US foreign policy in the 1970s:

From the Middle East Oil Crisis to the Latin American Debt Crisis

 

Introduction: Traditional interpretations of the oil-foreign policy nexus

In this paper I examine the relationship between the rise and fall in oil prices and US foreign economic policy in Latin America in the 1970s and 1980s. I set out how US foreign policy in the Middle East in the 1970s, and US domestic economic conditions, affected US foreign policy towards Latin America, particularly US foreign economic policy towards the region, ultimately resulting in the 1982 Debt Crisis. The results of this relationship had widespread and dramatic effects for Latin American polities and economies, including the fall of decades-old military dictatorships, radical market reforms, and drastic reconfigurations of societal dynamics.

 

The relationship between oil and U.S. foreign policy is usually considered in the context of Middle East geopolitics. The US’ dependence on oil imports (oil has been described as a “strategic necessity”), renders the obtaining of imports germane to the political, security and economic interests of the US and its allies. During the 1970s, the actions of OPEC in raising oil prices and imposing an embargo on the United States caused oil prices to soar, with the expected effects o the US economy: inflation and economic depression. The OPEC decision was largely a political one, made in response to the US support for Israel in Arab-Israeli hostilities in 1973. Prices rose again in 1979 with the fall of the Shah and the Iranian Revolution, and then again with the outbreak of the Iran-Iraq war; the resulting effects were deleterious to the US economy (Griffin and Teece 1982, 9).

 

Oil as a foreign policy issue has also been considered in the context of the Cold War, where, particularly in the 1980s, the Soviet Union aimed to further its strategic interests by extending its power over the oil-rich Middle East. Such an extension would have served to guarantee itself and its satellites consistent oil supplies, but also to disrupt and possibly cut off oil exports to US allies, namely Europe and Japan (Conant 1982, xiii).

 

Background to US foreign policy in Latin America

US foreign policy towards Latin America has always had economic dimensions, implicit or explicit. During the first century of US policy toward Latin America—from just before the region won its independence from Spain in the early 1800s until the early 1900s—the objectives of US foreign policy in the region were the fulfillment of America’s “manifest destiny” through territorial expansion, and the precluding of European influence and power in the region, a policy embodied in the 1823 Monroe Doctrine. 

 

Towards the end of the 19th century, US policy shifted as decision-makers began to think of Latin America as the seat of the US’ commercial empire. This shift precipitated the US attempt to create an economic—not merely political—sphere of interest in the region. This shift in strategy was based on two principal factors:

1)      Latin America was considered unsuitable for European immigration and was already populated by undesirable races (Iberian, Indian, African) that the US deemed unfit for incorporation into the US;

2)      A shift in the imperial contest where commercial advantage was seen as a more worthwhile endeavour. This included the realization that European-style imperialism was expensive, as evidenced by British and French imperialism in Asia and Africa, in terms of military and administrative outlays that required considerable resources with questionable economic returns;

 

These policy ideas became embodied in the 1888 Pan-American conference that led to the creation of the Commercial Bureau of the American Republics, parent of the Pan American Union, the precursor of the Organization of American States. Subsequently the US made a series of bilateral reciprocity treaties with individual Latin American governments.

 

The new enthusiasm for commercial as opposed to political hegemony was made in the 1904 Roosevelt Corollary (to the Monroe Doctrine), also known as the Big Stick policy. This policy stated that if a country “behaves itself” it should not fear interference from the US, but, should a country act in a way as improper, and intervention by another nation results, the US may exercise force in its role as an international police power. Thus the US claimed a general right to intervene in the hemisphere, including its financial and economic problems. This claim was extended by a still more expressly activist policy: Dollar Diplomacy.

 

Dollar Diplomacy was a policy created by US president William Taft (term of office: 1909-13) and his Secretary of State, Philander C. Knox, to ensure financial stability in Latin America. While Dollar Diplomacy has been interpreted as the “heedless manipulation of foreign affairs for strictly monetary ends,”[1] one could argue that its intention of financial control was not only an economic objective, but was, at least to some extent, politically motivated. While it is true that the policy sought to protect and extend US commercial and financial interests in the region, it also had the objective of precluding European economic power in the region. At this time, commercial hegemony over the region was held by England, France and Germany, which the US had a vested interest in dismantling, not only in its contest for power in the region. As a practical matter, European creditor nations tended to resort to military intervention in order to collect on its debts in Latin America, which violated the US’ proprietary senses. If the US wanted the Europeans out, it meant that US banks had to move into the region in order to obviate European financial presence there.

 

The Roosevelt Corollary and subsequently the Dollar Diplomacy policy were issued in response to German, Italian and British armed intervention in Venezuela when its government defaulted on their debts in 1902. Subsequently, when the Dominican Republic defaulted to its European creditors in 1904, the guarantee of U.S. loans was exchanged for the right to choose the Dominican head of customs (the country’s major revenue source). An (unsuccessful) attempt was also made in Nicaragua to overthrow the president, and then provide guarantees the new president for “friendly” US loans.[2]

 

The Dollar Diplomacy policy sought to protect and extend US commercial and financial interests, and it had the objective of precluding European economic power in Latin America. At this time, it was England, France and Germany who held commercial hegemony over the region. The US had an interest in dismantling that hegemony, not least because European creditor nations tended to resort to military intervention to collect their debts in Latin America, a practice that affronted the US’ proprietary sentiments. But if the US wanted the Europeans out, US banks would have to move in to supplant the traditional lenders.

 

Dollar Diplomacy was seen as a failure. The Taft administration abandoned it in 1912, and the following year President Woodrow Wilson publicly repudiated it. Nevertheless, the US continued to have a strongly activist regional policy throughout the 20th century, until the end of the Cold War.

 

Cold War Policy: Economic Dimensions

After an all-too-brief “golden era” of US-Latin America relations, during which Franklyn Delano Roosevelt promulgated non-intervention under the Good Neighbour policy, followed by near unanimous Latin American support for the Allies in World War Two (WWII), US foreign policy in Latin America, as in the rest of the world, was dominated by the anti-Communist effort of the Cold War. The success of the Cuban Revolution, just 90 miles off the coast of Florida, reminded the US that Latin America was the geographical region closest to home. US strategies to promote economic development (and thus forestall) pro-Communist sentiment ranged from technical and financial aid, to support for undemocratic, often repressive authoritarian dictators, to direct albeit covert action to overthrow any leader perceived as too friendly to Communism. The Iran-Contra scandal was perhaps the epitome of this period, where the US used the proceeds from illegal arms sales to Iran in order to fund (again illegally) US-trained guerrillas against the democratically elected, pro-Socialist Nicaraguan government.

 

In economic terms, after WWII, the US dominated the region. For most countries, at least one-third of their total trade was with the US. Latin America was also an important market for US exports: in 1950 some 28% of total US exports went to Latin American countries (O’Brien 1999, ix). Private US investment was quite significant in some countries, particularly Cuba, Brazil, Colombia, Peru, Chile and Venezuela. US manufacturing enterprises, in their drive to expand their markets, saw Latin America as a natural target. The transnational corporations allied themselves with the IMF and local regimes to promote economic policies to enlarge the consumer base (though, arguably, these alliances and any ensuing policies were largely ineffectual.) Thomas O’Brien (1999) argues that, as far as US relations with Latin America are concerned, the 20th century should be remembered as the “corporate century”. His thesis is that US corporations launched and sustained an “intensifying effort to transform Latin America into a series of societies compatible with the successful operation of capitalist enterprises” (vii). The conclusion is that the entirety of the US-Latin American relationship in the 20th century has been driven by the motive of US capitalist expansion.

 

Even if O’Brien’s thesis seems overdrawn, there obviously were significant economic interests at work in the US’s Latin American policy during the Cold War, even within the overarching anti-Communist political thrust. Preserving and expanding capitalism was, after all, a key element in the anti-Communist effort. It might be argued, however, that these economic aspects were implicit in Cold War policy, rather than economic motives in and of themselves.

 

Sometimes, however, the US’s economic objectives were explicit. Often the rationale behind anti-Communist covert action was to protect US business interests. For example, the expropriation of property belonging to the US-owned United Fruit Company was a significant issue in the decision making that culminated in the overthrow of the democratically elected Guatemalan president, Jacobo Arbenz, in 1954.[3] Similarly, protecting US business interests in Chile was a good part of the motive for assisting the coup that deposed democratically elected president Salvador Allende in 1973.

 

The most expressly “economic” policy of the Cold War relationship with Latin America was in the early 1960s, and was driven primarily by the Cuban Revolution. President Kennedy argued that if socio-economic conditions remained as they were in Latin America, Communism would easily take hold of those countries wracked by poverty and deprivation. This policy came into being as the Alliance for Progress, and comprised technical and financial aid towards modernization and economic development.

 

After a decade with few, if any, perceptible successes, the Nixon administration downgraded the project, and cut financial aid to Latin America significantly. The US advised Latin America to open its doors to private enterprise. US aid policy to the region reflected this position. More than half US government money going to Latin America in the 1970s took the form of Export-Import Bank loans to US exporters in the region (Stallings 1987, 100). Thus foreign policy towards the region through Carter did not explicitly reflect economic concerns—the US’ or Latin America’s—to any significant degree until the Reagan years. Nevertheless, there were implicit economic dimensions to the US-LA relationship during that period, one feature of which was the activity of US financial institutions in the region during the 1970s and 1980s.

 

US foreign economic policy towards Latin America during the rise and fall in oil prices does not fit into the general pattern of US-Latin America economic relations during the Cold War, but could perhaps be interpreted in O’Brien’s terms: as one aspect of the quiet but consistent thrust of official policy to expand American capitalism beyond US boundaries. According to O’Brien’s thesis, these efforts were not limited to the actions and initiatives of the US private sector: the US government implicitly promoted the expansion of private financial entities in the region during the 1970s, and in the early 1980s took direct measures on behalf of US private sector interests to redress the fallout that followed when Latin American governments went into default. Thus while not necessarily capital ‘F’ capital ‘P’ foreign policy, the relationship between US foreign policy and US private economic interests’ activity in Latin America is a small aspect of the “corporate century” that is worth exploring as an example of the linkages between the US domestic economy and US policy towards other countries.

 

Oil prices, petrodollars and US banks

There are two aspects of the US relationship with Latin America, where oil is concerned. First is the relationship with oil producing countries, namely Mexico, Peru and Venezuela, where US oil companies had significant interests up until they were respectively nationalized. The second aspect, which will be explored here, deals with the recycling of petrodollars (the enormous oil profits of the OPEC countries) in loans from US banks to Latin American countries.

 

American banks began expanding into Latin America in the mid-1960s, after three decades of wariness of the region (many countries had defaulted on their debts in the 1930s.) Latin American economies were growing rapidly, and the presence of many multinational affiliates was a bellwether of economic optimism in the region. US and European business cycles were then on the downswing, stimulating the search for new borrowers in order to maintain their loan volume and profit rates (Stallings 1987, 96). In the early 1970s, OPEC producers needed to do something with their windfall from the rise in oil prices that resulted from the US support of Israel in the 1973 Yom Kippur War, and deposited it primarily in branches of US-based multinational banks (Wachtel 1977, 4). Having gotten hold of these large sums of cheap money, these banks then sought to make a profit by re-lending.

 

The political and economic situation in Latin America was propitious for the taking of these low-interest loans: In the late 1960s, largely influenced by the precepts of dependency theory, Latin American governments initiated a policy of import substitution industrialization (ISI). This strategy aimed to break the cycle of declining terms of trade for Latin American primary products, and promote the production of manufactured goods within national borders, with the ultimate aim of realizing higher economic growth and development. To finance this strategy, governments resorted to borrowing abroad from international lending institutions and private commercial banks.

 

The doubling of oil prices in 1973-4 spurred further borrowing on the part of Latin American governments and private sector interests to pay for higher-priced oil imports. At the same time, the oil shocks hit US businesses adversely, further dampening loan demand at home. A reduction in interest rates after 1976 accelerated borrowing even further. The market for loans was competitive, and foreign commercial banks vied vigorously with each other, under the assumption that governments were risk-free borrowers, and would not default. The lucrativeness of the borrowing business drew hundreds of smaller banks in the market, and borrowing became even easier for Latin American countries.

 

When oil prices rose again in 1979, after the fall of the Shah of Iran and the Islamic Revolution, again events in which the US was intricately involved, the renewed global recession further depressed commodity prices. Despite ISI, commodity exports still contributed significantly to export earnings and national income in Latin America, and the loss of income was a severe shock to many Latin American economies. In 1980, the US Federal Reserve Board (the Fed) took steps to curb US inflation by monetary tightening, part of which was a drastic increase in interest rates. By 1982 the government of Mexico announced it could not meet its external debt obligations; subsequently many other Latin American governments followed suit, and the Debt Crisis was born.

 

The US government’s involvement was much less in the lending phase than in the subsequent crash-and-attempt-to- recover phase. At the time of Mexico’s announcement, Latin American external debt totaled about $315 billion. US banks held nearly 40% of that debt, with the nine largest banks in the US holding two-thirds. Given this rather drastic situation, and the fact that the US financial sector was at serious risk of collapse should the loans not be repaid, the US was heavily involved in negotiating with Latin American governments on debt repayment. The US acted through the IMF on the one hand, and a consortium of private international banks on the other. Government officials from the State Department, Treasury and the Federal Reserve Board were key players in the planning and negotiating for debt rescheduling. The end result was a series of precepts calling for drastic structural economic reforms. These precepts have now come to be known as the Washington Consensus. They were primarily designed to increase foreign exchange revenue so that debts could be repaid.   

 

There is also an “official” foreign policy aspect of this story. Barbara Stallings (1987) argues that the banks’ activities served to vitiate official US foreign policy to Latin America during the Carter administration (1976-80) in two ways. Jimmy Carter came into office promising to focus on human rights issues around the world, including Latin America, and to some extent he was successful in this policy.[4] First, aid was cut off to the most repressive regimes in the region, while ties were strengthened with more democratic governments. However, the large bank credits continued to prop up many of the same authoritarian governments that official policy sought to sanction. Second, where Latin American countries accumulated heavy debt as a result of cheap and easily accessible bank loans, the debt servicing obligations caused or exacerbated balance of payments problems. Impending crises in borrower nations brought the involvement of the IMF, stepping in to give short-term loans, along with the conditionalities of cutting public expenditure. Stallings’ argument is that the types of policies that the IMF imposed with their loans caused economic hardships and often required political repression for their enforcement.

 

Conclusion

This short story has attempted to make the link between (1) US foreign policy in the Middle East, (2) the deposits of OPEC’s oil proceeds in US banks, (3) the US domestic economy, (4) the activities of US banks in Latin America, and (5) the Latin American Debt Crisis. OPEC had oil profits because it had raised prices to punish the US for its assistance to Israel in the Yom Kippur War. The US domestic economy was in a recession largely due to the rise in oil prices as well as to fiscal deficits brought on by spending on the Vietnam War. As a result of the recession, US and European demand for loans fell, and US banks began to look overseas to lend money, and they looked to their “natural” market, Latin America. The recession provided a further push for US banks to broaden their activity in Latin America. At the same time, largely due to the development strategy being pursued in Latin America, Latin American governments and private investors borrowed at such a rapid pace that the market for loans to the region grew by leaps and bounds. When oil prices rose again in the late 1970s, and US domestic inflation soared, the Fed sought to cool the economy and decrease the money supply, and drastically increased interest rates, which ultimately led to the default on over $300 billion in loans, nearly 40% of which was from American banks.

 

References

 

Atkins, G. Pope. 1999. Latin America and the Caribbean in the International System. Boulder, Colorado: Westview Press.

 

Conant, Melvin. 1982. The Oil Factor in US Foreign Policy, 1980-90. A Council on Foreign Relations Book. Lexington, Massachusetts: Lexington Books.

 

De Carmoy, Guy. 1977. Energy for Europe. Washington, D.C.:American Enterprise Institute.

 

Encyclopædia Brittanica. www.brittanica.com

 

Frieden, Jeffry. 1991. Debt, Development and Democracy: Modern Political Economy and Latin America, 1965-85. Princeton, New Jersey: Princeton University Press.

 

Griffin, James, and David Teece. 1982. OPEC Behaviour and World Oil Prices. London: Allen and Unwin, with the Centre for Public Policy, University of Houston.

 

O’Brien, Thomas. 1999. The Century of US Capitalism in Latin America. Albuquerque, New Mexico: University of New Mexico Press.

 

Pastor, Robert. Whirlpool: US Foreign Policy toward Latin America and the Caribbean. Princeton, New Jersey: Princeton University Press.

 

Smith, Peter. 1996. Talons of the Eagle: Dynamics of US-Latin American Relations. Oxford: Oxford University Press.

 

Stallings, Barbara. 1987. Banker to the Third World: US Portfolio Investment in Latin America, 1900-1986. Berkeley, California: University of California Press.

 

Wachtel, Howard. 1977. The New Gnomes: Multinational Banks in the Third World. Washington, D.C.: Transnational Institute.


[1] Encyclopædia Brittanica. www.brittanica.com

[2] This policy was also attempted in China, but was much less successful, as the US was not able to meet the demand for loans there, and also because of the world’s reaction to US policy.

[3] The Guatemalan government put through a series agrarian reforms that empowered government to expropriate uncultivated portions of large plantations, valued according to its taxable worth. In 18 months 1.5 million acres were distributed to some 100,000 families. The United Fruit Company immediately opposed the reforms as it owned enormous tracts of Guatemalan land, 85% of which was unused (the company maintained it was held in reserve for natural disasters.) The UFC had also consistently undervalued its holdings when calculating its taxes, thus the value placed on it, according to its own valuations, was much lower than its true value. Also worth noting are the personal ties between UFC and Washington as Secretary of State John Foster Dulles and CIA director Allen Dulles both worked for a law firm that had close ties to UFC.

[4] The ending of atrocities committed by the Argentine military dictatorship, and the freeing of political prisoners in Cuba and Paraguay have been in large part attributed to the activism of Carter’s principals working in the region (Pastor 1992, 61).