Tyler Cowen recently made the following comment:
I still am glad we bought the Danish West Indies in 1917. Nor do I hear many Danes, or island natives, complain about this.
This issue has been revived due to discussion regarding the purchase of Greenland. So who got the better of that earlier deal? Or was it win-win? It’s not obvious, but let’s start with a few facts:
1. In 1917, we paid $25 million in gold, which today is worth a bit over $3 billion. (Denmark now has $5.6 billion in gold reserves.) That’s a non-trivial sum for a small country, but certainly not a game-changer.
2. Reports suggest that the US was motivated by two factors, a desire for a place to host military bases to defend the Panama Canal, and a desire to prevent Germany from getting the islands.
In my view, those objectives do not justify spending lots of money to buy some tiny Caribbean islands. We could have used the Monroe Doctrine to prevent Germany from taking the islands. Germany was tied down in a losing war in Europe, and in no position to challenge US supremacy in the Western Hemisphere. And I don’t see the Virgin Islands playing an important role in defending the canal.
Of course, that doesn’t mean it was a good deal for Denmark or a bad deal for the US. Even $3 billion is a modest sum for the US government, and the islands may have great value for other reasons, such as tourism. For many years, it hosted a big oil refinery. Nonetheless, I am confident that it was a very good deal for Denmark, and probably a bad deal for the US (although I’m less confident in that claim.)
Denmark already has a big money pit in Greenland, which requires large subsidies. The last thing they need is another money pit in the Caribbean. I suspect that most Danes would prefer $3 billion in gold to those faraway islands.
The US case is trickier. The original justification certainly doesn’t make much sense. But what about today? Aren’t these islands a nice tourist destination? Yes they are. I’ve never been there, but my wife and I enjoyed snorkeling in the British Virgin Islands. So I see the appeal. But the fact that we were able to have a nice holiday in the BVI suggests that ownership isn’t all that important—what matters is the ability to use a resource. Thus in my view the US might be better off having a military base in an independent Greenland, perhaps even negotiating exclusive rights to military use of the island (to keep out China and Russia), rather than the burden of owning the whole thing. As far as mineral resources, our firms can negotiate agreements with a Greenland or Danish government representative. What exactly does ownership buy you, other than a big fiscal burden?
One good objection to my argument is that it proves too much. If all areas with a net fiscal burden were undesirable parts of the US, then we’d have to get rid of many states. There are economies of scale in having a big national market and this helps the US prosper, even if some specific areas are below average. I accept that counterargument, but I suspect it applies more the contiguous states in the lower 48, where low transport costs allow for a closely integrated market. Due to factors such as the Jones Act, the US Virgin Islands are less closely integrated into the US economy, making it less likely that they contribute to our overall prosperity. We do help the Virgin Islanders, but there are probably more utilitarian ways of helping the people of the Caribbean—such as smaller per person subsidies to a larger area.
Another argument is that it’s nice to have some small idyllic Caribbean islands, to give America a greater level of geographic diversity. But we already have nearby Vieques and Culebra, as well as the much larger Puerto Rico.
Here’s beautiful Culebra:
