US Economic Statecraft for Survival 1933-1991 Part 1

US Economic Statecraft for Survival 19331991.

Alan P.Dobson.

Acknowledgements.

This book has been a long time in coming. When I started research back in 1990, I was a lecturer in the Department of Political Theory and Government at the University of Wales, Swansea. In 19945, I had sabbatical leave, which allowed me to complete two other projects, and also move this one forward. In 1997 I enjoyed a Senior Research Fellows.h.i.+p in Oslo funded by the Norwegian n.o.bel Inst.i.tute, which enabled me to write Chapters 5 and 6. In 1999 I received an Arts and Humanities Research Board Sabbatical Scheme Award, which gave me six months of leave funded jointly by the AHRB and the University of Dundee. This allowed me to complete the first full draft of the book. Along the way I also had grants from the British Academy, the Harry S.Truman Library and Foundation, and the Franklin D.Roosevelt Library and Foundation. Without these awards I could not have written what follows.

It is also important to register my grat.i.tude for the support and faith in me of my publisher, Routledge/Taylor & Francis. Throughout they have been patient and understanding, as one deadline superseded another. They have received two other books from me since the signing of the contract for this (one of which was not foreseen in 1990), but, nevertheless, their patience has been much appreciated.

Chapters, or the whole ma.n.u.script, have been read by friends: Steve Marsh, Tom Zeiler, Saki Dockrill, Ian Jackson, Norrie MacQueen, and, last but by no means least, my long-standing intellectual mentor Charles Reynolds, who commented extensively on Chapter 11. Two anonymous readers for Routledge/Taylor & Francis also deserve a mention for their constructive and painstaking comments, which helped to improve the ma.n.u.script in its final editing. The help I received was always constructive and to the point; the flaws that remain are my responsibility, and mine alone.

The 1990s was a busy decade for me, and writing was not always easy. Respite and sustenance from friends and family kept me sane at moments of desperation when continuing the explanation seemed beyond my grasp. Most of all, thanks go to Bev and our girls, Naomi, Jessica and Becky for their love and support, and good fun.

Alan Dobson Dundee August 2001.

1.

Economic statecraft.

The strength of a war waged without monetary reserves is as fleeting as a breath. Money is the sinews of battle.

Francois Rabelais, c. 14921553.

Irony provides an enduring fascination for the historian. It emerged in the early stages of research for the present work, when sanctions and embargoes often appeared more costly for those that sanctioned than for those who were sanctioned. The idea that one state should make another pay for unacceptable behaviour by imposing greater economic costs on itself than those endured by the target state does indeed appear ironic. But, as the investigation into US policies proceeded, it became apparent that this involved more of a semblance of irony than a reality. Once costs and benefits are calculated broadly, and not simply in crude economic terms, the balance between gains and losses s.h.i.+fts. As this study demonstrates, there are important non-economic dimensions to economic statecraft that need to be drawn into the calculation of costs and benefits.

The heart of this enquiry is concerned with how the USA crafted policies of economic statecraft that were an integral part of its foreign and strategic policy, geared towards ensuring the survival of the USA in the face of vital threats to its security. The way American officials thought about such policies was partly the outcome of long-established traditions of practice and styles of policy-making, and partly the result of the contemporary context set by the character of US domestic politics, the international system, and the economic instruments of statecraft available to twentieth-century pract.i.tioners. However, these factors alone only set the parameters of the possible, they cannot explain radical changes in American thinking. For example, to explain how the USA moved from defending its traditional neutral rights to trade in wartime to arrive at a position of waging a kind of economic warfare against the Soviet Union in peacetime, the ideas and moral positions of individual policy-makers need to be factored in.

Explaining how and why that journey was made is one of the early tasks of this book. However, a more abiding concern and a more important claim is to do with the value US policy-makers ascribed to the ability of economic instruments of statecraft to act as a means of communication: to project symbolic meaning in ways that were vital for the more political and strategic goals of the USA, and to provide a means of bargaining in the broad panoply of diplomatic negotiations. The importance of those qualities and tactics has been seriously underestimated in previous attempts to explain US policy. Understanding the importance of the power of symbolism and communication with which US policy-makers came to imbue economic instruments of statecraft casts new light on important lines of reasoning within the American official mind, and helps to explain many of the contours of, and directions taken by, US policies. This, in turn, helps one to understand why the USA continued to shoulder the costs of a wide-ranging strategic embargo during the Cold War, even after most officials came to believe that it was ineffective in terms of slowing down either economic or weapons development in the Soviet Union. It was not, as some were to claim, a case of fossilisation of policy and 'the inability or refusal to re-evaluate the "optimality" of these policies once the a.s.sumptions underlying them proved to be erroneous'.1 While bureaucratic inertia played a part in maintaining the stringency of the US embargo, much more significant were lines of argument to do with the importance of symbolism and communication. These led to positive and conscious decisions to sustain the embargo, even when calculation of economic losses and gains no longer justified it. The a.s.sumptions that underpinned the US strategic embargo in the 1940s no longer did so in the 1960s, but new ones did, and they provided the justification in American minds for continuing with an expansive embargo against communist states. It did not become a policy by default.

Part of the reason why the importance of symbolism has been so seriously understated in previous works is a strong tendency to look for quantifiable and observable economic results from sanctions, strategic embargos and economic warfare. There is no denying that such instrumental economic effects were looked for by pract.i.tioners and often used to justify US policies. However, more commonly, pract.i.tioners used instruments of economic statecraft for symbolic or communication reasons, or for bargaining purposes. In a rather crude categorisation, one might say that during 193341 the USA looked for a mixture of economic instrumental and symbolic effects from its embargo against j.a.pan. It looked overwhelmingly for economic instrumental effects from its economic warfare during the period 19415 and from its early Cold War embargo aimed at the Soviet Union, from 1947 to the early 1960s. Thereafter, in the early 1960s (but beginning in the mid-1950s), the emphasis s.h.i.+fted in Was.h.i.+ngton, and the USA looked to the symbolic, communication and bargaining aspects of the strategic embargo. Such objectives reached their apogee of importance in the period of detente from 1969 to 1979. Finally, during the Second Cold War, the Reagan Administration was ideologically riven into two factions in a way no previous administration had been on policies of economic statecraft. One faction looked for economic instrumental effects, the other for symbolic and communication effects and advantages for the US bargaining position. For a while, these factions, although they had different motives, were agreed upon a hard-line policy, but beginning in 19834 their policy preferences began to diverge.

Not only have there been failures to give due prominence to these changing features of US objectives, but a closer look at the way they were pursued casts new light on the kind of lessons that American policy-makers drew from their experiences and provides a sharper perspective on the limitations of US power within the Western Alliance. The lessons drawn from 193341 and from 19415 were highly influential in US Cold War policies. While economic sanctions failed to deter j.a.pan, economic warfare during 1941 5 was seen as highly effective. Furthermore, the clearest policy imperative to emerge from the pre-war period was that appeas.e.m.e.nt did not work and had given the wrong message to the totalitarian regimes. But, while appeas.e.m.e.nt was now seen as the worst possible kind of folly, and effective communication of US resolve was deemed to be of paramount foreign-policy importance, how was the USA to convey that effectively and safely to its potential adversaries in a nuclear-perilous world? Especially after the Soviet Union acquired its own nuclear capability, the answer to that was increasingly seen to lie in the use of economic instruments of statecraft, such as sanctions and a strategic embargo.

A corollary of US determination to avoid appeas.e.m.e.nt involved vigorous leaders.h.i.+p of the Western Alliance, but the suggestion made by many that this was hegemonic in character is brought into question by a close examination of America's experience in the field of economic statecraft. While some scholars declare outright that the USA was hegemonic in the Western Alliance, others nuance their interpretation by suggesting that US prudence, made manifest in numerous occasions of self-restraint, disguised the real extent of its hegemonic dominance. Both these views are significantly modified by the present work, which shows that US policy-makers believed that, had the USA tried to flex its muscles more vigorously, the alliance would have suffered serious ruptures, and that American power would have diminished not expanded. Although the idea of hegemony is brought into severe question by these arguments, ironically there were leaders.h.i.+p costs that had to be shouldered by the USA of a kind similar to those predicted by hegemony theory.2 The USA, throughout the Cold War, maintained a more extensive national embargo list than that imposed multilaterally by the Western Alliance through the Co-ordinating Committee (COCOM, of which more shortly). The USA maintained a very substantial differential between itself and its allies on trade with the People's Republic of China (PRC), and always took the lead in imposing sanctions in response to crises such as the Soviet invasion of Afghanistan in 1979. Part of the reason behind all this was a US sense of leaders.h.i.+p responsibility. But why did the allies not dutifully follow suit? Was the US inability to achieve such action from its allies a major failing of persuasion? Did the West Europeans and the j.a.panese cynically free ride and exploit the US leaders.h.i.+p dilemma for their own interests? Alternatively, did the allies genuinely disagree with the USA on the best tactics for waging the Cold War and see benefits for overall Western strategy from the USA playing hard-ball and getting the right deterrent message across to the communists, while the Europeans and the j.a.panese pursued a softer line to seduce the opposition with trade, communications and cultural exchanges?

These preliminary observations give some hint of the importance of economic statecraft in general and of US policy in particular, and yet, rather puzzlingly, for many years study in this area was neglected. Rabelais' view that state power and money were directly related was part of the conventional wisdom of the age of mercantilism, but, beginning in the eighteenth century, the laws of supply and demand seemed to create an independent economic realm, which challenged that conviction. At the very point in history when the industrial revolution began to produce unprecedented wealth and undreamt-of military capabilities, there was a tendency to see economics as separate from the study of political power and strategic relations.h.i.+ps. Vestiges of that perception remained influential, well into the latter half of the twentieth century, until the revival of political economy. Economics then rejoined high politics as a focus of study in diplomacy and international relations, and there was thus a return to something not dissimilar to mercantilist perceptions of power and the importance of wealth. In contemporary parlance, such views often find their expression in the language of realism.3 As a result of this revival of interest in economic statecraft, there has been a growing scholarly preoccupation both to try to identify the nature of economic power and the manner in which it operates in, or impacts on, the political and strategic domains.

There are plenty of works on US foreign policy conceived of primarily in political and strategic terms. By comparison, economic instruments of foreign policy and economic issues as the subject of policy-making are generally only of peripheral or pa.s.sing concern, or are seen as technically separate from other aspects of foreign policy. Banishment to the periphery and the segregation of the economic from the political and the strategic are regrettable. Deterrence and attempts at deterrence in the 1930s and in the Cold War went deeper and spread broader than can be captured simply by focusing on the purely political and the purely strategic. The political, the strategic and the economic are all inextricably intertwined strands of foreign policy. A brief excursion into the 1930s will demonstrate the pertinence of this judgement.

In 1935, with the Western democracies in disarray over how to deal with the threats of militarism and totalitarianism, the Italian fascist dictator Benito Mussolini deemed it an opportune time to embark on a mission. He wanted to recreate the Roman Empire by invading Abyssinia. Britain and France were in a dilemma: they wanted Italy to help balance the threat from Hitler in Europe, but could not countenance the moral outcry against Mussolini's naked act of aggression. They decided to impose economic sanctions through the League of Nations, but excluded oil from them, which was the one key commodity that would have hit Italy hard. At the same time French Foreign Minister Laval and British Foreign Secretary h.o.a.re sought a compromise deal whereby Italy could have part, but not all, of Abyssinia. In the end both policies failed, and Mussolini seized the whole country. Henry Kissinger has aptly noted the folly of Anglo-French policy, the two countries' failure of resolve and their inability to convey the right messages to Mussolini. He has also commented: 'Prime Minister Baldwin [of Britain] was to say somewhat wistfully that any sanctions that were likely to have worked would also have been likely to lead to war. So much, at any rate for the notion that economic sanctions provide an alternative to force in resisting aggression'4 Kissinger was only partly right. If a state is bent on aggression and convinced that its potential enemies cannot withstand its force of arms, then war does indeed seem inevitable. But in the Abyssinian case Baldwin's timid att.i.tude was not universally subscribed to. Winston Churchill thought 'Mussolini would never have dared to come to grips with a resolute British Government'.5 Italy could not have prevailed against France and Britain, or either of them separately, but the danger of retribution had to be conveyed effectively. If economic sanctions had been imposed in a different way, had included oil, and had been made to appear as a clear preliminary to the use of force by France and Britain, then the story might have been very different. Economic sanctions might have 'worked'. But they would not have worked as an instrument of economic statecraft unrelated to other aspects of statecraft. They would have worked as part of a wider strategy that used economic sanctions as a means of conveying a determination to use force as the next step, if that were necessary.6 In other words, much will be conveyed to the target state and to other const.i.tuencies by the way sanctions are imposed, upheld and withdrawn, and those messages may often be a vital part of the political and strategic policies of the state imposing them.

Between the Marxist idea of the state in capitalist society and the liberal conception of laissez faire falls the actual role of economics in the life of both the state and the international realm. Economics does not necessarily dictate to politics, but neither is political life immune from economic influences. The liberal conviction that social and political values should not interfere with the economic laws of the marketplace created an unfortunate tendency to approach the study of the 'high policy' of states through a preoccupation with political, diplomatic and military matters, to the neglect of economic considerations. This was, of course, with the exception of Marxists, who a.s.serted the truth of their doctrine and consequently that politics was a mere epiphenomenon conjured up by economic realities. Between these two incompatible extremes little intruded for many years, and the result was what is now widely recognised as a neglect of economic statecraft.7 Economic theory may have flourished, but explaining both why economic policies came about and how they interacted with the political and the strategic did not. The key issue here is not so much to do with the abstract complexity of economic theory, but the understanding of it by policy-makers. If one draws the distinction between economic theory, on the one hand, and how politicians understand it on the other, then inhibitions about marrying the political with the economic can fall away even for the semi-numerate, providing that they are not enmeshed in the ideological straightjackets of market liberalism or Marxism. The distinction between economic theory and the understanding of economic policy by decision-makers is one that it is important to draw. And, although this may seen a rather obscure point, it is a highly relevant one, because it helps to differentiate the narrative and a.n.a.lysis contained in this book, which concentrates on explaining specific US practice and understanding of it by the agents involved, from the kind of work produced by scholars such as David Baldwin, Philip Hanson, Per Lundborg, Michael Mastanduno,8 and others, whose main, but not exclusive, concerns are to produce frameworks for policy evaluation and strategic guidance for future practice.

Not everyone avoided economic statecraft. Some pointed out the interaction of political and economic forces in the US Marshall Plan and the drive for European integration, in Western policies of economic denial directed at the Soviet Union and other communist states, and in Western policies embodied in the Bretton Woods international monetary system and the General Agreement on Tariffs and Trade (GATT).9 Such scholars were still in a minority, however. But with the oil price traumas and behaviour of the Organisation of Petroleum Exporting Countries (OPEC) in the 1970s, economic matters became such an obvious and integral part of the international political system that the prejudice against the study of economic statecraft began to break down.10 Both social scientists and historians took corrective action, but economic affairs still often sit uneasily beside political, diplomatic and military matters.11 This book is an attempt, among other things, to make them sit together more comfortably.

One of the problems of writing this kind of book is the contested meaning of some key terms and concepts. In Chapter 11 we shall look in some detail at these issues in the light of the explanation offered here of US policies of economic statecraft and argue that definitions of practice cannot be imposed a priori, but only derived from an explanation of practice. For the purpose of clarity in the narrative that follows it simply needs to be declared that the terms 'sanctions', 'strategic embargo', and 'economic warfare' all have rather elastic meanings that overlap in terms of the kinds of practice that they attempt to identify, and the meaning of these terms will become clear from the context in which they appear. However-rather ironically, given claims made here that much of the literature in this field has been too a priori and procrustean in its definitions-it emerges that an important distinction is often not drawn by scholars, namely that between economic warfare and cold economic warfare.12 The former can involve military action such as blockades and strategic bombing, and is thus only possible in wartime, whereas cold economic warfare, which shares similar objectives, is conducted in conditions of formal peace.13 Similarly, notwithstanding all the ink that has been spilt on the subject, it is not clear that previous scholars have given sufficient weight to the effects that the change from conventional total war to nuclear war has had on what is technically known as fungibility. The term 'fungibility' attempts to capture the sense in which a seemingly non-strategic good can prove to be of more strategic value than weapons. In other words, there is no such thing as an intrinsically strategic good; all is relative. Those who think otherwise fall into what Wu has called the strategic materials fallacy.14 Everything depends on the context, the nature of the conflict and the state of technology. In modern warfare, and particularly in conditions of conventional total war, fungibility is of immense importance-providing, of course, that it has time to take effect. This is a problem. For example, it takes time for personal computers to raise the industrial productivity of a country, thus providing the potential to make it militarily more powerful. In a cold-war nuclear world fungibility becomes even more problematical. If nuclear war were to break out there would be no time for fungibility to take effect, but in the peaceful meantime strategic decisions need to be taken on the basis that fungibility might have time to impact on the potential enemy's war-making capabilities. Contrary to what some scholars have claimed, US policy-makers were either directly or intuitively aware of the significance of fungibility, and that influenced both their a.s.sessments of what were and were not strategic goods and their relative economic and strategic values. The narrative will demonstrate that these kinds of calculation went on, and that they were not conducted in a vacuum. Political factors within the domestic realm, alliance politics, and a.s.sessment of whether or not the target state might overreact often modified what might have been determined, in the abstract, as the most economically cost-effective line of action to take. Such calculations were also further complicated by the need to a.s.sess future developments, not solely in relation to the results of action to be taken in the realm of economic statecraft, but also in relation to possible moves in world politics and international strategic changes. For changes in the broad international situation might determine whether fungibility would have time to operate, or whether a crisis might arise in which items of less strategic value in the long term might have a critical impact on the not-so-distant here and now.

Many of these considerations, particularly domestic political pressures for expanding trade, raise the issue of the autonomy of the executive branch of the USA-and particularly with regard to the office of the President and the State Department where one would normally choose to look first of all for policy development and implementation in the foreign field. Just how autonomous the foreign-policy executive was during this period will be considered in the next chapter, but the balance between autonomy and external influence will only become fully apparent in the detail of the later narrative. However, it is also important not to forget the general pluralist condition of the free market in which decisions had to be made and policy carried out. From time to time, and particularly after detente demonstrated the potential for US trade with the Soviets, and US corporations established vested interests in continuing and expanding such trade, the Congress and US corporations had more important input into US economic statecraft. Those inputs often complicated policy-making and sometimes forced matters in ways that were not agreeable to the executive branch. In contrast, the j.a.panese in the 1930s, and the n.a.z.is, and the Soviets, did not suffer from such complications.

Thus economic statecraft emerges as a focus of concern for scholars within the broader field of foreign policy. In this study, activity falls within the scope of economic statecraft not only when economic instruments are used as means for conducting statecraft, but also when non-economic instruments are used against specific economic targets in wartime. In examining the different categories of economic instruments of statecraft, it is clear that sharp theoretical distinctions drawn between sanctions, strategic embargoes, cold economic warfare and economic warfare cannot be sustained when trying to explain practice. We come to understand things by experiencing change and rendering it into an explanatory form via an appropriate theoretical framework. Practice is too complicated to be captured by preconceived rigid definitions that make no allowance for change. In simple terms, trying to define sanctions in the abstract has severe limitations. However, using the term sanction in a particular context can make sense, even when it overlaps with other tactics or strategies of economic statecraft, and when it has both instrumental and expressive effects. Actors often have several motives and several objectives in mind when they impose trade controls. Both intent and effect might simultaneously involve restricting and weakening the military and economic strength of a target state, economically strengthening satellites of the main target state in order to create tensions and jealousies, enhancing a bargaining position, allowing trade with the specific aim of trying to seduce ma.s.s opinion in the opponent state, attempting to persuade it to change policy, making a moral statement, and sending complicated and different messages to the target, neutral states, allies and the sender's own domestic const.i.tuency. In these kinds of situations a single action is a sanction, a strategic embargo, a message-sender, and an instance of cold economic warfare or economic warfare. In situations where trade is allowed or promoted and looks like normal trade from the outside, it is only by addressing intention that we can see that more is at stake than just profit and loss. If the intent is to change att.i.tudes in the target state, then this distinguishes the trade from normal commercial transactions. However, it is not just in cases where trade is allowed or promoted that we need to be sensitive to the expressive as well as the instrumental effects of trade controls. They all make statements. Sometimes they speak to a target state in a way that was not intended by the sender, but they always say something. Particularly in times of heightened tension short of war, and especially in the Cold War, the ability of economic instruments of statecraft to send messages was of great significance to American policy-makers. For much of the Cold War it was more important than the instrumental effects of trade controls.15 The actions and policies of the USA of interest here are those, which use economic means, or non-economic instruments directed at economic activities, for political, military or strategic reasons. The intention of such actions is to damage another state or states in some way; to bring about changes of policy; to enhance the power, influence and status of the USA, or its bargaining position-either in a tangible way, by keeping important resources for itself and/or by denying them to others, or, in an intangible way, by conveying messages to the targeted state, to non-aligned states, to allies, or to its own domestic const.i.tuency. How the USA fared in such policies will be examined shortly, but first some general foreign-policy context is needed.

The impact and importance of economic issues in both the study and practice of international relations have clearly changed over time, and states have crafted their policies in response to those developments. There are some common characteristics in the economic statecraft practiced by individual coun-tries, but they also have distinctive national policies, and none more so than the USA. Economic statecraft is not only a general sub-category of response to developments in both the domestic and international economy, it is also particular to the nation engaged in the activity, reflecting its individual traditions, characteristics and circ.u.mstances. So far as the USA is concerned, economic statecraft has always had prominence: 'the American people and their governors turn automatically to boycotts, embargoes, and other economic sanctions as ways to solve international conflicts.'16 However, the aim here is not to produce an exhaustive account of either the traditions of US foreign policy or of its economic statecraft. With regard to both there has been selection. The practice and traditions of American foreign policy are only characterised in so far as it is necessary to provide indicators of how its economic statecraft has developed. And the focus on economic statecraft is restricted to a selected scope and to policies that involve economic matters as either the means or the targets of US policies. The chronological scope is from 1933 to 1991, which is determined by the a.s.sumption that between these two dates the USA faced international challenges to its survival-from j.a.pan, n.a.z.i Germany and Italy, and then from the Soviet Union-in a way that it did not either before or after those dates in the twentieth century In these circ.u.mstances pressures emerged for a particularly aggressive form of economic defence policy. The focus is thus on the US Government's attempts to advance its political and strategic interests through economic warfare in times of war, and the use of economic instruments of statecraft in times of peace, which could damage the commerce and industry of other states in attempts to ensure the survival of the USA if intense rivalry with them were to develop into open war.

This is not a study of more purely commercial and profit-driven policies such as trade and investment strategies, nor does it deal with American non-governmental economic actors to any great extent.17 The main concern is with what American officials thought about how to conduct economic statecraft in order to further US national interests under conditions of strategic threat to the survival of the USA. In terms of the thinking involved in these economic strategies, the key questions are: Why did the USA switch from its long-established position of defending neutral rights to trade in wartime to trying to deny trade to countries during peacetime? What did Americans learn from the ineffective use of economic instruments of statecraft in the inter-war period? How did the form and content of US thinking change in the crucible of war? Why did the USA continue with its trade-denial policies during the Cold War, after they were perceived to be ineffective in either damaging the Soviet economy or restricting its military capabilities? What kind of role did the USA play in the West's multilateral Cold War strategic embargo, organised by COCOM, and what kind of relations.h.i.+p did it have with its allies? And where, in American thinking, did the balance lie between the importance of achieving concrete economic consequences from the USA's economic denial policies and sending effective messages to militaristic or totalitarian target states, neutrals, allies, and its own domestic political const.i.tuency?

2.

The practice.

Economic statecraft and US foreign policy.

Mercantilism, the realism of Thomas Hobbes, and the raison d'etat of Cardinal Richelieu have much in common. They project a view of the international arena as a state of nature with finite resources, where all states are pitched against each other as their interests come into conflict. Most disturbing of all, there is neither a Leviathan to impose order nor a powerful enough sense of a moral order, such as universal Christendom, to override priorities of state. Modern economic statecraft emerged from these conditions.

In the mercantilist age, before the idea of comparative advantages of trade, and in a situation where gold and silver were in great demand to facilitate the continuance of trade with the Orient, the acc.u.mulation of wealth became a major imperative. A positive trade balance, together with the acc.u.mulation of silver and gold, was a zero-sum game in which wealth also came to be seen as the basis for military and political power. Mercantilism dictated policies of economic denial and that trade with other countries should be politically a.s.sessed regarding its benefits within the overall context of an ongoing power struggle of all states against each other. Policies of economic denial were not restricted solely to use in time of war. Their potential was recognised for a kind of pre-emptive strike to prevent other states from realising their full potential. This was an early version of cold economic warfare that uncannily antic.i.p.ated the att.i.tude towards economics in the ideologically charged conflict between East and West after the Second World War.

Mercantilism was an important development in the history of economic strategies of statecraft, largely because it made explicit what had previously been implicit: namely, that power depended greatly on economics. Just as power in the form of warfare had often been used in the past to acquire wealth, now the use of economic policies of denial were seen as important in determining the power level a state might achieve. Power, while not solely dependent upon acc.u.mulated wealth, was clearly something difficult to muster without it. The relations.h.i.+p between economic wealth, productive capacity, and the power to wage war under conditions ushered in by the industrial revolution broadened the horizons of economic statecraft in general and economic warfare in particular. In the USA, these changes were a.s.similated into policy-making in a rather contradictory way. A conflict between normative prescriptions about foreign policy and interests of state produced a confused position on the use of economic instruments of statecraft. Furthermore, the democratic system of the USA conditioned the manner in which policies of economic statecraft were both formulated and implemented. However, before examining how these factors influenced US policy, we need to understand what instruments of economic statecraft had come to be by the twentieth century.

Developments in economic statecraft.

After the publication in 1625 of Grotius' seminal work on international law The Law of War and Peace and the Treaty of Westphalia in 1648, there developed a more orderly system of international relations, at least compared with the unholy chaos of the Hundred Years War. Within this system the modern state emerged and began to flourish. As it did so nationalism also began to develop, and its manifestation in the French Revolutionary and Napoleonic Wars posed new dangers to international order and created a new context for economic statecraft.

Figuratively speaking, things changed overnight with the French Revolution, though the makings of change were to be found in developments that occurred over a time span in excess of a hundred years. The French levee en ma.s.se-the attempt to mobilise the nation for war through conscription-and all that that entailed in terms of production of arms, supplies, and war materiel for a ma.s.s army, would not have been possible without three necessary preconditions. The first of these was a degree of industrialisation, the second was the development of democratic theories of government, and the third was the emergence of the secular nation state. Risking being both too a.s.sertive and prosaic, one could say that the necessary conditions for total war are industrial revolution, the democratisation of politics, and the emergence of the secular nation state.

It is misleading to talk of total war in the nineteenth century, but the Revolutionary and Napoleonic Wars and the American Civil War came as close to this as the world was to see until 191418. The nature of the Napoleonic Wars had a major impact on economic statecraft with the inst.i.tution of Napoleon's so-called Continental System and the British government's retaliation with Orders in Council, 7 September 1793, which imposed a trade embargo on Napoleonic Europe. American Secretary of State, Thomas Jefferson, wrote to his Minister in London, protesting about these measures.

Reason and usage have established that when two nations go to war, those who chuse [sic] to live in peace retain their natural right to pursue their agriculture, manufactures, and other ordinary vocations, to carry the produce of their industry, for exchange, to all nations, belligerent or neutral, as usual, to go and come freely without injury or molestations, and in short that the war among others shall be for them as if it did not exist. One restriction on their natural rights has been admitted to by nations at peace, that is to say, that of not furnis.h.i.+ng to either party implements merely of war for the annoyance of the other, nor any thing whatever to a place blockaded by it's [sic] enemy. What these implements of war are, has been so often agreed, and is so well understood, as to leave little question about them at this day.1 Jefferson's rather altruistic view was a vestige of a world order that had pa.s.sed away. While the British adapted pragmatically to the new condition of warfare, the USA appeared not to-though later argument will show that American altruism was heavily spiced with self-interest with regard to its position on the right of neutrals to trade in wartime. Britain, even with the added complication of its free-trade doctrine (which became dominant from the mid-nineteenth century onwards), managed to balance needs of state and the facts of modern warfare with the requirements of international order and the demands of commerce. In theory, free trade and comparative advantage were seen as incompatible with anything other than peaceful economic compet.i.tion and development. Unlike mercantilism's zero-sum mentality, free trade was an optimistic theory whereby all nations were to gain from commerce. Such a doctrine could be used to reinforce the demands for extensive neutral rights to trade in wartime, especially when b.u.t.tressed by the claim that economic affairs were separate from political and other activities. However, that never moved the British from their position of overriding both economic and legal principles with interests of state. Not surprisingly, therefore, the USA made little headway with them when it a.s.serted neutral rights to trade in wartime. The British deferred to the demands of neutral trade and the norms of the international system inherited from the seventeenth century only in so far as they recognised the right to trade courant normal in non-contraband goods and then only providing that it was not to a blockaded port. In practice, they breached even these canons of behaviour when the national interest demanded it.

It was Britain above all others that influenced the way that economic statecraft developed in the nineteenth and the first part of the twentieth century. The reasons for this are not difficult to identify. It was the richest state for much of this period, with a great empire and the world's most powerful navy. However, it did not have a large standing army, except in the First World War, and relied upon the Royal Navy, wartime alliances, and economic warfare to achieve its aims and to protect widespread interests. The story of British policy during this period is also, among other things, that of the development of international economic statecraft.

Throughout the nineteenth century the policies of Britain and the USA continued to coexist uneasily. In 1812 they fought a war provoked by what the Americans viewed as unlawful interference with their neutral rights by the Royal Navy. But the USA was not always positioned on the moral high ground. In the war with Mexico 18468 and in the Civil War 18615, it acted contrary to its own previous position on neutral rights and developed naval embargo policy in a way that was not unfamiliar to the British: these US policies were auguries of things to come in the twentieth century. In both conflicts, the USA relied on a so-called long-distance paper blockade, which involved interception well away from a blockaded port, and the monitoring of cargo lists for contraband. This was in direct contradiction of policies of physically effective blockades that it had called for in the past. But, as insh.o.r.e blockades require large numbers of s.h.i.+ps, which the USA did not have at the time of either the Mexican or the Civil War, self-interest drove it to adopt long-distance paper blockades. Furthermore, in the case of the seizure of the British s.h.i.+p Bermuda, during the Civil War, Chief Justice Salmon P.Chase of the US Supreme Court declared: if it is intended to affirm that a neutral s.h.i.+p may take on a contraband cargo ostensibly for a neutral port, but destined in reality for a belligerent port, either by the same s.h.i.+p or by another, without becoming liable, from the commencement to the end of the voyage, to seizure, in order to the confis-cation of the cargo, we do not agree to it.2 This was the adoption and development by the USA of what is known as the doctrine of continuous voyage. Nevertheless, despite practising policies that encroached on neutral rights during American national crises, the US government reverted to being a champion of extensive neutral rights to trade at all other times, and as a result agreement with Britain remained elusive. There was no agreement at the Second Hague or the London Naval Conference, 1907 and 1908 respectively. The Declaration of London, 1909, was the last opportunity for an international accord on neutral trading rights before the outbreak of the First World War. It specified that blockades were to be physically effective, and it defined goods as non-contraband, or absolute or conditional contraband. According to the latter, goods were designated as contraband if they had strategic value in the context of a particular conflict: a provision that in effect acknowledged the growing importance of fungibility and hinted at what Wu later termed the strategic materials fallacy (namely the failure to realise that trade in materials for civilian production can be more strategically valuable than trade in weapons of war).3 Goods were catalogued under these three categories, and contraband could be seized, not only when on direct course for a belligerent port but also if it were determined that it would be trans.h.i.+pped by sea or conveyed overland from an intermediary to a belligerent (i.e. a continuous voyage). The declaration embodied some concessions from both Britain's and the USA's traditional positions. The definition of contraband would restrict economic warfare more than Britain had allowed in the past, and the Americans were willing to acknowledge what they had practised in the Civil War as now internationally acceptable regarding continuous voyage.

However, neither Britain nor the USA accepted the Declaration of London in the end. The British House of Lords, apprehensive of growing German naval power, rejected it. Once that was known in the USA, the President refused to accept the declaration as well, even though the Senate had approved of it. As a result there were no clear rules to apply once the First World War broke out. Fortunately for the British, their hands were not tied by a formal understanding with the USA, for, as the historian H.C.Allen has speculated, if Britain had had to breach such an understanding because of her national interest, the consequences for good relations with the USA, which were invaluable, would have been dire indeed.4 Even as it was, the Americans and the British soon found themselves in serious dispute over neutral rights to trade. The Americans repeatedly urged the British to adopt the Declaration of London, but the British would only go so far as to adopt it after excluding the contraband lists. They did that by an Order in Council, 20 August 1914, but then subsequently broadened the scope of their blockade even further.

The underlying causes of the dispute over the British blockade can be divided into two broad categories. The first was the development of technology, communications, trade and industrial production, and the overall impact that they had had on the potential for waging war. So far as the war at sea was concerned the single most important technological development was the submarine. On 3 March 1915, Winston Churchill, the First Lord of the Admiralty, wrote to the Cabinet explaining the problem that now confronted Britain and its policy of economic warfare at sea.

The international laws relating to blockade were framed without reference to the new conditions introduced into warfare by the presence of the submarine.

However great the superiority of the stronger fleet, it is not practicable to draw blockading lines in close proximity to the enemy's coasts and harbours, as was always previously possible, because the submarines of the weaker fleet would sink the blockading vessels although that fleet was unable or unwilling to put to sea. It therefore becomes necessary to draw the lines of blockade at a greater distance from the enemy's coasts and ports than heretofore, and this involves in certain cases the inclusion within the scope of the blockading lines, not only of enemy but of neutral ports.... It is for neutral nations to recognise that it is not practically possible, nor in neutral interests, to claim the maintenance of a situation which would deprive naval strength of all its rights while permitting naval weakness to indulge in every abuse.5 The result was the formal abandonment of insh.o.r.e blockades and the adoption of a policy which gave an ever-broader definition of contraband, relied on selective/random interception and search, and, most important of all, expanded the practice of the so-called paper blockade. In effect, this meant Britain tried to monitor and 'license' world trade in order to prevent supplies reaching the enemy via neutrals. These policies directly interfered with the rights of neutrals, which, among other things, were only allowed to trade at normal pre-war levels-courant normal. There was a certain ineluctable logic at play here, which drove Britain towards an ever more comprehensive conception of strategic embargo. Such logic would be resisted by the USA at first, but gradually it too had to give way to the new realities of modern warfare.

The second category of cause concerned the different circ.u.mstances of Britain and the USA. The latter had not felt territorially threatened since the war of 1812, and its policy of isolation from European political and security matters had allowed it to uphold the principle that neutral trade in times of war should be as extensive as possible (except during the Mexican and the Civil War). The imperative of national survival under threat from an external power had not been felt in the USA for over a century, and thus there was a lack of sensitivity to the overriding demands of survival felt by Britain, which forced it to restrict neutral trade in the First World War. The story in the Second World War, when direct threat to the security of the USA was much more overt, was very different.

Policies of economic denial had become an integral part of strategic thinking in Britain by the twentieth century. The strategic importance of depriving the enemy of trade, commerce and capital, even when they were, prima facie, of little direct use for the actual waging of war, was axiomatic in British wartime thinking. Although civilian goods might not immediately be employed in the waging of war, when society as a whole is mobilised in the war effort, the question has to be asked: In these circ.u.mstances what kinds of materials and services are not of strategic importance? For example, if food becomes unavailable for munitions workers, war production is prevented. A more likely scenario than starving the munitions workers would be that the state that is denied food has to redirect its labour force to fulfil people's nutrition needs under comparative disadvantages and at the cost of war production and manpower that could be used in the armed forces. Democratic society entails democratised war. When government involves all the people, then so does war. When all the people are involved, then the scope and effect of economic warfare is limitless. When the possibilities are limitless, then controls on trade have to be ever more intrusive into neutral sovereignty and ever more comprehensive.

In the end, trade with Germany in the First World War was only allowed by the licence of the British Government. It made the rules, and that involved a very extensive definition of contraband. As the First Lord of the Admiralty wrote some time after the events: 'The whole conception of conditional contraband was affected by the fact that the distinction between armies and nations had largely pa.s.sed away.'6 Even before America's entry into the war, the aims of the British in controlling neutral trade were defined largely in pragmatic rather than legalistic or moral terms. British Foreign Secretary, Viscount Grey of Fallodon, wrote in his memoirs: 'The object of diplomacy... was to secure the maximum blockade that could be enforced without a rupture with the United States.'7 Rupture, however, there nearly was. The indignation of the USA at Britain's stop-and-search policies, its definition of contraband, its promulgation of a Black List of companies in February 1916, and its policy on continuous voyage was very real and a serious threat to the continuation of Anglo-American amity.8 Fortunately Britain was saved by the German unrestricted U-boat campaign in the Atlantic, which helped to put things into a clearer perspective in the USA, especially after the sinking of the Lusitania in May 1915. Gradually the realities of modern warfare began to gain a purchase on American minds. In the course of that process one thing above all stood out in the contrast between British and German policies on the high seas. As Prime Minister Asquith put it: 'Let the neutrals complain about our blockade and other measures taken as much as they may, the fact remains that no neutral nation has ever lost a life as a result of it.'9 Ironically, when the Americans entered the war in 1917 they adopted even more draconian measures than the British to prevent supplies reaching Germany. The USA co-operated fully in the food embargo against Germany, and then in July 1917 embargoed all exports to neutral Scandinavia and shortly afterwards extended that to cover the Netherlands as well. Britain, because of the fact that some neutrals provided her with vital supplies, would not go as far as the Americans, for fear of retaliation.

The USA's experience of the reality and horror of total war in 191718 appeared speedily to disabuse it of fond beliefs that the principles of extensive trading rights for neutrals could be upheld in time of war. The logic of modern war dictated the practice of economic warfare, and little s.p.a.ce was left for neutrals. They could only trade at the indulgence of the superior naval combatant. Total conventional war was just that: total. With the entire population and economy of a state mobilised for war the targets of war strategy broadened to include the entire population and the economy, with only very narrow areas cordoned off on humanitarian grounds. If supplies from neutrals were to be used in the German war effort, then that trade had to be stopped. This was so unless supplies to the allies might be stopped in retaliation and cause more damage than the stopping of supplies to Germany. Whatever policy might be adopted, it would be on the basis of a pragmatic a.s.sessment of how most effectively to damage the German war effort and maximise the Allied. The matter of neutral rights in terms of principles, moral and international legal claims was of decidedly secondary importance when governments were confronted by the option of adopting a total embargo in violation of international norms, or of upholding such norms and risking defeat. One might be tempted to ask, was it not ever so? The answer is probably yes, but the difference now was the extent to which war could be carried into everyday life and into the domestic economy of the state. War was so pervasive that it was not possible to maintain the myth that moral principles and international law held sway over force. In the past, rules and principles sometimes appeared to be upheld simply because they were rules and principles, but it was also the case that states simply did not have the technology available to breach the 'rules' in, a way that would be to their advantage. Modern technology changed all that. With no Leviathan in the international realm to uphold neutral rights contrary to the immediate interests of the stronger naval powers, it was inevitable that they would be eroded, and in the end extinguished.

As clear as this development might appear now, with the benefit of hindsight, it by no means dominated American thinking in the inter-war period. There were still powerful crosscurrents at work in the way that US officials and politicians thought about foreign policy, and that affected how the USA regarded economic statecraft as a tool in its international dealings. In order to get a clearer view of this it is necessary to have a grasp of the main traditions and doctrines that have influenced the style and content of American foreign policy-making.

United States foreign policy: traditions, doctrines and economic statecraft.

The USA was conceived of by the Founding Fathers as a nation that embodied a political morality expressed in terms of rights, which required justice and liberty for all citizens. This ideal political society was provided for through a written const.i.tution and protected from corruption by checks and balances, the due process of law, divided sovereignty, and popular elections. Arising from this came ambivalence in American foreign policy and a tendency to moralise, particularly in terms of public justification of US policies.10 Pride in the American society and system of government produced two incompatible inclinations: the first was to protect the integrity of the republic both from the danger of becoming entangled in the dynastic power struggles of Europe and from contamination by its corrupt political system-in short, isolationism; the second was to shed the light of liberty abroad and to pursue American international trade and economic interests-in short, internationalism. Furthermore, these dispositions often contained within them conflicting approaches to the conduct of foreign affairs. Idealism emphasised ethics, rights and moralising, while realism emphasised security, self-interest and geopolitics. This matrix of forces has affected the making and conduct of US foreign relations, and, while it undoubtedly oversimplifies things, it nevertheless casts light on policy-making and provides a starting point for explanation and a.n.a.lysis.11 Isolationism and internationalism were both infused with a mixture of moralising and self-interest, though the former mainly took precedence over the latter in the articulation and public justification of American policy Idealism fed off American exceptionalism. America was supposedly different from other states, and particularly those of the European Old World, in that it had an altruistic mission to uphold and spread the benefits of justice, liberty and const.i.tutional representative democracy in a flawed, but perfectible world. Accordingly, American actions should arise from its moral principles and not calculation of either self-interest or power relations, with their exclusive preoccupation with security. Native Americans, Afro-Americans, Mexicans and others, often feel that they have good grounds for questioning this moralistic picture of US foreign policy Self-interest arose in various guises. For many years a potent concern within the isolationist mind-set was fear of entanglement with the more powerful European states at a time when the young United States needed to consolidate and grow peacefully. Later, the benefit of being able to continue trade and commerce during European wars clearly benefited the USA, as did the desire for independent action. Fear of entanglement was often equivalent to fear of losing the ability to command one's own affairs in a situation where other states were much stronger than the young republic. Here moral super-egoism and self-interest coincided. Furthermore, entanglements could draw the USA w.i.l.l.y-nilly into de facto war, and this would undermine the integrity of the const.i.tution, which reserved the prerogative of declaring war to the Congress. All these factors, as well as a sense of moral superiority, nurtured the tendency towards the USA's political and strategic disengagement from Europe: US isolationism was, in fact, tantamount to an attempt to be politically and strategically isolated from Europe.

The self-interest in America's internationalism arose first of all from its expansion of trade and commerce and the need to protect those interests. Soon the need for defence, strategic and international policies became self-generating, as American influence spread with trade, missionary work, and through colonial acquisitions. The need to defend this expanding sphere of interest then developed a dynamic of its own. For example, the need to meet naval threats in both the Pacific and the Atlantic prompted the building of the Panama Ca.n.a.l, which in turn expanded America's immediate defence concerns to Central America. In contrast, the moral vigour, which reinforced internationalism, came from a sense of mission to convert the corrupt world to the American way, and this grew as a force in foreign policy as national power grew and the ability developed to project American values abroad. But that eventually brought the USA into confrontation with threats to its very existence from powerful states and prompted more overtly self-interested calculations of power politics of the realist kind that it had spurned publicly for so long and for which it had condemned the European powers.

These divergent dispositions emerged early in the life of the new republic, with two of its leading statesmen adopting different lines of argument. Treasury Secretary Alexander Hamilton favoured the development of the USA into a manufacturing and commercial state with the ability to project its power abroad, whereas Secretary of State Thomas Jefferson looked to the future with America standing as an example to others and fiercely protecting its integrity without great intercourse abroad (later as President, he did not actually live up to these principles). Falling somewhere in between was the first president, George Was.h.i.+ngton. In his Farewell Address he observed: 'it must be unwise in us to implicate ourselves by artificial ties in the ordinary vicissitudes of her [Europe's] politics or the ordinary combinations and collisions of her friends.h.i.+ps and enmi-ties.'12 Compared with Jefferson, Was.h.i.+ngton was less afraid of corruption by a.s.sociation with Europe and gave more recognition to America's weakness vis-a-vis the military might at the disposal of the great European Powers. Although political and military entanglements were to be avoided, Was.h.i.+ngton favoured the expansion of trade and commerce by all means. One could say this was either a recipe for the best of all worlds, or a rather naive belief that political isolation was possible even during economic intercourse. The precarious nature of this policy emerged as the nineteenth century progressed: isolationism as a doctrine and a moral position only prospered because Britain tacitly gave approval to the US Monroe Doctrine of 1823 (which cautioned European powers to stay out of the western hemisphere), and its navy kept other European states from threatening the north American continent. This allowed the USA to avoid the self-interested power political arrangements that European powers, under mortal threat from other states, had to make. Even so, neutral trade in wartime brought difficulties with Britain that flared into war in 1812 and continued to rumble on as a major bone of contention between them throughout the century and on into the early 1930s. By 1900 the interlinked policies of isolationism from Europe's political power games and neutrality and extensive neutral rights to trade in wartime were under threat from technological developments, and indirectly from Britain's relative decline, which undermined its ability to maintain the balance of power in Europe and threatened its naval supremacy. This in turn posed problems for the Monroe Doctrine. Ironically, there was also a challenge posed by America's own burgeoning power.

The technology of modern warfare reduced the effectiveness of the Pacific and the Atlantic as defence buffers, and the rise of both j.a.pan's and Germany's military and naval power posed further threats to the viability of isolationism. Furthermore, America's own development into a world power complicated matters. On the one hand, it provided the means to enforce claims to extensive rights of neutral trade if the USA so wished, but at the same time it made the tenability of neutrality ever more difficult to sustain. Whether or not Americans liked it, their nation was necessarily part of the world community of states, and, as US power and commerce grew, they became potentially decisive in the s.h.i.+fting power struggles of the wider world. Even though the USA might have preferred to be left alone, other states with a more Realpolitik view of international relations could not afford to leave it out of their power calculations. Protestations of neutrality were not persuasive when confronted with the Realpolitik aphorism-today's friends must always be seen as tomorrow's potential enemies. Thus, when foreign powers directly threatened the USA, it had to make a choice of friends; isolation and neutrality were no longer viable or acceptable as policies. If the USA were drawn into war it might be in America's interest to compromise the principles it had a.s.serted for so long regarding neutral rights to trade. By the 1930s, although America still publicly sought to draw Britain into negotiations to guarantee extensive neutral rights to trade, the US Navy was beginning to have doubts about the wisdom of all this: if America were drawn into war her naval power could be used for America's self-interest in precisely the same way that Britain had used its power over the years during its period of naval supremacy. Tension thus arose, and became more and more acute, between contending public arguments about isolationism and internationalism, idealism and realism. Each of these represented a potent tradition within US foreign policy, and as they vied for influence they complicated the process of producing a coherent foreign policy to cope with the challenges of the 1930s.

Realism had flourished in those areas of policy where the USA had immediate security interests. The USA had a long record of ruthless Realpolitik in its relations in the western hemisphere and the Pacific, and had seized opportunities when they arose in its relations with European states. It exercised skilful pragma-tism in its land purchases from European powers: it had bl.u.s.tered and threatened force on numerous occasions at the end of the nineteenth century to grasp land and secure its interests against European powers. And it had experienced the nearest thing to total war in the nineteenth century during the conflict between the Confederacy and the Union. It waged war against Mexico and Spain and interfered to protect American economic interests in the sovereign states of several Latin American republic