to exploit Wall Street's investment capital to develop the islands—especially Edwards, who boasted that he was “on intimate terms now with all the hydra-headed capitalists in New York.”Footnote ⁸¹ By 1904, after the initial bond sales had been concluded, colonial bureaucrats decided to cement their relationship with the Wall Street banks by employing one of their own. This, it seems clear, was a primary consideration for encouraging W. Cameron Forbes, a scion of the legendary Forbes banking family, to join the Commission. Forbes was not being considered because of his political connections, but because of his experience in finance and, perhaps even more importantly, his social connections on Wall Street. As one colonial state official wrote to Taft, “He is evidently a man of affairs and will be most valuable as a member of the Commission at a point where it is weakest, because of his practical knowledge of corporate affairs and American capitalists. I am inclined to think he is just the man to ‘hustle the East’, if anybody can?”Footnote ⁸²

As it became clear that insular bond sales could be used to leverage more capital for development projects, colonial officials returned to Congress to gain broad authority to take out even more development bonds—a task that proved surprisingly easy. Members of Congress were not unaware that these bonds might have the implied, if not legal, guarantee of the U.S. Treasury. As one Democrat pointed out, “it is undeniable that the purchasers … regard the United States as ultimately responsible for their payment.”Footnote ⁸³ But Republicans dismissed this as an unwarranted conclusion. Although there was a “kind of moral support,” Edgar Crumpacker (R-IN) acknowledged, there was “no liability upon the part of the Government for their payment.”Footnote ⁸⁴ On February 6, 1905, Congress passed the Cooper Law, which provided a 4 percent guarantee on railway investments and allowed the insular government, with the president's approval, to fund the further construction of roads, bridges, and various municipal buildings through future bond offerings.Footnote ⁸⁵Table 2 lists these bond issues in the Philippines from 1904 to 1920.

Table 2.

Philippine Bond Issues, 1904–1920

Source: Forbes, Philippine Islands, v. 1, 269.

After conducting their first two successful bond sales and being given congressional permission for more, insular officials began to use bond sales to fund ambitious public works projects, including railroad development, in the islands. For Americans who had come of age during the great railway boom in the United States, this faith in the ability of the railroad to spur economic development is unsurprising. “If we can possibly get a crowd of strong Americans to build a comprehensive railroad system for Luzon,” one official wrote to Taft in 1904, “it would be of more benefit for this people than anything we could possibly do.”Footnote ⁸⁶ Under the advice of Sir William Van Horne, the builder of the Canadian Pacific, the Commission had earlier commissioned a survey of new railway lines, and this report was now privately sent to a number of top Wall Street firms. Initially, J. P. Morgan & Co., James J. Hill, the Guaranty Trust, and Lee, Higginson & Company had all expressed some interest, but Speyer & Co. eventually emerged as the most likely partner.Footnote ⁸⁷ This was fine with Edwards, who thought Speyer's interest would signal to the rest of Wall Street that the Philippines was a sound investment. As he reported back to another official, “Speyer, as Commissioner Forbes will tell you, is about as clever a chap as they have on Wall Street. He don't [sic] miss any opportunities, and his relation with London capital allows him to command financial situations.”Footnote ⁸⁸ Speyer, at the BIA's suggestion, had placed himself in an excellent position to win the concession by gaining control of the Manila Railway Company in 1904—the Philippines' only existing railroad.Footnote ⁸⁹ By this point, the relationship between the colonial state and Wall Street had become decidedly cozy.Footnote ⁹⁰ After the large bond sales and early negotiations for railway investment, Edwards could brag in a letter back to Manila, “One or two of the ambitious financial concerns who think they are going to get the franchises for the trunk line railroads are flattering me by asking me if I won't resign, and at a big salary and manage the proposition in the Philippines. I wonder if I could get along with the Commission if I should take them up?”Footnote ⁹¹

After all this—the extensive lobbying and bond trading on Wall Street—it is worth asking if anything was actually accomplished. The record of the colonial state here is impressive, especially because the American insular state managed these improvements with almost no direct financial support from Congress. Given conditions such as these, it would not have been surprising if nothing were done. Yet, through their partnership with American banks, colonial state officials were able to fund, albeit in less lavish fashion, their ambitious public works projects. As Figure 1 shows, for example, the mileage of all improved roads and rails grew dramatically during the colonial period, and this success was followed by harbor and waterworks developments. By 1905, then, after just five years of civil government, the American insular state had developed a remarkable collection of resources to run the Philippines with significant independence from Congress and with little assistance from the domestic American state.

Fig. 1.

Highways and Railrods in the Philippines, 1907–1917 Source: Railroad miles are the combined total of the Manila Railroad Company and the Philippine Railway Company. Highways are first-class roads. Figure for 1907 is an estimate. Data adapted from Forbes, Philippine Islands, v.1, 1907.

The Spread of Private Financing to Puerto Rico and Cuba

This public-private strategy for raising funds would be replicated in other parts of America's formal empire, too. Although Puerto Rico adopted this strategy more slowly than the Philippines, issuing its first bond sale in 1907 for $1 million to finance road construction, colonial officials in San Juan eventually embraced it with a fervor equal to their counterparts in Manila.Footnote ⁹² In part, the fact that Congress granted Puerto Rico eventual free trade made it easier to attract direct investment from the United States, which made the need for capital less immediate than in the Philippines. Yet when control over Puerto Rico was transferred to the BIA in 1909, colonial officials dramatically increased the use of private bonds to finance development. Indeed, by 1913 Puerto Rico's bond debt stood at $5.8 million and would nearly double by 1918 to $10.8 million.Footnote ⁹³ As in the Philippines, much of Puerto Rico's bonded indebtedness went to finance infrastructure improvements. In Cuba, too, the use of private bonds to finance development occurred later than in the Philippines. When Charles Magoon, formerly General Counsel of the BIA, became the provisional governor during the second American occupation in 1909, he worked with Speyer & Co. to offer a $16.5 million loan to finance sewer improvements.Footnote ⁹⁴

In the context of these formal colonies and occupations, then, the public-private partnership provided colonial officials with increased capacity to pursue their development goals, and it allowed Congress to avoid politically divisive questions about the tariff or having to justify more direct state support for the controversial colonies. Yet the confidence colonial officials had in this strategy would soon lead them to apply it in more unstable contexts and over the outright opposition of Congress.

The Dominican Crisis

The Dominican Republic was in a state of near-constant turmoil for the entirety of the nineteenth century. Ruled at various points by France and Spain, and suffering from repeated invasions by Haiti, its more populous neighbor to the west, it finally achieved a measure of stability under the dictatorial rule of Ulises Heureaux between 1882 and 1899.Footnote ⁹⁸ But Heureaux's rule came at a heavy price—crushing loads of debt. To buy off opposition leaders and provide some minimal level of public services to the population, the Dominican Republic became trapped in vicious cycle of debt and default that soon reached catastrophic proportions, while revolutionary outbreaks crippled the government's ability to collect revenues. By 1903 the debt totaled $33 million and the duties on various export commodities had already been promised to other creditors, leaving the government completely broke and with no prospects for future income. After the Dominican Republic defaulted on its massive debt, an arbitral commission made up of European and American creditors ordered it to pay $450,000 a year to its creditors, an obligation that the government was entirely unable to meet.Footnote ⁹⁹

Roosevelt administration officials began to fear that European powers would intervene to force payment to their creditors, which, according to contemporary international law, they were well within their rights to do. The Dominican default now presented itself as the first test of Roosevelt's recently articulated Corollary. Giving European powers a foothold in the Western Hemisphere so near the Panama Canal was anathema to Washington, but to prevent this, the administration needed to devise a solution that satisfied European creditors and also avoided domestic opposition to the acquisition of further American colonies. At the very least, Washington would need to take emergency control of Dominican finances to buy some time.

Secretary of State John Hay instructed U.S. minister Thomas Dawson to “ascertain whether the Government of Santo Domingo would be disposed to request the United States to take charge of the collection of duties,” an arrangement that Dominican President Carlos Morales readily agreed to, telling Dawson that “he had long been of the opinion that the best solution was for the United States to take charge of the collection of the revenues, guaranteeing to the Dominican Government enough to live on and arranging with the creditors.”Footnote ¹⁰⁰ A formal agreement was quickly reached on January 20, 1905, and a treaty signed on February 7, giving the United States full authority to collect the customs revenues of the Dominican Republic, to appoint the collection personnel, and to pay any surplus funds beyond that needed to pay the national debt to the Dominican government at the end of the year. Furthermore, no changes in the tariff or port duties were to be made without the consent of the United States. For its part, the United States would take responsibility for the debt and negotiate terms with European creditors. To further allay Dominican fears that the United States might be trying to add Santo Domingo to its collection of colonies, Hay instructed Dawson to add the words “agreeing to respect the complete territorial integrity of the Dominican Republic” to the treaty's preamble.Footnote ¹⁰¹

Yet the president was under no illusions that the treaty would find a warm reception in the Senate. It didn't help matters that word of the January agreement reached the United States before Roosevelt had announced his intention to submit the agreement as a treaty. In an aptly titled editorial, “President vs. Senate,” the New York Times reported that “the Secretary of State is running around the Senatorial end with the Santo Domingo ball, and depositing it, as a ‘fait accompli,’ behind the Senatorial goal. It is a beautiful quarrel as it stands.”Footnote ¹⁰² Predictably, Senate charges of executive usurpation of senatorial powers were raised. “I deny,” Senator Henry Teller (D-CO) exclaimed, “the right of the executive department of the Government to make any contract, any treaty, any protocol, or anything of that character which will bind the United States … .”Footnote ¹⁰³ Although the treaty was successfully reported out of the Foreign Affairs Committee on March 10, Republicans leaders informed Roosevelt that the treaty would fail, and no vote was taken. Roosevelt was furious, but not surprised. For him, as for Root and Taft, the Senate's attempts to shore up its institutional prestige were preventing the United States from taking its rightful place among world powers. “Apparently the Senators in question felt that in some way they had upheld their dignity,” he later wrote in his Autobiography. “All that they had really done was to shirk their duty.”Footnote ¹⁰⁴

With the treaty's failure, the Dominican Republic would have no access to funds and would be unable to settle with its creditors, a situation that would almost certainly end with the intervention of European powers in America's backyard. Refusing to back down, Roosevelt declared a modus vivendi, dispatched several experienced colonial hands from the Philippines to take charge of Dominican customs, and continued with his plans to bring the Dominican Republic under the aegis of the American empire.Footnote ¹⁰⁵ Until the situation could be stabilized, Roosevelt ordered that revenue collected in Dominican customs ports was to be deposited in the United States at the National City Bank of New York, the same bank that held most of the Philippine Commission's gold reserve fund. As he informed Secretary of the Navy Charles Bonaparte, “I intend to keep the island in status quo until the Senate has had time to act on the treaty, and I shall treat any revolutionary movement as an effort to upset the modus vivendi. That this is ethically right I am dead sure, even though there may be some technical or red tape difficulty.”Footnote ¹⁰⁶

Bureaucrats and Banks: Securing the Dominican Loan

Among the Senate's central objections to the treaty was a provision that put the United States in charge of refunding the Dominican loan. What was needed was a way to confine American responsibility only to debt collection, not the payment of creditors. Root, returning to Washington as secretary of state in 1905, proposed a third private party to take on this responsibility:

For Root, a man widely regarded as one of the top corporate lawyers in New York, there wasn't anything especially novel about this solution. The Dominican Republic would be treated as a bankrupt corporation, and a third party—in this case the U.S. government—would arrange for the restructuring of its debt. A private investment bank would then refinance the Dominican debt and settle with its creditors, while a U.S. customs receiver appointed by the American president would supervise debt collection. The United States would get out of the business of debt settlement, thus pleasing the Senate opposition, but its presence on the island would reassure a private bank that such an investment was sound. Root, who was on far better terms with the Republican leadership in the Senate than was Roosevelt, now had to assure the senators that they were not doing precisely what they feared they were doing; that is, providing an effective guarantee to private investors. He reassured Senator Shelby Cullom (R-IL), chairman of the Foreign Relations Committee, that the “so-called modus vivendi … consists merely in a plan or way of getting along, pursued by the Government of San Domingo on its own responsibility, but with the acquiescence and unofficial good offices of the President.”Footnote ¹⁰⁸ Yet this arrangement, while similar to the private financing of infrastructure improvements in the Philippines, was, of course, far less secure, because the Dominican Republic was not to become an official possession of the United States.

Naturally, before any loan could be made with private funds, someone would first need to sort through the web of Dominican creditors and ascertain who owed what to whom, much like what would have to be done with any bankrupt corporation. In 1905, while the treaty was still being debated in the Senate, Jacob Hollander, a Johns Hopkins economist who had organized the conversion of Puerto Rico's currency to U.S. dollars, was appointed as the president's confidential agent to study the debts and to examine “the amount actually received by Santo Domingo, the amount of indebtedness nominally incurred, the circumstances so far as they are known under which the various debts were incurred, and so forth.”Footnote ¹⁰⁹ As he began to dig into the records, however, Hollander became convinced that a great deal of the debt was fraudulent or the result of terrible financial decisions made by past corrupt regimes. Even the American-owned Santo Domingo Improvement Company (SDIC), the republic's largest creditor, was not immune from Hollander's audit. In his final report of October 1905 he concluded that the SDIC's “presence and activity in Santo Domingo have been a continuous embarrassment and impediment to the course of orderly and economical government,” and later referred to the SDIC-owned Santo Domingo Railway as “40 miles of old junk.”Footnote ¹¹⁰ Other members of the Roosevelt administration shared Hollander's negative reaction to the SDIC's claims. Indeed, Roosevelt himself had written to Hollander that if negative reports on SDIC practices proved to be true, “we must take sharp measures to disassociate the Government from all responsibility for the debt.”Footnote ¹¹¹ The administration's hostility to the SDIC belies the notion that the receivership was merely a scheme to defend America business. In fact, it seems, administration officials were worried that the very appearance of impropriety would draw the attention of muckraking journalists or Congress. To further combat such charges during the final loan agreements, Root insisted that the white shoe law firm of Stetson, Jennings & Russell—the same firm used by J. P. Morgan and other major Wall Street financiers—represent Dominican interests.Footnote ¹¹²

As Hollander began to lay the groundwork for a private loan to refinance Dominican debt, Root also had to confront the very real possibility that the Senate would never pass the treaty. What then? The evidence here is conflicting. Root initially appears to have resisted any such scheme for continuing to operate the receivership in the event of outright Senate rejection of the treaty. “I strongly disapprove of the proposition,” he wrote to Taft. “If the Senate refuses to give the President the legal right to act officially in regard to Dominican finances, I do not think that we should go on as we are now.”Footnote ¹¹³ Months later, however, Drew Carrel, the private secretary for Dominican General Receiver George Colton, reported that “[Root], like everyone else in authority here who are tying to keep in touch with matters in Santo Domingo, cannot say what will happen to the Treaty … Mr. Root told me that I would be perfectly justified in saying to you, unofficially, that the original policy of the United States toward Dominican affairs is unchanged and as strong as ever.”Footnote ¹¹⁴ Whether or not the modus vivendi would have continued indefinitely, however, became more of a technical question, as it quickly became clear that bankers would be unwilling to extend credit without a formal treaty. In the Philippines, after all, the colonial state had managed to maintain a certain ambiguity about this issue, but bankers were taking a much more significant risk in floating bonds for the Dominican Republic, which still retained its official sovereignty.

Hollander's familiarity with the Dominican situation led Roosevelt to ask him to work out the refunding negotiations with private bankers. The problem he confronted, however, was convincing banks to lend to the Dominican Republic. Reacting to what he considered the dishonorable conduct of the SDIC, Hollander reached out to prominent and well-established American banks, some of which had also been involved in financing operations in the Philippines. In June of 1906, he wrote to Charles Allen, head of the prominent Morton Trust and former governor of Puerto Rico, to encourage him to make the loan:

While the proposition was “worth while of anybody's attention,” Allen responded, he could not commit to anything in specific.Footnote ¹¹⁶ Allen's reaction was typical of many bankers who were reluctant to sink their money into this new venture without proper guarantees that their investments would remain safe. Days later Hollander received J. P. Morgan's response, which exposed yet another wrinkle in the scheme. “[T]he whole value of the bonds,” Morgan wrote, “would depend entirely upon the form of interference contemplated by the United States Government in case of repudiation by the San Domingo Government … [U]nless the public are quite convinced that the American control will in future be absolute and in proper form so that no change of administration will affect the policy, the price is very high for the bonds.”Footnote ¹¹⁷ Morgan's concern that a change in policy might come from a change in administration exposed a central problem with the entire plan. Although his fears would later be proven unwarranted, Morgan had every reason to believe that a Democratic administration might not look so kindly on the arrangement, and with no formal relationship between Washington and Santo Domingo, the bank would have no recourse. At the very least, the bankers needed a credible commitment that they would not be abandoned in the case of Dominican default or Democratic control of the White House, and this was why the Senate's adoption of the treaty became crucial. Yet even with the condition that any new private loan would only be extended with a formal customs treaty in place, it was difficult to attract the cautious bankers.

Hollander must have been relieved, then, when Jacob Schiff, the legendary financier and senior partner of Kuhn, Loeb, agreed to entertain a Dominican offer. Hollander later claimed that he had agreed in part as an idealistic proposition, because, as he noted, “it was such a picayune profit that it would not interest them as a business proposition.”Footnote ¹¹⁸ Even Schiff, however, had his initial doubts. When he wrote to Assistant Secretary of State Robert Bacon a few days after acknowledging his interest, he confessed that “[N]o one, I believe, will touch the proposed new Bonds unless the United States will undertake to look to the sufficiency of the customs tariff, to its proper collection and application to the service of the debt, and unless the Bondholders can look to the United States for this, no bankers, who value their reputation should undertake to sell the Proposed bonds to the public.”Footnote ¹¹⁹ In other words, if the government could not formally guarantee the loan, then it must administer the receivership itself. Naturally, Schiff's offer was contingent on the Senate's approval of the treaty, which would allow American control of Dominican customs houses and supervision of its finances. Yet this was an easier challenge to surmount, particularly because American officials were already running Dominican finances under the modus vivendi.

As Root predicted, the arrangement proved far less objectionable to the Senate. On July 20, 1906, the Dominican representative signed an agreement with Kuhn, Loeb for the sale of $20 million in gold bonds at a rate of 5 percent for fifty years and with the Morton Trust Company, where Root had previously been general counsel and Conant was treasurer, to serve as the depository for payments.Footnote ¹²⁰ Furthermore, as a result of Hollander's efforts with the Dominican creditors, the debt was cut in half, leaving $5 million of the expected bond sale for the use of public works.Footnote ¹²¹ The new agreement met with the approval of the Senate, and a new convention was signed with Dominican officials and sent to the Senate on February 8, 1907. The clause that obligated the United States to guarantee the integrity of the Dominican Republic was eliminated, as was the original proposal that the United States would take over its debt. Now the only U.S. obligation was to collect the customs revenues. Further stipulations prevented the Dominicans from taking on more debt or changing their duties without American consent. These amendments were enough to secure the support of two-thirds of the Senate, and the treaty was adopted on February 25, on a 43 to 19 vote, and subsequently signed by Roosevelt on June 22.

American goals in operating the Dominican receivership, of course, were far more modest than those in the Philippines, but the American customs officials did manage to settle the Dominican debt situation and to provide the Dominican government with a stable supply of revenue for the first ten years of its operation. Under American administration, trade increased dramatically with exports nearly doubling in five years.Footnote ¹²² The lessons American executive officials drew from these results were simple: their solution worked, or at least that was how it seemed at the time. Through Dominican-style arrangements they could project power into Latin America and keep the Europeans out, while also avoiding the ire of the Senate. Yet the expansion of the partnership also came at a cost, although one that must have seemed quite remote to these men who so firmly believed in the stability of their experiment. After all, the success of the Dominican receivership required an implicit commitment to American bankers that their investments would be safe. Should the receivership prove inadequate—as indeed it very soon would—it would undermine the entire strategy and dramatically increase the political costs of the arrangement.

Honduras and Dollar Diplomacy's Failure

Not every proposed extension of Dollar Diplomacy was successful. American bankers were not fools. Despite the profits that stood to be made in the sovereign bond market, there were limits to the amount of risk bankers considered acceptable, and mere assurances from bureaucrats were not enough to force an investment. In the Philippines and Puerto Rico, the formal colonial status of those nations was enough to convince them to extend credit even if the Treasury did not technically guarantee the bonds. In the Dominican Republic, having an American-run customs receiver backed by a treaty, while admittedly less solid, provided enough security for Jacob Schiff to proceed with a loan. The problem, of course, was that a formal treaty—the most credible commitment the U.S. government could make—required congressional approval. Naturally, this requirement dramatically increased the political costs of Dollar Diplomacy, because Congress objected to precisely what the bankers demanded—a guarantee that the U.S. government would defend their investments in the case of default. As Taft administration officials looked to expand Dollar Diplomacy partnerships into even more unstable nations, they were caught between the Senate's hostility to providing formal guarantees of bankers’ debt and the bankers' desire for some credible signal that the U.S. government would do precisely that. In Honduras, these obstacles would prove insurmountable, but they would also pave the way for more creative arrangements that pushed the partnership even further from congressional sanction.

Honduras, much like the Dominican Republic, entered the twentieth century in desperate financial straits. After defaulting on a British loan in 1873, its debt, in arrears for nearly forty years, amounted to $120 million by 1909, an especially regrettable situation given the fact that, as one diplomatic memo noted, the nation had “little to show in return but a very few miles of railway.”Footnote ¹³⁸ For officials in the State Department, this seemed to offer a clear opportunity for another Dollar Diplomacy intervention, which, it was confidently predicted, would stabilize Honduras and increase American influence in the Caribbean by replacing British with American banks. In London, the Council of Foreign Bondholders had made an attempt to settle the debt, but an internal State Department memo dismissed their proposal as an irresponsible “scheme” and observed with studied contempt that it involved “the raising of the customs duties and the mortgaging of nearly everything in sight to the detriment of commerce and future enterprise.”Footnote ¹³⁹

To provide an alternative American option for refunding the debt, Assistant Secretary of State Francis Huntington Wilson set to work trying to attract J. P. Morgan, who was sought out specifically because of his good relationships with the British Council of Foreign Bondholders.Footnote ¹⁴⁰ As in the negotiations for the resettlement of the Dominican debt, however, Morgan proved more cautious than the Taft administration would have liked. At the very least, Morgan wrote to Huntington Wilson, his bank would not extend credit in the absence of a formal treaty.Footnote ¹⁴¹ Although Morgan himself thought the administration was unlikely to deliver on this requirement, he agreed to proceed because the project was so strongly endorsed by both Taft and Knox.Footnote ¹⁴² The bankers were not the only ones who greeted this further extension of Dollar Diplomacy with skepticism. In Honduras, President Dávila was understandably reluctant to sign over management of his country's finances to the Americans. But after a great deal of arm-twisting by Huntington Wilson, and faced with few other options, he agreed to send representatives to New York for discussions. After two years of negotiations, a loan convention was signed in January 1911, which provided Honduras with a $10 million loan of which $7.5 million would be immediately issued. Nearly all of this money, however, would go to settling the republic's old British debt, making the arrangement an especially bitter pill for the Honduran government to swallow. Furthermore, the bankers would only take the bonds at a price of 88 percent of par, a rather generous 12-point profit spread, which would net them $529,900.Footnote ¹⁴³ Nevertheless, Charles Conant, who had been so instrumental in establishing the credit of the Philippines and Puerto Rico and who was hired to review the contract, concluded that terms were as good as could be expected given the Honduran history of default.Footnote ¹⁴⁴

Taft dispatched the convention to the Senate with a note assuring the senators that the arrangement's success was “a self-evident proposition.”Footnote ¹⁴⁵ Yet what concerned the Senate Foreign Relations Committee more than its probable success in stabilizing Honduras was the American state's implied responsibility for collecting the debt. In an attempt to defend the convention from its critics on the committee, Knox provided a clear articulation of the convoluted logic that underlay the entire Dollar Diplomacy partnership:

In short, Knox's point was that the borrowed money would increase stability, thereby decreasing the likelihood of an American intervention. “Prior to the Dominican convention this Government was constantly having to interpose between clamorous foreign claimants and the Dominican Government and to use its naval forces for the protection of United States property,” Knox explained to the Committee. “Since the Dominican convention no such necessity has arisen.”Footnote ¹⁴⁷ Senators who were concerned about the U.S. government responsibility for the debt, then, were missing the entire point of the receivership—its “self-evident” success led to more stability, not less. The system's success, as Knox saw it, was the debt's real guarantee, and nobody in the Taft administration seriously entertained the idea that these arrangements would fail. Yet whether the customs receiver was appointed directly by the president, as was the case in the Dominican Republic, or from a list submitted to the government, as was proposed for Honduras, did not change the fact that the American state remained responsible for the debt's ultimate collection. This distinction was nothing more than a legal technicality, although one designed to disguise just how involved the American state was in these arrangements. Furthermore, Knox's claim that the treaty's adoption did not set a precedent for the entire Caribbean was, at best, a creative manipulation of the truth; at worst, it was a clear deception. Earlier that year Huntington Wilson had described the Honduran case to a State Department colleague “as a test case of utmost importance because … the principle we seek to act upon in Honduras is one we are bound to have to resort to in still other cases,” and Knox himself had proposed similar arrangements for Liberia, Guatemala, and Costa Rica.Footnote ¹⁴⁸

In the meantime, however, a revolution had broken out in Honduras, which eventually doomed the Honduran receivership proposal. In February 1912, with little possibility that the treaty would be approved, J. P. Morgan withdrew from the convention, leaving Knox with no private bankers who were willing to refinance Honduras's debt.Footnote ¹⁴⁹ Not that this failure led the Taft administration to abandon Dollar Diplomacy. What was needed was a way to remove the Senate from the picture altogether, yet still signal to the bankers that their investments would remain safe.

Nicaragua, Dollar Diplomacy, and the Private Contract

American-Nicaraguan relations had declined precipitously after the United States shifted the transoceanic canal route to Panama in 1903. Nicaraguan president José Santos Zelaya made no secret of his dim view of this bit of Yankee treachery, and by 1909 the Diario de Nicaragua, Zelaya's official mouthpiece, was calling for a Nicaraguan-Japanese alliance to keep the United States in check. In Washington, Zelaya was widely blamed for fomenting instability in neighboring Central American nations.Footnote ¹⁵⁰ In particular, Taft administration officials feared that he might attempt to sell Nicaragua's canal rights to a foreign power. In 1909 a revolution broke out in Bluefields, the American-dominated commercial center on Nicaragua's Mosquito Coast, and Zelaya was forced to flee the country after Knox ordered American marines to the region on the pretext of protecting American lives and property.Footnote ¹⁵¹

To fill the power vacuum created in the wake of Zelaya's departure, Knox ordered Thomas Dawson, who had earlier negotiated the Dominican customs agreement, to Managua to work out a similar arrangement for Nicaragua. Knox also arranged for the investment houses of Brown Brothers and J. & W. Seligman and Company to send representatives for loan negotiations. Brown Brothers had earlier indicated their interest in providing such a loan, writing to Knox several months earlier to inquire if the “Government of Nicaragua is desirous of enlisting the good offices of our own Government and of entering into engagements with it which shall furnish a satisfactory basis for such security as may be required.”Footnote ¹⁵² Unlike the Dominican Republic, however, Nicaragua had never defaulted on its debt, and could possibly have obtained a loan without the receivership. Earlier in 1911, Speyer & Co. (the same firm that had funded the railways in the Philippines) had offered to make a $15 million loan on less favorable terms and Brown Brothers and Seligman had signaled that they would also consider making an offer before a receivership was in place. Officials in the State Department, however, had no interest in such arrangements; after all, the creation of a receivership, which they believed would have a stabilizing effect on the country, was the purpose behind all the negotiations.Footnote ¹⁵³

On June 6, 1911, the Knox-Castrillo Convention was signed, providing for a $15 million loan in exchange for control of customs receipts and the appointment of an American general receiver.Footnote ¹⁵⁴ The contract, however, was contingent on the U.S. Senate's approval of a Dominican-style convention, and this proved impossible to get when the Senate adjourned before considering the treaty. When the Senate again took up the Nicaraguan treaty in early 1912, Knox worked tirelessly to have the Committee on Foreign Relations consider it. Among other things, he sent to the members a copy of a speech he had made earlier in the year in which he explained in glowing terms the success of the Dominican receivership. In the speech, given before the New York Bar Association, he described the success of the Dominican receivership as “brilliant” and noted that it was “the best possible guaranty of the good effects to be expected from the Nicaragua” convention. More importantly, “[i]nstead of producing foreign entanglements,” he argued, “they have precisely the opposite effect because they do away with the present discontent and clamor of foreign creditors, because they insure prosperity, and because they make for peace.”Footnote ¹⁵⁵ Knox's arguments, however, did little to sway the Senate, and the treaty never made it out of the Foreign Relations Committee.Footnote ¹⁵⁶

With the lack of Senate approval for a treaty with Nicaragua and the collapse of Honduran loan negotiations, Taft and Knox now had a serious problem on their hands, one that placed the entire institution of Dollar Diplomacy in jeopardy. Their solution was not to abandon what had become a cornerstone of American foreign policy, but rather to move even further in the direction of market-based contractual relationships.Footnote ¹⁵⁷ While waiting for Senate approval, they had negotiated with Brown Brothers and Seligman a smaller loan of $1.5 million, and though this arrangement was originally intended to provide Nicaragua with some much-needed short-term cash, they now moved to make it permanent. A receivership along the lines of the original Dominican modus vivendi was thus arranged using an entirely private contract between the Nicaraguan government and Brown Brothers, with a customs collector to be appointed by the State Department.Footnote ¹⁵⁸

Why were bankers willing to take on this risk with no formal treaty? To some extent, of course, they weren't. The $1.5 million loan was far smaller than loans to the Dominican Republic. But State Department officials moved to construct a contract that placed control of Nicaragua's assets in the hands of bankers who were given control of Nicaragua's national bank. To secure an additional $750,000 loan, the State Department next pressured the Nicaraguans to give Brown Brothers a 51 percent stake in the national railroad. For most practical purposes, then, the Nicaraguan receivership operated exactly as the Dominican receivership had earlier, yet this newer arrangement had the virtue of cutting Congress out of the picture altogether, and as a technically private contract between the Nicaraguan government and the investment bank, it aroused little attention from the Senate.Footnote ¹⁵⁹ Yet, in point of fact, the agreement rested on the same implied guarantees that had supported the use of private capital in the Dominican Republic and even the Philippines. In each case, whether it was the formal colonial status of the Philippines, the employment of American officials in the Dominican customs houses, or the use of Nicaragua's national bank as collateral, the bankers were left with little doubt that they could call upon the American state to defend their investments. The increasingly private appearance of these contracts was necessary only to avoid the ire of the Senate. For their part, colonial officials had supreme faith that sound American leadership under these agreements would lead to increased stability, and nobody in the Taft administration seems to have considered that this assumption might prove incorrect.

The Wilsonian Interventions

Soon after taking office, Woodrow Wilson made his objections to the Taft administration's Dollar Diplomacy arrangements perfectly clear. In a 1913 address at the Southern Commercial Congress in Mobile, he noted that Latin American nations “have had harder bargains driven with them in the manner of loans than any other peoples in the world. Interest had been exacted of them, that was not exacted of anybody else, because the risk was said to be greater; and then securities were taken that destroyed that risk—an admirable arrangement for those who were forcing the terms!”Footnote ¹⁶⁶ If this did not suggest the new direction Wilson planned to take, the appointment of William Jennings Bryan as his secretary of state certainly did. Dollar Diplomacy, according to Bryan, was nothing more than “a repudiation of the fundamental principles of morality.”Footnote ¹⁶⁷ The threat that the Great Commoner posed to the receivership system was hardly lost on American bankers. Brown Brothers and J. & W. Seligman, which had so recently been persuaded by Knox to extend a loan to Nicaragua, threatened to pull out. At the very least, as one State Department official wrote to Huntington Wilson, they would extend no more credit “in the absence of any knowledge of what the attitude of the incoming administration might be.”Footnote ¹⁶⁸ These, of course, were the exact fears that J.P. Morgan had expressed in 1905. Without a formal contract, how could bankers have any guarantee that their investments would be safe in a new administration? For his part, Huntington Wilson tried to smooth the transition and helpfully summarized the policy for the new secretary as “intelligent team work.”Footnote ¹⁶⁹

Yet, as the bankers would soon discover, they had little reason to worry. Both Wilson and Bryan embraced Dollar Diplomacy as a central tool in their own Caribbean policy, especially after the outbreak of the war in Europe seemed to make American dominance of the Caribbean all the more important. Bryan himself, it seems, did not have any serious objections to the idea of using loans to stabilize countries in Latin America and the Caribbean. Rather, he objected to the appearance that the state was doing the work of bankers. Soon after assuming office, he had proposed to Wilson that the United States should directly lend money to the Caribbean nations. “If, for instance, in the stating of your policy, you propose, with the approval of Congress, that the Government lend its credit … we will offer what no one else is in a position to offer, and show that our friendship is practical and sufficient, as well as disinterested.”Footnote ¹⁷⁰ Wilson, however, quickly rejected this idea “as a novel and radical proposal.”Footnote ¹⁷¹ Rather than repudiate the partnership with the bankers or question the wisdom of the receiverships, the Wilson administration recommended yet more loans and increased American control in the Caribbean. Indeed, even as evidence of the policy's spectacular failure presented itself in the Dominican Republic, the secretary would recommend that Haiti, too, should be controlled through a receivership. “The success of this Government's efforts in Santo Domingo,” he wrote to Wilson, “would it seems to me, suggest the application of the same methods to Hayti [sic] whenever the time is ripe.”Footnote ¹⁷² His fellow Democrats met Bryan's curious support for Dollar Diplomacy with surprise and indignation. Despite a personal appeal from the Great Commoner himself, the Senate refused to support a more comprehensive receivership agreement with Nicaragua, according to the New York Times, “on the ground that it is a return to the imperialism against which Secretary Bryan declaimed so vigorously in 1900.”Footnote ¹⁷³

Undeterred, Bryan pressed on, eventually arranging a tighter receivership agreement with Nicaragua and extending American control to Haiti. Even these modified arrangements, however, soon proved too unstable to be sustained. In 1915, Wilson ordered the marines to occupy Haiti, and, a year later, military control was extended to the Dominican Republic and Nicaragua. In an ironic development, the Dollar Diplomacy partnerships, which had originally served to provide some measure of executive autonomy in foreign affairs, now left the Wilson administration defending the very banking interests they had denounced prior to taking office.