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Money and Power: America and Europe in the 20th Century

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Money makes the world go around: Kathleen Burk looks at how the Yankee dollar transferred influence from the Old World to the New.

The international power of the United States in the twentieth century has been grounded in its economic strength. In 1900, even before the US had much of an army, it was perceived as a power and a future great power. By 1920 it was the supreme financial power in the world, having displaced Great Britain during the First World War. By 1945 it was virtually the only financial power, most others having been devastated by the Second World War. By 1985 it had lost its position as supreme financial power, with Japan succeeding to the crown. It had been a short but action-packed reign.

The economic power of the US, as of any country, can be difficult to pin down. Power to do what? After all, economic power is not necessarily transferable to other realms. Power exercised by whom? Does the term 'financial power' refer to private money controlled by bankers and private investors, or public money controlled by governments? Indeed, does 'financial power' exist if abundant private money cannot be directed according to government policy? Certainly these are important questions when considering American relations with Europe, because economic relations, economic aid and economic rivalry have been dominant themes.

Yet from the beginning of the century until the advent of Lend-Lease in 1940, the years 1917-19 excepted, the only American money available was private money: power arising from a government's ability to disperse cash was not at issue. It is in the post-war period, with foreign aid and contributions to multi-lateral institutions such as the International Monetary Fund and the World Bank, that this direct governmental pressure becomes possible. But of course, what money can also do is finance an aggressive foreign policy. But here a country needs a will to power and a willingness to accept continuing responsibilities. Only in the post-war period did the US clearly, and more or less steadily, conduct such a foreign and military policy. The fact that she could afford to do so constituted the great difference between the US and the UK, her erstwhile rival and now increasingly- dependent ally.

Clear distinctions have to be drawn, therefore, between private and public money, between wartime and peace-time, and between Europe and, for example, Latin America, where American economic power underlay its own informal empire. Within Europe itself, there are distinctions. American relations with the UK are of a different order from those with any other nation. The financial communities, for example, remained close throughout the twentieth century. On the other hand, the trading communities have frequently been great rivals. At the official level, the US saw Britain as a great rival during the whole period from 1.900 to at least 1947: thereafter she gradually took on the colouration of a dependent, a position highlighted if one looks at episodes such as the 1949 devaluation, the Suez crisis, the fight to maintain the pound during the 1960s, or the 1976 IMF crisis.

American relations with, for example, France and Germany, have been very different. For a good part of the period, Germany was either an enemy, as during both of the world wars, or a basket case, such as during the Dawes negotiations in 1924 or during the immediate post-Second World War years. Germany's economic miracle and subsequent economic power have meant that Germany could share in the burden of supporting NATO, for example, but she has become increasingly difficult to push around, and lately the American Government has sometimes found this hard to cope with.

Nevertheless, Germany since 1945 has never denied the L'S the leadership role it has craved. The same cannot be said for France, which has never acknowledged that the US had any right to tell it what to do. France in her weakness suffered from American decisions during the inter-war period, such as over the Ruhr, and there is reason to suspect that post-war French politicians – in particular de Gaulle – determined never to be in this position again. De Gaulle, for example, hoarded gold and periodically attacked the dollar when it was down.

The US has always worked against a Europe led by France because France refuses to kowtow to the US in the way that Britain does. France's deep faith in 4er own moral and intellectual self-sufficiency has made her impermeable to the cultural weapons of a US conscious of its missionary significance to the rest of the world, and this has affected the impact that American power can have on France.

At the onset of the twentieth century, American power was seen as almost wholly economic. While Joseph Chamberlain, who pursued an Anglo-Saxon alliance, and Cecil Rhodes, who set up the eponymous scholarships, clearly thought there was useable power there, the American Army was experienced only in fighting Indians. The power of the US lay in its wealth.

For the public mind, there were certain iconic figures, pre-eminently the banker and financier J. Pierpoint Morgan on the one hand, the creator and holder of wealth, and on the other the American heiress, such as Consuela Vanderbilt, the dispenser of wealth particularly to an impoverished European aristocracy. For governments, there were other measurements: picture Sir Edward Hamilton, Joint Permanent Secretary to the UK Treasury, sitting late over his diary one night in 1906, listing the several previous years' output of steel for the UK, the US and Germany, and admitting that American industrial superiority was inevitable: his only hope was that it would not become too obvious in his own lifetime.

Hamilton's wish was granted, but only because he died in 1908. Had he lived through the First World War, he would have seen the prediction made manifest. Within the first month of the war, both Britain and France had sent people to the US whose duty was to purchase American goods for their respective armies, while within a few months all of those belligerents who fought on the side of Britain were purchasing goods in the US. Britain, of course, used the Royal Navy to prevent the enemy from shopping in the American market- place.

But the Allies came in their thousands. Britain by 1917 had purchasing missions in the United States totalling some 10,000 members, and she ~-as not alone. France and Russia also had resident purchasing missions, as did many of the smaller Entente powers – Italy, Belgium, Serbia and Greece. This all cost a substantial sum. Britain, paymaster of the Entente, by October 1916 was spending 40 per cent of all her war expenditure in North America. By April 1917 Britain alone had sent £305 million in gold across the Atlantic.

There was a limit to the money the Entente powers could send, largely because American goods had to be paid for in dollars, and the more dollars they needed to buy, the dearer they tended to become. In other words, exchange rate crises either threatened or existed for most. One way of getting around this problem was to borrow money in the United States itself and, beginning in 1916, this is what they did.

Indeed, it is useful to remember that all of this traffic in goods and loans was carried out privately. There was no question of the US Government becoming involved, other than allowing it to happen, and indeed European governments did not expect more while the US was neutral. More importantly, it had not the tradition of involvement in European wars. The US firmly held to the view that it would remain on the sidelines. Therefore, the Europeans were free to help themselves to American goods, as long as they could pay for them, but were to ask no favours from the American government.

All this changed when the US became a belligerent against Germany in 1917. The borrowing and spending in which the European powers had indulged drove them to throw themselves on the mercy of the US Treasury. Britain, on behalf of her- self and the other Entente powers, wanted the United States to take over the financing of the alliance in the United States – that is, to provide the funds to pay for goods bought in North America – while she, Britain, continued to do the same in the remainder of the world. The US, and in particular the US Secretary of the Treasury, William Gibbs McAdoo, was stunned at the amount of money required, and accused Britain of wanting the US to pay for the entire war. Britain, stunned in her turn, demonstrated by means of memoranda and verbal argument that this was hardly the case: what she was asking the US to pay for was less than she herself would continue to provide. In the end the US provided funds to finance the purchases of the Entente powers in the US, and some Canadian purchases, but she refused to take over the guaranteeing of Russian purchases, since, quite sensibly, the US preferred to hold IOUs from Britain rather than from a Russia in the throes of revolution. These loans constituted the war debts, $4.6 billion to Britain and over $4 billion to France alone, and they were to cause endless trouble during the inter-war years.

But even during the war both the president and the Secretary of the Treasury planned to utilise their financial leverage over the European powers. President Woodrow Wilson was determined that the other powers should agree to his peace plans, set out in the famous Fourteen Points, and he noted pointedly to his close adviser, Colonel Edward House, that at the peace conference 'we can bring the Allies to our way of thinking, because they will be financially in our hands'. Wilson found that, on the whole, this would not be the case. First of all, the US held back, for philosophical reasons, from exerting much of her power. She refused to supply more funds to her allies after March 1919, and therefore lost strictly financial leverage early on: she could no longer threaten to withdraw aid. Furthermore, she refused to accede to French demands to organise and control supplies of food and raw materials: the French idea was to use them as a weapon against the Central powers, as well as to ensure affordable supplies to the Entente powers. The US refused because the preponderance of Americans believed that the production and supply of goods should be left to the private sector and the marketplace, once the war was over. Thus, the US Government could not pressure France by withholding food, for example, because the government refused to take peace-time powers to control the foodstuffs in the first place.

But there was another reason: power in one realm is often not transferable to another realm. One target that Wilson had in America's sights was Britain's insistence on belligerent rights, especially the right to stop and inspect neutral ships in time of war and to commandeer their cargoes if she believed that they were bound for the enemy. He had included the 'freedom of the seas' as one of his Fourteen Points, and he determined to force the British to accept this. But Britain believed belligerent rights to be a matter of national life and death, and there was virtually nothing that Wilson could have offered, or threatened, which would have forced the British Government to agree to their cessation.

Secretary of the Treasury McAdoo, however, had other hopes and plans for American financial power. Britain in 1914 stood as she had for a century, the supreme financial power in the world. This was based on the strength of her economy, on the comprehensiveness and maturity of her banking system, on the experience and expertise centred in the City of London, and on the strength and dependability of the pound sterling, which both symbolised and helped to support the empire. This was in 1914: by April 1917 she was within three weeks of being unable to pay her bills in the US, and much of the summer of 1917 in the US Treasury was taken up listening to and negotiating with the UK to provide funds to pay bills for American supplies and to support the exchange rate of the pound, which otherwise would have plunged. This naturally gave people ideas, and comments began to be made that it was time for the dollar to replace the pound as the world standard of value, and for New York to replace London as the world's financial centre.

This was not an idle threat. Certainly in the inter-war period there was a distinct lack of capital in London and an abundance of it in New York. Two points will indicate this: firstly, by 1928, fully 40 per cent of British public expenditure was going on war debts of various sorts, and taxes were high to pay for this; and secondly, the US during the war became a great sink of gold: in 1913 Europe had held 63 per cent of the world’s total stock of gold and North America 24 per cent, while by 1925 Europe held 35 per cent and North America held 45 per cent. Banking assets in the US just during the decade of the 1920s increased by 36 per cent, from $53 billion to $72 billion.

In other words, comparing the state of the British economy, and in particular available resources, with the situation in the US, it is clear why many US Government officials and bankers became excited at the idea of displacing Britain as the financial power. In 1920 Congress passed the Edge Act, which allowed American banks to combine overseas in opposition to British banks; many Americans were also keen to set up numbers of American branch banks overseas, again in competition with the British. This was all private sector activity, and as such perfectly normal, but beyond this, things became more problematic.

The use of private money, particularly investment funds, to gain foreign influence was hardly unknown in Europe. Consider French encouragement of its citizens to purchase Tsarist bonds as a support for the Franco-Russian Alliance; or German encouragement of its nationals' banks and railroad companies to push into the Persian Gulf. The question for the US Government and the American investment community in the 1920s was, to what extent could they do the same? Europe had to be reconstructed, and major geopolitical problems, especially the Franco-German balance, were played out on economic, rather than military, fields. The European countries, and especially Britain, wanted the US to take part because she had by far the greatest financial resources available.

But these resources were private, not public, and thus not under the government's control. The Republican administrations of the 1920s believed that questions of finance and economics should be left to the private sector, but certain officials, especially the Secretary of Commerce, Herbert Hoover, wanted to 'guide' bankers and businessmen into following government advice. The problem was, he had no power to coerce; furthermore, there was the danger that if the road into which the government guided bankers disappeared into an abyss – say, that German loans turned out not to be repaid – there was the danger that these same bankers would turn to the government and demand compensation. This worry prevented the US Government from being more insistent. It could indicate, but not direct.

This meant that American financial power was not brought to bear directly on the main problems of the day. Direct foreign aid was never in question. It is probable that what the Europeans really objected to was that the US refused to make the gestures: it refused to attend international conferences, such as Brussels and Genoa, to play in the League of Nations or to take part in negotiations over reparations. But beyond this the US did not wish to become permanently involved in European affairs: she did not want to spend the money on an army or navy of a size which would have enabled her to make good such a guarantee. She could have had a friend for centuries in France, if only she would have agreed to some security guarantee for her against a resurgent Germany.

In short, the US took a look at the centre court of international politics, and refused to play. During the inter-war period the power of the US was potential, rather than actual. At the end of the First World War the US certainly had the resources to act as a great power. But to be a great power you need both resources and a sustained will, and the US lacked the sustained will.

The turning point, clearly, was the Second World War. The US joined the war two years on, much as had happened during the First World War, but the relationship and situation was very different. In April 1917 her allies, especially Britain, were still in the fight, even if the situation was one of stalemate: they were not defeated. In December 1941 France had been knocked out of the war, Britain was game but faltering, and the USSR could well have been on the way to defeat. The US entered as saviour, and increasingly became leader of the alliance.

Not only was the relationship of the US to Europe different during the Second World War, but the American reaction to power was different. In the Great War the idea was to finish the job and get back home. In the Second World War, the US clearly gained a taste for power, even for dominance. By the end of 1945 she no longer felt under the foreign policy tutelage of Britain, and developed policies both towards Europe and towards the British Empire very different from those espoused by the UK.

But even more of a change from 1918 was the fact that the US decided to become part of the world. She had had plans for a new world order in 1918, or at least President Wilson and some followers had, but they had come to nothing. Instead, the US had retreated to isolation. Again by 1944 the US had plans for a new world order, but this time she decided to make certain they were implemented. Her financial power was clearly brought to bear on her allies to force them to agree to her conception of a world of free trade and convertible currencies, or making the world safe for American business. She was also fundamental to the setting-up of the United Nations, in which the US would provide the largest financial support. In other words, she had learned the lessons of her sins of omission during the 1920s, and would help to set up and to run institutions to facilitate trade and to maintain peace.

The biggest change between the two post-war epochs, however, at least if one focuses on money and power, is that the US used public money as a weapon, instead of relying on guiding private money. The most obvious example here is Marshall Aid, an absolutely quintessential example of the combination of altruism and self-interest in foreign policy, and one which was focused on 'Europe', rather than on individual European countries.

The Marshall Plan was intended to solve several problems. First of all, in its urgency, it expressed the consensus of the American Government as to the threat posed by Soviet Communism: the US Government determined to help those threatened by Communism, whether externally or internally, if it was possible to do so, and as long as they tried to help themselves. The second problem, but a connected one, was that of Germany. The question was, should Germany be allowed to exist, but little more, or encouraged and helped to recover some semblance of her former economic strength? France, of course, wanted to keep her weak; Britain, on the other hand, wanted Germany to recover her rightful economic position, since the conviction was that Europe would never recover until there was a strong German economy to lead and to help sustain recovery. From this point of view, the Marshall Plan was a way of accommodating German recovery within the context of European recovery: they would all be helped together.

And finally, the third problem was what appeared to be the imminent collapse of the Western European economies. This had several dimensions. First, both France and Italy had strong Communist parties, which were already part of their governmental coalitions, and the fear was that the economic chaos would allow them to take over, as was happening in Eastern Europe. Secondly, the US was exporting seven times more than it was importing, and the fear was that if it could not find markets in Europe, recession would spread over the US. However, many European economies had to be re-built, but virtually anything they needed to buy, whether machine tools or food or coal, had to be paid for with dollars. No one in Europe had any dollars, or at any rate not nearly enough, and the main point of the Marshall Plan was to provide these dollars to jump-start the European economy.

The point of a European economy is crucial here. A major, though not the only, thrust of the policy of the United States with the Marshall Plan was to push for the integration of Europe. An integrated European economy would be a, free-trading economy fuelled by convertible currencies: this was a good thing in itself, but it would also provide a rich market for American products. Furthermore, states tied together economically would tend to stand together politically, and Europe would thus provide a barrier against the further expansion of the USSR.

Indeed many American officials and politicians believed that the answer to European failings was foe them to develop into a United States of Europe, based on the concept of federalism.

The Continental Europeans were most co-operative, implementing the Schumann Plan for the European Coal and Steel Community and then the Common Market. Britain was the problem, first in staying out of the ECSC, and out of the EEC at its founding in 1957, and second in persisting with its own nuclear deterrent. During the presidency of John F. Kennedy, the administration pushed the concept of the Grand Design, described by one of its most fervent advocates, George Ball, as the integration of Europe, into which Britain would have to be pushed by the US. Britain did not really need to be pushed by this point – 1961 saw her first and unsuccessful application to join the EC – but France, distrustful of both Britain and the US, kept her out. The US persisted in her support for a united Europe which contained Britain, but neglected to consider more carefully the implications for her own trade. What price a huge, thriving market if its barriers keep your own goods out?

Nevertheless, the US is far happier with a Europe united in an economic community than she would be without one. Europe moved because Europe needed American money, and she moved in the direction she did largely because this was what the Americans wanted. But it was also the case that many Europeans themselves agreed with the goal of integration – Schumann, Monnet, Spaak, Marjolin spring to mind – and this meant that the exercise of the money power was seen as more benevolent than threatening.

Other episodes were not so gentle. Three spring to mind: Suez, British devaluation in 1967, and the British IMF crisis in 1976. During the Suez crisis in 1956, Britain was brought to heel and forced to withdraw from Egypt not because the US attacked her financially: rather, the US refused to rescue her. The attack on Egypt brought on an accelerating sterling crisis which brought Britain to the verge of a catastrophic loss of reserves: the US refused to allow her to draw on the IMF until she agreed to withdraw her troops. Likewise, oil was embargoed, and likewise, the US refused to allow Britain to draw on American supplies. Faced with the situation, Britain capitulated. Curiously, France also was forced to capitulate, but not because of American pressure. France, unlike Britain, had anticipated financial pressure, and had providently drawn on the IMF before attacking Egypt; she only withdrew because her position would have been untenable without British troops. Suez, then, is an excellent example of American financial pressure turned on Europe; it also exemplifies a sub-theme, that France prepares and when possible defies, while Britain assumes the US will be friendly, does not prepare, and then gives in.

Part of the problem for Britain is that for most of the post-war period she tried to maintain the role of sterling as an international trading and reserve currency. Neither France nor Germany made the same attempt, or mistake, and thus their currencies were not vulnerable to attack in the same manner and as constantly as Britain's. During the 1960s, speculation increased against the pound. The US very much wanted the pound to remain pegged against gold, and indeed got James Callaghan, when Shadow Chancellor of the Exchequer, to promise that if and when Labour came into power, they would not devalue but would maintain the rate of the pound. The Americans feared that if speculators successfully attacked the pound, they would then turn their attention to the dollar; the pound, therefore, was seen as the dollar’s outer line of defence.

When Labour came to power in 1964 they immediately rejected the notion of devaluation, and thus spent the subsequent four years sacrificing their other policies to the defence of sterling. Time and again there had to be credits extended by other countries, but by 1967 the game was up. The Americans made one last offer of a substantial credit, but they tried to tie it to British foreign policy: they would extend the loan if the UK remained East of Suez and did not withdraw her troops from Aden and other bases. Britain refused, she had to devalue, and speculators did indeed turn their attention to the dollar, which President Nixon was forced to allow to float in 1972.

The final episode is the 1976 IMF crisis in Britain. Labour was again in government, and engaged in activities which very much worried the US Government: they appeared to kowtow too much to the unions, public spending was much too high, inflation in 1975 had been at an annual rate of 27 per cent, although it had fallen by 1976, and the government appeared, to the Americans, to be in grave danger of falling under the control of the left wing – in particular Tony Benn – who would lead the UK into a siege economy by throwing up currency and trade barriers, and withdrawing from Europe and NATO. Therefore, when yet another sterling crisis threatened both the economy and the reserves, and the UK was forced to apply to the IMF for a loan in September 1976, the US determined to use the 1MF to force changes in British Government policy and behaviour.

Indeed, ever since the beginning of the IMF, the US, by far the largest shareholder had used the organisation as a surrogate. The IMF was a multilateral institution and thus could require changes in the behaviour of governments which they would have spurned, had the suggestions come directly from other governments. The US Treasury in particular, but also the US State Department and the National Security Council, working through the IMF, required fundamental changes in British economic policy, in terms of cuts in public expenditure, unemployment policy, credit policy and interest rates. In short, the US, through the IMF, required a public recantation of British policy before she would allow funds to be supplied to Britain.

American economic power and influence in the post-war period, however, did not stem only from public expenditure, massive as was the total of foreign economic and military aid, especially on NATO. There was also the great, and greatly increasing, ambit of American banks and multinationals, and a consideration of American money and power in relation to Europe in the twentieth century must emphasise that they are part of the equation.

The power of the United States in the post-war period has been grounded in the power of the American economy. This had had two streams, private and public. The private sector has invested and controlled and taken over: one needs only consider Ford in Europe. The public sector has contributed foreign economic and military aid, sometimes directly, country to country, sometimes indirectly, through the World Bank and the IMF.

The reactions of European states has varied. The UK has had the most complicated relations with the US, sometimes fighting American wishes, frequently trying to co-opt American power and influence, but often giving in to American pressure, Germany, mesmerised by defeat and American dominance, and the Soviet threat, has largely accepted American leadership and American wishes; but this is changing as German economic strength increases and her interests begin to diverge from those of the US: there can be pleasure, and electoral benefit, in defying the 1US. France, of course, has never accepted American leadership: she withdrew from NATO, has more than once attacked the dollar, and has generally gone her own way, most recently and publicly during the Gulf War, and in attempting to use the Western European Union to undermine NATO. Europe itself presents a united front against the US over the GATT.

Money, then, is power either if the amount: is overwhelming and, the holder .is ruthless in its use, or if the recipient accepts the exercise of this power. During the first half of the century, the US had the resources, and much of Europe wanted her to act as a great power, but the US did not have the will to do so: she wanted her wishes to be taken into account: by Europe, but not to have continuing responsibilities either .for, or within, Europe. During the second half of the century, the US had even more of a preponderance of re- sources, and now she also had the will. Europe has been changeable and ambiguous in its response, partly insisting on the presence of the IUS, but partly also resenting this presence. How will all this end? The American economy is now in terrible shape, while those of the major European countries and that of a United Europe have a relatively better position. The US now has less money with which to be powerful: will she end the century as she began, somewhat isolationist and very self-absorbed?

Kathleen Burk is Lecturer in History at University College, London and author (with Alec Cairncross) of ‘Goodbye Great Britain’: The 1976 IMF Crisis (Yale, 1992).

Further reading: 
  • Kathleen Burk, Britain, America and the Sinews of War 1914-1918 (George Allen A Unwin, 1985)
  • Melvyn P. Leffler, The Elusive Quest: America's Pursuit of European Security and French Stability, 1919-1933 (University of North Carolina Press, 1979)
  • William Pfaff, Barbarian Sentiments: How the American Century Ends (Hill R Wang, 1989)
  • Robert Gilpin, The Political Economy of International Relations (Princeton University Press, 1987).

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