Formal imperialism was off the table after 1900, but the property rights of Americans continued to come under threat from a combination of feckless foreign governments and political instability. Governments in Venezuela and the Dominican Republic confiscated American direct investments, while other Latin American governments defaulted on their debts to American creditors. After the 1893 intervention in Hawaii, the 1895 resolution of the Venezuela-Guyana boundary dispute, the 1898 Spanish-American War, and the 1903 machinations that cleaved Panama from Colombia, it would be hard for any American administration to argue that it did not have the power to intervene on behalf of American investors.
U.S. administrations may have had the power to intervene on behalf of private interests, but their willingness to intervene depended on both the character of the president and the strength of the pressures brought upon him. When investor groups lined up the same way and could make a credible case that intervention served strategic interests, then intervention became more likely. Conversely, if investor groups were divided and there was no strategic interest, then intervention would be practically impossible.
In 1904, as instability threatened American direct investments, President Theodore Roosevelt was under pressure to intervene in the Dominican Republic, but he waited to build political support. In fact, he waited until the Dominican government joined bondholders and direct investors in requesting intervention. Roosevelt then proclaimed his intervention in terms of broad principles. The United States would exercise an “international police power” across the entire Western Hemisphere should Latin American governments engage in “chronic wrongdoing” or collapse into chaos.
By phrasing his reasons in the broadest possible terms, Roosevelt effectively committed his successors to the protection of American property rights across the circum-Caribbean. With Roosevelt’s declaration, risk premiums fell on all sovereign debt issues across the circum-Caribbean (that is, all countries with a Caribbean coastline, plus El Salvador), not just those of the Dominican Republic. A future president could not back down from that commitment without risking a strong adverse market reaction. In fact, when crises emerged in the U.S. intervention sphere, markets did react adversely until the administration of the day showed its willingness to act.
A corollary of the argument that intervention was likely when the interests of investors were aligned is that intervention was not likely when the interests of investors were divided. Such a situation in fact occurred in Venezuela in 1902. President Cipriano Castro confiscated the assets of an American asphalt company. Castro, however, carefully designed his expropriation around conflicting claims between two American asphalt interests—and the interests that benefited from Castro’s actions were closely connected to powerful Republican politicians. Castro therefore managed to forestall an American reaction. He did not prevent the aggrieved asphalt interests from privately funding a revolt against his government, but he did keep the United States from using its power against him.
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Theodore Roosevelt was not usually a man to choose inaction when action was an option. He nevertheless moved slowly in declaring hegemony over the Americas. It took an unfortunate and extended series of events in the Dominican Republic to get the American president to declare that the United States would exercise an “international police power” over the hemisphere.
The Dominican Republic had been chronically unstable since independence from Haiti in 1844. The republic suffered armed revolts in 1849 and 1857. Fearing a Haitian invasion (and hoping to stabilize his government), President Pedro Santana agreed to annexation by Spain in 1861. Spain, unfortunately, proved unable to bring stability: after four years of civil war, Madrid withdrew in 1865. In 1870, President Buenaventura Báez invited the United States to assume sovereignty. President Ulysses Grant signed an annexation treaty that promised Santo Domingo territorial status and eventual statehood, but race-based opposition against the admission of a “Negro republic” into the Union caused the treaty to fail on a 28 to 28 vote on the Senate floor.
Dominican political instability translated into financial instability. In 1869, the Dominican government contracted £757,000 ($89.7 million in 2011 dollars) in debt on the London market. The government promptly defaulted. In 1888, the Dominican government arranged a new issue worth £770,000. It used £142,820 to pay off the defaulted 1869 debt—at 45 pence to the pound—and the rest to finance the government. As security, the Dominican government placed the customhouses under the formal control of the underwriter, Westendorps & Co., a Dutch company, which sent managers from Europe to the republic. Two years later, in 1890, Westendorps underwrote a £615,000 issue intended to build a forty-two-mile railroad across the mountainous terrain between Santiago and Puerto Plata on the coast. The issue failed, and Westendorps assumed the debt. By 1892, eleven miles of railroad had been completed, at which point the Dominican government forcibly took back control of the customhouses and again defaulted on its debt. The Dutch government protested, but it had no legal recourse and took no action.
In 1892, a newly incorporated American firm bought out Westendorps’s interest. It sold the debt at 65 cents on the dollar to the San Domingo Improvement Company (SDIC), headquartered in New York. The SDIC gained “control” over the customhouses, but its managers understood that they could do little if Santo Domingo decided to revoke their privileges. As security, therefore, the SDIC wrote into the contract that, in the case of default, the governments of Belgium, France, the Netherlands, the United Kingdom, and the United States would appoint a “financial commission” to take direct control of Santo Domingo’s finances. SDIC refinanced the Dominican Republic’s existing debt and issued new bonds to finish the construction of the railroad.
~~The Empire Trap -by- Noel Maurer
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