War by Other Means

by Robert D Blackwill

  As with recent U.S. administrations and Congress, America’s early leaders also showed a clear appreciation for sanctions as a geopolitical instrument. Jefferson believed that economic sanctions could be used to bring peaceful pressure on other states, and he instituted an embargo to protect American seamen and avert war with Britain on his watch.

  Presaging the prolonged Washington debate on U.S. policy toward Iran, in November 1808 Jefferson himself argued that there were only three policies for responding to English belligerence: “embargo,” “war,” or “submission and tribute.” Not unlike the latter-day struggles of his successors, Jefferson too lacked a perfect blueprint for the use of the sanctions tool. The 1807 embargo against British goods was unsuccessful and was eventually repealed. The American economy suffered, American public opinion opposed the policy, and the embargo failed to have a consequential impact on British actions. In 1815, Jefferson, with geoeconomics on his mind, wrote to the French economist Jean-Baptiste Say, lamenting how during wartime “the interception of exchanges … becomes a powerful weapon in the hands of the enemy,” and extolling protectionism as a means by which the country may be secured “against a relapse into foreign dependency.”14

  During the Civil War, the Union successfully threatened Great Britain with trade sanctions, vowing a complete cessation of trade, including an end to grain shipments, and the loss of billions of dollars invested in U.S. securities. This potential geoeconomic coercion was one of the factors, along with U.S. willingness to use military force, British suspicion of French motives, and British repugnance toward slavery, that led London to stop supporting the Confederacy.15 A few years later, as the task turned from warfighting to reconstruction, U.S. leaders did not lose sight of geoeconomic opportunities that would not merely restore America but strengthen it beyond its antebellum position. Secretary of State William Seward negotiated the purchase of Alaska from Russia in March 1867, increasing the country’s size by more than 586,000 square miles for roughly two cents an acre ($7.2 million in total). Going on to begin negotiations similar territorial sales in Panama and Hawaii, “Seward laid the foundation for the United States to become not merely a continental power but an international empire.”16

  In December 1898, the United States paid $20 million to purchase the Philippines as part of the peace deal that would end the Spanish-American War. Concerned, then as now, about the future of China and arguing for an early pivot to Asia, Arthur MacArthur Jr., appointed in 1900 as the military governor of the Philippines, was convinced that “the only open field that presents any attractions to the practical economist is in the Far East.” He concluded that “peaceful possession of the Philippine Archipelago by the United States … is absolutely essential to the progressive development of American national interests.” MacArthur saw it as “the stepping stone to commanding influence, if not political, commercial, and military supremacy, in the East” and “a base from which American interests can be effectively protected.”17

  Thus geoeconomics was in the bloodstream of American leaders from the early days of the Republic. Facing predatory European nations and possessing weak military power projection, the founders as a matter of expediency instinctively reached for economic instruments to protect the young and vulnerable United States. As the North American continent was explored and conquered, their successors used the same tools decade by decade to broaden the U.S. strategic horizon into Asia and Latin America. Even as several of the founding leaders, such as Benjamin Franklin, evolved their views on basic questions of market orientation, abandoning mercantilism in support of free trade, their embrace of geoeconomics remained constant. The nineteenth-century grand strategy was established: military force at home to keep the country together and subdue Native American tribes, and geoeconomics abroad to generate wealth and expand the American empire.

  As Americans from Alexander Hamilton onward understood with great clarity, the American economy existed within an international trading and investment system that was centered on Great Britain’s naval might and industrial ingenuity and capacity. For many generations, geoeconomics in the United States involved the question of how the connection between the American economy and the British system could be accomplished so as to maximize American prosperity and security. But beginning with World War I and accelerating through the 1940s, this U.K.-supported global commercial system began to weaken, and London gradually lost its strength and eventually its political will to defend it, leaving Washington with the profound question of how best to manage world order.

  World Wars I and II: The Geoeconomics of Total War

  The outbreak of war in 1914 brought a profound shift in America’s relationship with geoeconomics. By World War I, geoeconomic policies, especially ones of economic privation, had entered into the bloodstream of British strategic thought. As British foreign secretary Viscount Grey of Fallodon recounted in his memoirs, “The object of diplomacy … was to secure the maximum blockade that could be enforced without a rupture with the United States,” which still clung zealously to its neutral trading rights with Germany.18 The British very nearly pushed too hard. But fortunately for London, the Germans’ aggressive U-boat campaign in the Atlantic soon “helped to put things into a clearer perspective in the USA,” especially following the sinking of the Lusitania in May 1915.19 But once Washington entered the war in 1917, the Americans introduced economic embargo measures even tougher than the British. Within a matter of months, the United States pivoted to full cooperation with the Allies’ food blockade of Germany and then embargoed all exports to the Scandinavian countries and the Netherlands, all of which had stayed neutral. America’s exposure to the horrors of total war in 1917–1918 “appeared speedily to disabuse it of any fond belief that the principles of extensive trading rights for neutral nations could be upheld in time of war.”20

  It was around the same time that Woodrow Wilson became outspoken in his criticism of “dollar diplomacy.” Speaking at Independence Hall on July 4, 1914, on the nature of liberty, Wilson staked his opposition thus: “There is no man who is more interested than I am in carrying the enterprise of American business to every quarter of the globe … [But] if American enterprise in foreign countries, particularly in those foreign countries which are not strong enough to resist us, takes the shape of imposing upon and exploiting the mass of the people of that country, it ought to be checked and not encouraged. I am willing to get anything for an American that money and enterprise can obtain except the suppression of the rights of other men.”21

  Wilson took issue with the ends of “dollar diplomacy,” not the means, in other words. So long as geoeconomic instruments were put in the service of U.S. foreign policy aims that Wilson considered valid, he believed they had a legitimate, even vital, role to play. This was seen certainly in his zeal for economic embargo once the United States entered the war. But by 1919, as Washington was shifting its focus from winning the Great War to the less familiar task of advancing the peace, Woodrow Wilson came to believe that the League of Nations could prevent war by imposing an “absolute” boycott on aggressor countries. “A nation boycotted is a nation that is in sight of surrender,” he explained. “Apply this economic, peaceful, silent, deadly remedy and there will be no need for force. It is a terrible remedy. It does not cost a life outside the nation boycotted, but it brings pressure upon the nation that, in my judgment, no modern nation could resist.”22

  Even as American isolationism returned in the period following World War I, U.S. geoeconomic policy was still at work in the world—if anything, deepening during the interwar period. “Disillusionment with the war, international commitments that could lead to war, and economic uncertainty discouraged ambitious U.S. involvement in global affairs during the interwar period,” as the State Department historian summarized the national mood at that time. Even as the United States fatigued of Europe’s military dilemmas, President Wilson and his foreign policy architects turned to facilitating U.S. private investment overseas; U.S. inv
estment dollars would be their mechanism of choice for expanding America’s influence abroad.23

  The Dawes Plan, for instance, allowed U.S. banks to lend Germany enough money to enable it to meet its reparation payments to France and the United Kingdom. Those countries used the received payments to service their war debts to the United States. Economic policy making in Berlin was reorganized under foreign supervision just as the reichsmark was adopted as new currency. Foreign supervision of German finances only ceased—and the last occupying troops left German soil—under the Young Plan in 1929.24

  In 1934, the Roosevelt administration established the Export-Import Bank with the narrow objective of facilitating trade with the Soviet Union. In the late 1930s, however, its focus expanded. “In June 1938,” according to one assessment, “the Bank made its first Latin American commitment that seemed to be influenced by considerations of foreign policy: an agreement with the Haitian government to purchase up to $5 million of notes to be issued to an American construction company in connection with an extensive public works program in the country.”25

  The Roosevelt administration intervened to preempt German encroachment in the Western Hemisphere, and more generally used trade to keep Germany out of its backyard. “Between 1934 and 1945, twenty-nine Reciprocal Trade Agreement treaties were made between the United States and various Latin American countries.”26 The administration also attempted to use the Ex-Im Bank to blunt the rise of Japan: citing a “bare chance we may still keep a democratic form of government in the Pacific,” Secretary of the Treasury Henry Morgenthau Jr. helped arrange a $25 million loan to China in December 1938.27

  A year and a half after the outbreak of World War II in Europe, the Lend-Lease policy of 1941 (formally titled An Act to Further Promote the Defense of the United States) enabled the United States to supply Great Britain, France, the Republic of China, and later the USSR and other Allied nations with defense materials, effectively ending the American pretense of neutrality. In all, some $50.1 billion worth of supplies (with a cost of approximately $660 billion in today’s dollars) were shipped, or 17 percent of the total war expenditures of the United States. Of this, $31.4 billion went to Britain, $11.3 billion to the Soviet Union, $3.2 billion to France, $1.6 billion to China, and the remaining $2.6 billion to other allies.28

  Secretary of War Henry Stimson regarded Lend-Lease as “a declaration of economic war.”29 Many in London saw it as a form of economic warfare against Britain. Their belief was not entirely unfounded: Lend-Lease exercised control over British exports, sought unilateral decision over the level of British gold and dollar reserves, and sought to extract U.K. concessions about the character of postwar commitments to participate fully in the new economic order. As such, Lend-Lease policies also helped sweep away whatever lingering discomforts there might have been in Washington about the unabashed wielding of geoeconomic power, at least in times of existential threat.

  Interestingly, had the U.S.-U.K. alliance been less resolute, the British might have obtained more favorable terms under Lend-Lease. Throughout the eight years of Lend-Lease, the Americans were far tougher on the British than on the French or the Soviets. Despite massive U.S. aid to Moscow, interdependence between the Soviet Union and the United States did not exactly foster in Stalin a vested interest in working with the United States to create a liberal capitalist postwar world order. Washington’s decision to refrain from exercising economic leverage on the Soviets during the European war was driven partly by fears of a separately negotiated peace between the Soviets and Hitler (à la the Nazi-Soviet nonaggression pact of 1939) and partly by the desire to gain Soviet support for defeating the Japanese.30

  With its entry into World War II, America would once again see its views toward both neutrality and neutral rights to trade powerfully reshaped. In a transformation led principally by FDR, U.S. Treasury Secretary Henry Morgenthau, his assistant Harry White, and Vice President Henry Wallace, the United States developed a renewed zeal for economic warfare, going well beyond anything the British had contemplated in their sanctions and embargo efforts. Washington widened its definition of contraband, and no longer insisted that a blockade be physically enforceable to be a blockade—innovations that U.S. leaders touted in far more moralistic terms than the more legal, pragmatic rationales favored by Whitehall. “Moralizing was not exorcised from U.S. decision-making,” explains historian Alan Dobson. “It was simply given a new direction and content.”31

  Geoeconomics may have been more strongly represented in U.S. foreign policy during this period, but it was not necessarily any easier. Bureaucratic tensions within the U.S. government vexed implementation of embargoes during World War II. As two members of the Foreign Economic Administration (a short-lived office established to overcome these tensions) summarized the situation:

  Even after we entered the war … the definition of responsibilities among the [U.S. government] agencies interested in various aspects of these programs was far from perfect. For one thing, economic warfare was a fascinating subject to dabble in, and everyone had ideas about what should be done.… The Board of Economic Warfare … had been intended to provide coordination and guidance, but it met infrequently and was abolished after the Wallace-Jones feud broke into the newspapers. Only the President could finally decide the controversies, and he usually had other things to do.32

  When it comes to formulating and implementing geoeconomic policies, destructive U.S. bureaucratic politics have a rich history, it seems; such sentiments could just as well have been written by frustrated American foreign policy strategists yesterday.

  Nor was foreign policy back then necessarily more self-aware than it is today. In what would go down as one of America’s most ironic displays of geoeconomic statecraft, after threatening Sweden with retaliation for not upholding its neutral rights in January 1943, U.S. Secretary of State Cordell Hull returned to the subject eighteen months later, this time warning Sweden of retaliation if it did not abrogate those very same rights (by Hull’s account, “nothing short of embargo and radical change in Sweden’s German policy would satisfy our [Allied] demands”).33 This serves as yet another reminder that consistency has not always been a hallmark of U.S. diplomacy, then or now.

  But these geoeconomic efforts were better resourced, more ambitious, and more in the foreground of U.S. strategy than is true today. In 1943, the United States established the Office of Economic Warfare, dispatching more than 200 market analysts around the world and housing nearly 3,000 experts in Washington with orders to safeguard the dollar by bolstering the U.S. current account position and by securing vital imports at favorable terms.34 In July 1944, delegates from the Allied countries signed the Bretton Woods Agreement, seeing strengthened international economic cooperation as their best hope for avoiding the horrors of another global war. Secretary of State Hull explained: “Unhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition, with war … [I]f we could get a freer flow of trade—freer in the sense of fewer discriminations and obstructions … so that one country would not be deadly jealous of another and the living standards of all countries might rise, thereby eliminating the economic dissatisfaction that breeds war, we might have a reasonable chance of lasting peace.”35 The goal, of course, was lasting peace on America’s terms. Baldwin notes, echoing a widely shared view, that “the American use of trade policy to construct an international economic order based on nondiscriminatory trade liberalization in the period after World War II was one of the most successful influence attempts using economic policy instruments ever undertaken.”36

  To be sure, other economic techniques, such as aid (especially the Marshall Plan), currency stabilization, and promotion of private investment, were also important components of American foreign policy. But American trade policy was the key to success. Even at the time of the Bretton Woods conference in 1944, this was well understood. As one attendee, writing in the New York Times, put it, “Commercial policy … is the key to the
whole show, for there is practically no one here who has the slightest confidence in the efficacy of any of the machinery in the process of building in the absence of an American trade policy that lowers tariff barriers and makes it possible for the world’s greatest creditor nation to perform her proper function of buyer.”37

  The Postwar Period and the Early Cold War: A Golden Age of American Geoeconomics

  America’s geoeconomic reflexes remained in full flower after the war, abetted by U.S. economic dominance and the USSR’s economic isolation. As early postwar consensus began to settle on economic factors as being among the leading causes of World War II, U.S. policy makers answered with a largely geoeconomic plan for achieving lasting peace, in Europe and beyond. Lend-Lease was rolled over to become one of the first forms of U.S. postwar assistance. A fierce debate erupted within the U.S. government over whether to include the Soviet Union among the eligible recipients of postwar Lend-Lease financing, with some favoring the move as liberalizing and others seeing the need to use economic leverage to bring the Soviets into line. But by 1946 Truman had lost patience with Moscow, declaring himself “tired of babying the Soviets,” and by the following year the debate had shifted away from extending postwar financing to applying geoeconomic pressure.38

  These various preoccupations finally came together in June 1947, when Secretary of State George Marshall, delivering commencement remarks at Harvard University, famously declared that “the United States should do whatever it is able to do to assist in the return of normal economic health in the world, without which there can be no political stability and no assured peace. Our policy is directed not against any country or doctrine but against hunger, poverty, desperation, and chaos. Its purpose should be the revival of a working economy in the world so as to permit the emergence of political and social conditions in which free institutions can exist.”39