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Chapter 3 Wartime Financial Diplomacy and the Transition to the Treasury System, 1939–1947 Anastasia Xenias In 1944, the United States held half of world gold reserves and was the only potential creditor for a plethora of war-ravaged potential borrowers desperate for cash. In the early years after the war, U.S. credit was not made available easily. After an initial period of very hard-line bargaining, however, U.S. financial policy then softened somewhat. The catalyst for this important change was the Cold War. The connection between the early history of the Bretton Woods system and the commencement of the Cold War is not widely appreciated. But George Kennan’s famous “long telegram” of February 22, 1946, was in fact prompted by an inquiry from the U.S. State Department and Treasury Department as to why the Soviet Union had not ratified the Bretton Woods agreements, negotiated one and a half years earlier, in July 1944.1 The activation of the International Monetary Fund (IMF, or Fund) required the ratification of its Articles of Agreement by December 31, 1945, by the countries representing at least 65 percent of the quotas allocated; otherwise, the initial deposits on subscriptions to the Fund would be returned. Why the Soviet Union chose not to subscribe has been the subject of much specuI am indebted to David Andrews, Kenneth Waltz, Graham Bird, Hubert Zuckerman, Louis Pauly, Robert Jervis, Robert Legvold, Kimberly Marten, and the participants at the Bretton Woods Revisited Workshop at Scripps College in February 2006 for their valuable comments on earlier drafts. 1. George F. Kennan, Memoirs 1925–1950 (Boston: Pantheon, 1967), 293; telegram U.S. Embassy Moscow to State Department, February 22, 1946. lation. Documents from the personal papers of Vyacheslav Molotov, recently released by the Russian foreign ministry, show that Soviet officials were preparing to join the Bretton Woods institutions until the last moment. The eventual Soviet decision not to participate in the fledgling system was influenced by what they saw as an unbalanced international monetary regime that added greatly to U.S. power while offering Moscow little in return. This view became especially pronounced when repeated requests by Moscow for postwar reconstruction loans on favorable terms were not met. Rather than ideological differences, the primary source of the decision to stay out of the Bretton Woods system was hard bargaining over economic matters; Soviet leaders saw withholding their acceptance of the agreement as perhaps the only bargaining chip available to them in their negotiations with the United States for postwar financing. For their part, the British were also wary of U.S. financial policy in the wake of World War Two. As Robert Skidelsky reminds us, British political leaders had fought the war not to gain advantages but to hold on to what Britain already had— in sharp contrast to U.S. war aims.2 Early in 1941, Keynes summarized the chief objective of Britain in its postwar financial negotiations with the United States: “the retention by us of enough assets to leave us capable of independent action.”3 Like their Soviet counterparts, British officials were concerned by the prospect of further reductions in their already limited relative capabilities under a postwar financial and monetary system that allotted them little and that instead promised an expansion of the relative capabilities of the United States.4 Ultimately, the British received a substantial infusion of U.S. cash, whereas the Soviets did not. But approval of funds for the British was not finalized until after the onset of the Cold War, a turn of affairs that was precipitated, or at least hastened , by the failure to reach an agreement with the Soviets about postwar financial assistance. “Whether such a loan,” observed Edward Stettinius, “would have made the Soviet Union a more reasonable and cooperative nation in the postwar world will be one of the great ‘if’ questions of history.”5 The U.S. ambassador to the Soviet Union, William Averell Harriman, wrote that U.S. economic policy had “so far added to our misunderstanding and increased the Soviets’ recent tendency to take unilateral action” and that U.S. loan policy “no doubt caused them to tighten their belts as regards improvement of the living conditions of their people and may 2. “Both Secretary of State Hull and Secretary of the Treasury Morgenthau had economic war aims. Their British equivalents had none.” Robert Skidelsky, John Maynard Keynes: Fighting for Britain 1937–46 (London: MacMillan, 2000), 137...

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