US Economic Statecraft for Survival 1933-1991 Part 2

For this broad array of reasons, rather than as a result of the unicausal capitalist dynamic often invoked by New Left historians, the USA moulded and then managed a new liberal economic world order. The question that troubled the Americans, however, was where the Soviet Union would fit in with all this. How American thinking developed over the years of the Cold War to cope with that question is one of the more fascinating intellectual odysseys in post-war US policy development. How the context for that odyssey took shape is revealed by the way the American att.i.tude towards post-war economic a.s.sistance for the Soviets developed between 1943 and 1947, and through the Americans' tendency to apply lessons learnt from discussions with, and economic strategies formulated for, dealing with the British.

Trying to coerce the Soviets.

The American world-view was now truly that-a world view-and, while integrating the western hemisphere, China, and Western Europe and its colonial empires into an American-led system was the first priority, the Soviet Union was not to be left out. Until 1945 the preponderant view in Washington was to try to co-opt the Soviet Union as a player for the system. The Americans placed so much value on creating a new economic order, as was evident from their wartime relations with Britain, that to lose the Soviets from the game would be a tremendous disappointment. In their search for a way to deal with the Soviets, the Americans drew upon their experience of the Lend-Lease programme of aid to Britain and their planning talks for a liberal multilateral world economy. It was in these contexts that Americans had come to appreciate the effectiveness of economic instruments of statecraft. In particular, the USA had developed a holistic strategy that had succeeded in difficult negotiations with the British. It would now be applied to the Soviets. Economic issues should not be dealt with in isolation from one another. The Americans would insist on a comprehensive economic and political settlement with the Soviets, just as they had with the British, and gain their objectives of drawing the Soviets into the international capitalist economy, moderating their foreign policy and subduing their ideological fervour. Their apparent success with the British encouraged Americans to believe that a similar line of persuasion could be adopted with the Soviets, who were widely expected also to need financial help after the war. Americans thought that, just as Britain's economic plight had made her vulnerable and in the end responsive to US demands, so the even greater devastation in the Soviet Union, wreaked by the n.a.z.is, would have similar results there. This turned out to be a serious miscalculation.61 The Soviets were never treated like the British or the French in the Lend-Lease programme. Thus, when the USA began to exert the kind of economic leverage on them that it had against the British it came as a shock to the Soviets and was all the more resented for that. During the war in Europe, they were never forced to give a full account of their resources, their needs, or of how they used Lend-Lease supplies. In effect their requests were accepted at face value.62 This remained the case even when the Americans knew that the Soviets were re-exporting Lend-Lease items for commercial gain, though by May 1945 this kind of behaviour was having a very negative impact on the way Americans a.s.sessed the likely direction of development in US-Soviet relations.63 When a leading FEA official acknowledged this difference in treatment in 1943, he only got part of the story correct. In his opinion, the reason why the USA controlled Lend-Lease with the British far more stringently than with the Soviets (or China) and intruded into Britain's economic sovereignty was because Britain was a traditional strong commercial compet.i.tor of the USA, and the Soviet Union was not.64 This was true, but there were other chapters in the story, one of which had to do with the much greater compatibility of the British and US economies: although there were differences of policy the modus operandi of the two was very similar. In the Soviet Union, with its cult of secrecy and the ubiquity of state planning and control, the situation was very different. The Soviet system was just not geared to public disclosure of the kind of economic information that the Americans wanted, and this helped to insulate it from possible US influence. An even more important chapter had to do with the fact that, although Stalin, Churchill and Roosevelt were in an alliance against the Axis, Stalin (and Churchill) recognised it for what it was: a Faustian pact. While Britain and the USA could look forward to compet.i.tive co-operation after the war in a context of shared liberal, democratic and free-market values, the Soviets believed that victory over the Axis would simply be a prelude to the final confrontation between capitalism and communism. With this understanding of the dynamics of the international system, security was paramount, and, as Stalin put it in April 1945: 'Everyone imposes his own system as far as his army can reach. It cannot be otherwise.'65 Under these a.s.sumptions, no amount of pressure from the USA was likely to yield the kinds of concessions from the Soviets that had been dragged out of the British in the Export White Paper, through the manipulation of Lend-Lease and Reciprocal Aid, and later, in the Anglo-American Financial Agreement. With Lend-Lease the USA did not even try during the war. After Pearl Harbor, Roosevelt bypa.s.sed the staunchly anti-Soviet State Department and dealt with Stalin directly, or through intermediaries such as Harry Hopkins, and dictated policy.

Roosevelt was convinced that a lasting peace after the war could only be achieved if the Soviet Union could be engaged in post-war security arrangements. He was thus opposed to exerting pressure on the Soviets-pressure that would have been unlikely to yield results in any case-and insisted that agreements about the post-war world should be left in abeyance until after victory, or that those that did go ahead, such as Bretton Woods, should not disrupt allied unity.66 In fact, as we have seen, quite a lot of post-war business was conducted with the British on the economic front, but the relationship there was very different, and the USA had far more leverage and scope to play the game. The situation with the Soviets was by no means so favourable. For, although the Soviets received large quant.i.ties of aid from the USA, there was not the same kind of interlocking interdependence that there was between Britain and the USA, and, unlike Britain, the Soviets did not have a vested interest in working with the USA in order to create a liberal capitalist world order after the war.

If that were not enough to restrain the Americans from attempting to use economic leverage on the Soviets during the European war, there were two other overriding considerations. The Soviets had engaged the vast majority of Hitler's military might, and it was important to keep the Soviets fighting. Memories of the n.a.z.i-Soviet Pact and the possibility of a separately negotiated peace between the Soviets and Hitler were always at the back of British and American minds. There were already enough differences between the Western allies and the Soviets without making matters worse by aggressive economic tactics. The second factor was the American desire for Soviet help in defeating the j.a.panese. Recapturing islands from the j.a.panese in the Pacific had been costly enough, and calculations of likely US casualties during an invasion of the j.a.panese islands proper were horrendous. And, of course, until the time of the Potsdam Conference, 17 July to 2 August 1945, the Americans did not know whether the atomic bomb would work. Until then, therefore, Soviet military manpower was seen as highly important in the Asian theatre. After Potsdam the Americans began to see new opportunities in their relations with the Soviets. With the war in Europe over, and victory over j.a.pan now a.s.sured without costly American casualties, Truman and his close advisers began to resent Soviet recalcitrance more and more and to urge the use of economic leverage against the Soviet Union in order to exploit what was seen as an imperative need for US help to reconstruct its economy. This had been in the minds of several key people for some time, but Roosevelt's insistence on trying to co-opt the Soviets into post-war co-operation and wartime strategic considerations had prevented full deployment of such a strategy. Now, differences previously suppressed because of the priority of winning the war came back to prominence. As relations deteriorated, Truman's inexperience in foreign affairs led him to rely on advice from US amba.s.sador to Moscow Averell Harriman, Secretary of State Stettinius, Acting Secretary of State Joseph Grew and his Chief of Staff Admiral Leahy: all of them hard-line anti-Soviets. The Americans had little fear that there would be an imminent military conflict with the Soviets, as intelligence estimates indicated that the Soviets were too exhausted militarily to risk such a venture for several years, but the USA did not want either its economic plans to be thwarted, or for central and eastern Europe to fall under the total sway of the Soviets. There could be no military solution to this problem, so, as the Soviets became more and more difficult, the obvious strategy was to try economic leverage. After all, it had worked, or seemed to, with the British in 1945; why should Washington not have a similar success with the Soviets? The decision to take this route in relations with the Soviets was a portentous one, but also highly predictable, given the US experience in the war with the neutrals and with Britain.

The possibility of US post-war financial help for the Soviet Union arose towards the end of 1943 and was considered in various meetings between US and Soviet officials, in a generally positive and optimistic way, through to the summer of 1944. Amba.s.sador Harriman, Donald Nelson, Chairman of the WPB, and Eric Johnston, a leading US businessman and President of the US Chamber of Commerce, expressed optimism in various talks with Soviet leaders and officials in Moscow about the prospects of loans and developing US-Soviet trade.67 Harriman thought that there were great prospects for loans, because the Soviets wanted them badly, and this would give the USA leverage. He wrote to Hull that 'this question of reconstruction is considered by the Soviet Government as, next to the war, the most important political as well as economic problem that confronts them'.68 Optimism about loans was also reflected in the disposition of the US Treasury, which had woven into the Bretton Woods Agreement provisions to cater for state trading and state-controlled economies specifically to try to attract Soviet membership. Morgenthau and his chief international economic adviser, Harry White, were both keen to extend financial help to the Soviets and were talking of a $5 billion loan in the spring of 1944. However, unlike Harriman and, subsequently, members of the State Department, the Treasury wanted the loans to be without strings attached.

On 1 February 1944 Anastas Mikoyan, the Soviet Commissar for Foreign Trade, suggested a 25-year $1-billion loan at 0.5 per cent to Harriman, but neither he nor key officials in the State Department were happy with such generous terms. They were also cautious about asking Congress to make the funds available to the Eximbank,69 and to amend the Johnson Act that prohibited government loans to countries, like the Soviet Union, which were in default on debts to the USA. Elbridge Durbrow, Chief of the Division of Eastern European Affairs, certainly wanted a stiffer line to be taken with the Soviets, and Harriman, who played a key role in the saga of credits and loans for Russia, had become more cautious with the pa.s.sing of time.70 By early 1944 he still thought that loans would be useful and would help to liberalise the Soviet system and make it more amenable to the West, but he emphasised more than ever the need to use economic leverage to bring the Soviets into line. He was also angered by Soviet misuse of Lend-Lease and saw economic leverage as the only real and effective way of affecting Soviet policy. In March he wrote to Hull: 'I am impressed with the consideration that economic a.s.sistance is one of the most effective weapons at our disposal to influence European political events in the direction we desire and to avoid development of a sphere of influence of the Soviet Union over Eastern Europe and the Balkans.'71 His idea of basing relations on a strict quid pro quo basis was not, however, acceptable in Washington. Roosevelt insisted on continuing with a policy of unconditional aid for the Soviets. Later, in October that year, the same sentiments were echoed in a letter from Harry Hopkins to General 'Hap' Arnold, Chief of US Army Air Force. Hopkins now, however, specifically argued that it would be unwise to change the unconditional nature of aid to the Soviets, for fear of alienating them while talks about their possible entry into the war against j.a.pan were being conducted. Harriman had to bide his time and wait for an opportunity to press his case.

In the meantime, there had also been developments in the Lend-Lease sphere, which began to establish a pattern to US-Soviet economic diplomacy. In late 1943 Oscar c.o.x suggested to his chief, Leo Crowley, that the Administration should consider a so-called 3c Lend-Lease Agreement for the Soviets, which would give them credit at 2.per cent to enable them to buy pipeline Lend-Lease goods at the war's end for reconstruction purposes. Crowley, Stettinius and Harriman were not sanguine about this, but Roosevelt was keen to help the Soviets, and negotiations began, though on the understanding among US negotiators that this was not to be a subst.i.tute for a reconstruction loan.72 Discussions soon became bogged down, however, because the Soviets balked at the rate of interest proposed by the USA. The Americans genuinely thought that their terms were generous and were rather annoyed by Soviet haggling. The Soviets clearly thought that they could get better terms, and this conviction is an important ingredient in the complex situation that began to emerge.

The Soviets thought that the Americans were desperate to develop new post-war markets for their ma.s.sively increased production capacity. If they did not, then there would be a rerun of the depression of the 1930s. This kind of thinking came naturally from Marxist-Leninist dogma, but it was also reinforced by the evidence of time and energy that the USA had invested in economic planning talks, most notably with the British, and by discussions with US officials and business people during 19434. Eric johnston impressed upon Stalin in June 1944 how he would strive to get credits extended to the Soviets to encourage trade.73 So, for their part, the Soviets believed that a waiting game was an effective strategy and that they could combine it with periodic requests for large amounts of aid at extravagantly generous terms, which would hold out a tempting prospect of a burgeoning Soviet market to the Americans. In contrast, the Americans generally thought that Soviet reconstruction needs would be so pressing that they would have to turn to them for immediate help. As the Soviet Union's behaviour became more recalcitrant, its att.i.tude more truculent and its policies, especially in Eastern Europe, more objectionable, the Americans increasingly thought that they should delay agreement on economic aid, as this would be a means of exerting pressure that would persuade the Soviets to change their ways. Both sides felt that they held key cards and that a waiting game was advantageous: the result was a series of desultory conversations about aid that got nowhere.

In late 1944 the Office of Strategic Services estimated that the Soviets had lost $16 billion of its industrial capital and $4 billion-worth of inventories. This was awesome damage to the economy, and its impact was compounded by work-force losses and the destruction of the industrial and communications infrastructure in the west of the country. However, Emilio Collado, monetary and financial expert in the State Department, expressed his department's view that, by using their gold reserves and reparation receipts, the Soviets could still achieve their pre-war investment levels by 1948 without a US loan and that a $2-billion credit would only speed things up by about two months.74 This a.s.sessment was later fiercely contested by Harriman, but as it stood it suggested that perhaps the USA did not have the kind of leverage that it thought it had. The whole question of post-war credits was becoming extremely complicated, and it was unclear what power America's economic resources might actually afford it in diplomatic affairs.

It would seem that how to apply power effectively to circ.u.mstances was a conundrum that afflicted not just nuclear policy but economic diplomacy as well.

The Soviets, unaware of how American thinking was developing, still thought that they were well placed to call for loans. With the 3c talks at a standstill because of Soviet insistence on better terms, Molotov now made a larger demand for US dollars and made it sound like a favour to Washington.

Having in mind the repeated statements of American public figures concerning the desirability of receiving extensive large Soviet orders for the post-war transition period, the Soviet Government consider it possible to place orders on the basis of long-term credits to the amount of 6 billion dollars.75 He suggested a 2 per cent interest rate, with repayment beginning in the tenth year of the loan. The responses in Washington to this development reveal the different att.i.tudes and policy preferences that were developing there. There were those in the State Department and the FEA who were unsure of the wisdom of granting credit to the Soviets, largely because they did not like the Soviet regime, and partly because they did not think that providing aid would give the USA leverage. Harriman's position was different. He wanted to help the Soviets, but only in return for Soviet concessions. A third group, consisting of the US Treasury and Vice President Henry Wallace, wanted to offer generous unconditional aid to the Soviets. The other implication of the Molotov request was for Lend-Lease, and it is worth concentrating on this for the moment in order to appreciate the nuances of American thinking.

By March 1945, largely on urgings from Stettinius and Harriman, the 3c discussions had been terminated, and the focus now switched to the suggestion of a separate loan or credit, the discussions for which would cover all outstanding economic and many political matters between the USA and the Soviet Union. In addition to suspending the 3c talks, Americans had been making p.r.o.nouncements throughout 1944, particularly in congressional hearings in the spring and summer, that Lend-Lease was a wartime measure, that it would cease at the end of the war, and that it was not intended for reconstruction purposes except under a 3c purchase agreement. There now followed a sad and sorry end to what Churchill once described as the most unsordid act in history. As we have seen in the account of British experience, the Americans savagely cut back Lend-Lease after VE-Day and reneged on commitments made to the British for Lend-Lease stage 2, the period between VE- and VJ-Day. That action made it extremely difficult for the Americans to extend Lend-Lease reconstruction aid to the Soviets, even if they had wanted to, without blatant discrimination against Britain. Finally, the atomic bomb ended the war abruptly and threw both British and Soviet expectations about further Lend-Lease supplies and their plans for economic reconversion into disarray.

By April 1945 there were serious problems arising with the Soviets so far as the Americans were concerned. The most serious was in Eastern Europe and especially in Poland, where the Soviets were not fulfilling commitments made at the Yalta allied summit conference, 411 February 1945, concerning the role of non-communist members of the new Polish Government. Poland was seen as a litmus test of the Soviet Union's intentions in Eastern Europe and whether it would allow free governments to emerge there, or would impose communist puppet regimes. All these matters were made worse because the allied working relationship between Stalin, Roosevelt and Churchill was broken in 1945, first by Roosevelt's death and then by Churchill's electoral defeat. Evidence of strained relations surfaced in a now notorious meeting between the new president and the Soviet Foreign Minister, Molotov. Truman, after taking advice from hard-liners on the Soviet Union, including Harriman, famously berated Molotov on 23 April 1945 for Soviet failures to keep to commitments on Poland. Matters deteriorated further, with growing Soviet truculence over economic issues and Moscow's failure to ratify Bretton Woods. At the San Francisco Conference, 25 April to 26 June 1945, convened to establish the United Nations, Molotov appeared uncompromising and difficult to Secretary of State Stettinius and Harriman, and there was still no satisfaction for them on Eastern Europe. Now more explicit connections began to be made between Soviet behaviour and US economic a.s.sistance.

On 9 May, just before leaving San Francisco for talks with Truman, Harriman asked Stettinius what position the Department took on the Soviets and Poland. 'It is important to know this, Harriman added, because it brought in such questions as lend-lease and post-war credits to Russia.'76 In conversation, he and Stettinius decided that the importance of Poland to the USA should be impressed upon Stalin, but that no pressures should be applied until after the San Francisco Conference had closed. Lend-Lease should be curtailed, with no further mention of a 3c agreement, but post-war commitments should be kept. Harriman reported all this to Truman and he agreed. The next day he signed the order, which drastically cut back Lend-Lease supplies to the Soviet Union. Later Truman was to claim that he did not fully understand the import of the order, and indeed the FEA and General John York, Acting Chairman of the Soviet Protocol Committee, gave a very harsh interpretation of the order, such that for a time it did not reflect the President's will. Ships at sea bound for the Soviet Union with Lend-Lease supplies on board were ordered to turn back to the USA. Both Harriman and Clayton were appalled at the unnecessarily provocative way that the FEA and York implemented the order; Clayton took steps to correct things, and soon the ships were turned around once again and allowed to sail to the Soviet Union. But the bottom line was clear, and there is overwhelming evidence that Truman understood it and approved: Lend-Lease supplies to the Soviet Union would be drastically cut back, only supplies for use in the Asian theatre, once the Soviet Union entered the war, would be shipped, and there would be no Lend-Lease for reconstruction.

This did not mean that the die was cast. Truman's att.i.tude to dealing with the Soviets still fluctuated. He sent Harry Hopkins on a two-week visit to Moscow to try to sort things out. Hopkins failed, and it was obvious that Stalin was becoming more and more suspicious of US economic intentions. Talking with Hopkins, the 'Soviet dictator was very careful to raise the question of American economic pressure. If the termination of lend-lease was "designed as pressure on the Russians in order to soften them up then it was a fundamental mistake", said Stalin. If the Russians were "approached frankly on a friendly basis, much could be done...Reprisals in any form would bring about the exact opposite effect".'77 It was not the Truman Administration's intention to exert such economic pressure through an abrupt ending of Lend-Lease that it appeared brutally hard to the Soviets. There were those-such as York, and officials in the FEA, the service departments and the State Department-who did want to make an immediate political point and cared little about Soviet sensibilities, but Harriman wanted to take things step by step and certainly keep things on an even keel until, at least, after the San Francisco Conference. Others, such as Clayton, nursed for even longer than Harriman hopes of drawing the Soviets into a liberal multilateral trading system. The Administration did intend that Lend-Lease should be shut down in such a way that it could not be used for reconstruction, and it knew that that would help to perpetuate the Soviets' vulnerability and hopefully make them court the Americans for other forms of economic help. However, the FEA and York had gone too far, and the character of their actions contrasted starkly with the unconditional nature of Lend-Lease deliveries throughout the European War. For a while the Lend-Lease issue was now dealt with in more comprehensive economic talks, but, with the Soviets defensive and cautious, they made little progress. By the autumn of 1945 Lend-Lease was separated out again, and on 15 October 1945 the Soviets finally agreed to the terms of a 3c agreement that had been offered to them months before. They were granted a credit of $400 million, at 2.percent, and by 26 March 1947, when credit transfers were discontinued, had used all but $19 million of the credit.78 Thereafter, a comprehensive Lend-Lease settlement arose as unfinished business periodically in US-Soviet economic diplomacy for decades to come.

While Lend-Lease matters were put on the backburner, the issue of a large credit was now at the forefront of concern in Washington. Harriman's initial reaction to Molotov's 'kind' offer to take a $6-billion credit was to ignore its unconventional nature and to put it down to ignorance of commercial practices. And, while he still favoured extending credits to the Soviets, he also entered the following observations and caveats.

From his [Molotov's] statement I sensed an implication that the development of our friendly relations would depend upon a generous credit. It is of course my very strong and earnest opinion that the question of the credit should be tied into our overall diplomatic relations with the Soviet Union and that at the appropriate time the Russians should be given to understand that our willingness to cooperate wholeheartedly with them in their vast reconstruction problems will depend on their behaviour in international matters.79 As early as this, in the unfolding of events that led into the Cold War, Americans perceived that economic relations between the Soviet Union and the USA would not just be a matter of dollars, roubles, commerce and clear political objectives. They were to have an important symbolic aspect to them as well. This grew in significance for the Soviets and the Americans as the Cold War developed.

On 8 January Stettinius summarised Harriman's advice for the President. The USA should extend credits to the Soviets, but divorce them from Lend-Lease and make them conditional on Soviet policies.80 But, this was not how Morgenthau and the US Treasury saw things. On 1 January Morgenthau had written to Roosevelt proposing Stage 2 Lend-Lease aid for the Soviets in the same way that it had been proposed for the British: the extent to which the Americans were to renege on their commitment to the British was not yet fully apparent. Just over a week later Morgenthau proposed a $10-billion credit for the Soviets repayable over 35 years. On 17 January, in conversation with Stettinius and Harry Dexter White, he called for a 0 per cent 3c agreement and repeated his call for a $10-billion credit at 2 per cent, with the possibility of some repayment in kind through Soviet supply of raw materials that were running low in the USA.81 This was the final time that the Soviets stood any chance of getting something like unconditional post-war reconstruction aid.

The State Department's response was articulated by Under Secretary for Economic Affairs Will Clayton. He thought that new legislation would be needed to authorise Morgenthau's proposals, which could cause difficulties, but there would also certainly be problems from embarra.s.sing comparisons with less generous loans to other allies, notably the British. The Administration would also look weak, as the Soviets had already been told that standard 3c terms were the best they could expect. If the USA now offered better terms, the Soviets would think that it was desperate for markets, and furthermore this would throw away the 'only concrete bargaining lever for use in connection with the many other political and economic problems which will arise between our two countries.'82 Joseph Grew, Acting Secretary of State, and Harriman both agreed with his diagnosis. In the face of this opposition, Morgenthau withdrew his proposal for an interest-free 3c agreement, but still favoured a $10-billion loan.83 Harriman, while agreeing with Grew and others in the State Department, that $5 billion was the maximum that they should consider, differed with colleagues such as Collado about the Soviet desire and need for loans. The State Department, we should recall, had accepted a.s.sessments by the OSS of Russia's ability to regenerate itself through its gold reserves and reparations without additional outside credits. Harriman insisted that such a.n.a.lysis overlooked the scale and ambition of the Soviets' plans to expand rapidly from their prewar industrial base. Once this was taken into account, then it became clear that they would need US credits more than the OSS and State Department estimate suggested. So Harriman's position remained that the USA should be willing to offer credits, should take advantage of what he saw as Soviet strong needs, and extract concessions from them on a strict quid pro quo basis. 'Our experience has incontrovertibly proved that it is not possible to bank general goodwill in Moscow.'84 By this point it had been decided that no further moves should be made by the USA until Truman had discussed the issues directly with Stalin and other Soviet officials. However, when Truman met Stalin at Potsdam there was no detailed discussion of loans. Thereafter relations continued to deteriorate, and, even after the October agreement on credit for Lend-Lease pipeline supplies, there was no further progress with the $6 billion request because of the problems that now plagued US-Soviet relations. In 1952 an official report for the President summed things up thus: These obstacles [to a loan agreement] derived from Soviet obstructionism in both the political and economic sphere and were of such a nature as to preclude the US Government's giving any consideration to the Soviet request unless there should be a fundamental change in over-all Soviet policies. Therefore, no steps whatsoever were taken by the US Government to act upon this request.85 Even though the Soviets did not get their $6 billion, they struck the October 1945 deal for $400 million for Lend-Lease pipeline supplies, and the USA, rather grudgingly, allowed $250 million to go to the Soviet Union via the United Nations Relief and Rehabilitation Agency (UNRRA). Thus in January 1946, when the Soviets enquired about a $100million credit to buy US surplus wartime goods, there was a rather mixed response. Under Secretary of State Dean Acheson favoured the credit because the government wanted to get rid of the stuff and it was costly to store and guard. Durbrow, on the other hand, led the charge to deny the Soviets the loan, arguing that they had already received nearly a billion dollars of aid, which was the reconstruction aid sum originally envisaged for them.

Despite our many protests and requests for coordinated action regarding the economic blackout in Eastern Europe and other related questions, the Soviet Government has consistently refused to accept any of our views on this point. It has been our firm feeling that the only real lever we had to bring about any semblance of economic and political stability in Eastern Europe was through the withholding of credits.86 By 11 February Soviet and American officials had nevertheless worked out a $100million credit, but the agreement was never consummated: 'Soviet obstructionism again precluded final agreement.'87 By 1946 att.i.tudes were really hardening towards the Soviets. Their behaviour in Eastern Europe was unacceptable, and they had not shown any inclination to join Bretton Woods. Their att.i.tude seemed to be growing increasingly truculent and aggressive, and under these circ.u.mstances the Americans saw economic leverage as even more important to try to rein in Soviet behaviour. This att.i.tude was now almost universal in the Truman Administration. In July 1945 Congress increased Eximbank funding from $700 to $3.5 billion, and later exempted members of the IMF from the scope of the Johnson Act, but these changes were in response to fears of the President and Leo Crowley about the deteriorating position in Western Europe and the need to funnel resources into the economies there. On 9 August 1945 Harriman told the Soviets that the Eximbank now had resources and was willing to receive loan requests from them, but thereafter American officials studiously ignored the matter. When the Soviets lodged a request for $1 billion it was simply not acted upon; the later claim by US officials that the doc.u.ments had been lost was nonsense.88 When the Soviets formally renewed the request in February 1946, the Americans actively sought means to deny them the loan, though without appearing to be discriminatory. Secretary of State James Byrnes laid down no less than nine issues that he wanted to address with the Soviets and which should become part of a comprehensive settlement of US-Soviet differences. This tactic was exactly the same as the one used with the British in the Anglo-American loan negotiations. However, the intended goals were different: the Americans expected the British to negotiate and give way; the evidence regarding the Soviets is that they intended the conditions to prevent negotiations. Byrnes' conditions were: i that claims by US citizens arising from the revolution and Soviet liberated areas of Eastern Europe should be met; ii that the Yalta agreements should be implemented, and the economic problems of Eastern Europe should be addressed by democratic means; iii that waterways of international concern should be free; iv that there should be consideration of a treaty of friendship and commerce; v that patents and copyright should be respected;vi that matters arising from Article 7 of the Master Lend-Lease Agreement should be resolved; vii that there should be a comprehensive solution to Lend-Lease matters; viii that civil aviation rights should be discussed; and ix that anything else that needed addressing should be addressed.89 The Soviets evinced pleasure initially at the prospect of talks and responded to American urgings to engage with the IMF and the IBRD by sending an observer to their inaugural at Savannah, Georgia. These American conditions were very demanding, but there were still a few individuals in Washington who wanted to take risks with the Soviets in attempts to cultivate better relations. One of these was Secretary of Commerce Henry Wallace. On 21 March 1946 he wrote to Truman saying that he thought that the recent Soviet att.i.tude was largely to do with internal difficulties and fear of capitalist encirclement; he suggested that the new US amba.s.sador to Moscow, General Bedell Smith, should open up trade talks as a remedy for the deterioration in US-Soviet rela-tions.90 Sadly, the time for being generous and taking chances with the Soviets was over: Truman did not act on this proposal. Thus, when the Soviets responded to Byrnes' conditions and indicated that they would only be willing to consider items iv, vi and vii on Byrnes' list, because they could not see the rele-vance of the other points, problems soon arose. In fact, the Americans were eager to take advantage of this situation to choke off the negotiations about financial help.91 The Americans were determined not to proceed to substantive talks. As one official put it to Clayton, 'we will discuss a $1 billion loan only in connection with an overall consideration of economic and financial policies'.92 In fact it is doubtful that they would have done even that unless convinced that the Soviets would capitulate to their demands. In April, money earmarked in Eximbank for the Soviets was used for other purposes. Now, if there were successful talks with the Soviets, the Administration would have to go to Congress for more money. But, the British loan had only just squeaked through on the argument that the loan would help to strengthen the British and enable them to resist the Soviets better; it was going to be difficult to return to Congress and now ask them to strengthen the Soviets with a loan.93 There were thus two alternatives: 'take advantage that the Soviet reply of May 17th gives to break off gracefully loan negotiations with the Soviet Union', or liaise with congressional leaders and explain that the Administration would need more funds to be voted for Eximbank if negotiations went ahead with the Soviets and turned out to be successful.94 This decision needed to be taken at a high level. It was. On 13 June Byrnes wrote again to the Soviets reiterating the need for the broad talks described in his letter of 21 February. In short, he was saying to the Soviets, agree to all our demands or no talks.95 Sporadic and desultory correspondence continued over the next few months, but there were no loans. In September 1946 the USA separated a Lend-Lease settlement out from other considerations and tried to get some movement there, but to no avail.

From 1943 until Roosevelt's death, American policy involved unconditional economic a.s.sistance to the Soviets largely as a result of cold calculation about Soviet contributions to the defeat of Hitler and the promise of help with the defeat of j.a.pan. Underpinning this approach there was also the fond hope that relations with the Soviets would gradually improve to the point where they could be eased back into the international mainstream, with further dollars for post-war reconstruction helping to lubricate things. However, as difficulties in the political and strategic fields were aggravated and turned into serious problems, the USA turned away from that strategy and tried to propel the Soviet Union into the capitalist system through economic leverage. When that failed things turned very sour. The USA then compromised every one of the six reasons it had for pursuing a liberal open-world economy in its efforts to deny the Soviets access to materials that could help them economically or strategically. They discriminated against the Soviets, denied them access to the Western free market, denied themselves access to the Soviet market, denied themselves access to strategic raw materials from the Soviet Union, denied their own companies the chance of making profits in the Soviet Union, and by their policy of non-economic engagement denied themselves influence in the Soviet economy, which could have fathered other forms of power vis-a-vis the Soviets over time.

On 5 January 1946 Truman told Byrnes that he was 'tired of babying the Soviets.'96 By 1947 matters had deteriorated so far that, instead of extending loans to the Soviets, the USA was more intent on mounting a form of cold economic warfare. So much, one might say, for the idea that capitalists should always go around and act like capitalists.

5.

The Truman Administration and the development of strategic embargo policy.

Between 1947 and April 1951 the Truman Administration debated with itself, Congress and allies about a strategic embargo on exports to be directed at the Soviet bloc and later the People's Republic of China and North Korea. The key question was how extensive the embargo should be in order to reap maximum benefits for the West. Always at the heart of trying to resolve this problem were the economic concept of relative gain from trade and the difficulty of defining a strategic good. During the Korean War the US Commerce Department effectively adopted the position that all goods had strategic value, and therefore advocated a complete embargo, irrespective of the economic consequences for the West. Such a stance flew in the face of the concept of relative gain and was not adopted universally by the USA, though complete US embargos were applied to China and North Korea, where moral, political and ideological considerations were paramount. With the Soviet Union, the USA allowed a small trickle of trade under a tightly limited national regime of trade controls and begrudgingly condoned a more permissive one, governed by multilateral agreement, for allied trade with both the Soviet Union and China.

Establishing containment.

Soon after the Second World War Americans concluded that generosity towards the Soviets would not be reciprocated, and would in fact be interpreted as a sign of weakness: the appeas.e.m.e.nt syndrome ran long and deep in the thinking of Western policy-makers.1 From the latter part of the war and into the post-war period US Soviet experts in Moscow, such as Harriman, had recommended applying economic leverage to the Soviets in order to achieve US goals. However, when these tactics were applied the Soviets proved more recalcitrant than the British had been, and by February 1946 there was a standoff with the Americans on economic matters, despite the conclusion of some minor arrange-ments.2 As friction between the USA and its main ally, Britain, on the one hand, and the Soviets, on the other, caused more and more heat, and as economic leverage was clearly not going to move the Soviets into more accommodating policies, Americans began to consider alternative strategies of economic statecraft to deal with them.

The architects of containment and those who believed that the Soviets had to be counterbalanced by resolution and force were already gaining the initiative in the West. For some time the British had worried about the projection of Soviet power into central Europe and had recognised the need to engage US help in order to achieve a measure of security However, the USA had always hoped to avoid direct long-term entanglement in the security affairs of Europe and initially would have preferred an accommodation with the Soviets in order to complete the tasks of demobilisation and returning American troops home.3 A number of developments involving the Soviets changed this position. Soviet dominance over Poland, confusion about what had been agreed at the 1945 Potsdam Allied war conference about reparations and future treatment of Germany, the Soviets' refusal to partic.i.p.ate in the IMF, their demands for concessions from Turkey, and, in early 1946, their refusal to abide by a wartime agreement to withdraw from northern Iran once the war was over-all this alarmed the USA. When Truman examined the results of the Moscow Foreign Ministers' Conference of December 1945, he became convinced that the Soviets were now a real problem and a threat to the West. He wrote a note for Secretary of State James Byrnes: I don't think we should compromise any longer. We should refuse to recognize Rumania and Bulgaria until they comply with our requirements; we should let our position on Iran be known in no uncertain terms and we should continue to insist on the internationalization of the Kiel Ca.n.a.l, the Rhine-Danube waterway and the Black Sea Straits and we should maintain complete control of j.a.pan and the Pacific. We should rehabilitate China and create a strong central government there. We should do the same for Korea.

Then we should insist on the return of our ships from Russia and force a settlement of the Lend-Lease debt of Russia.4.

With the newly created UN rendered ineffective, because of the great powers' veto in the Security Council and the ideological divide between the Soviets and the West, it became clear that the USA would have to look after its own security interests. Unfortunately for the prospect of harmonious international relations, American inexperience failed to calculate accurately the geopolitical impact this agenda would have on realist thinking in Moscow.

After strong American demands and adverse publicity in the UN, the Soviets finally withdrew from Iran, but Truman was now worried about their intentions. A belligerent call from Stalin for Soviet rearmament, in February 1946, did not help the President's peace of mind, and it also prompted an a.n.a.lysis by George Kennan, the leading expert on the Soviet Union in the US Moscow emba.s.sy. He penned the Long Telegram, probably the most famous diplomatic telegram of all times. In it he warned of the Soviet Union's tendency to expansion and argued that the USA needed to oppose it resolutely. This articulated many of the inchoate fears and concerns in the minds of Washington officials. Winston Churchill then added to the anti-Soviet momentum in his famous speech at Fulton Missouri on 5 March 1946. Conjuring up apocalyptic visions of danger with his powerful rhetoric, he dramatically called for Anglo-American co-operation to resist Soviet communism and spoke of an iron curtain having descended across Europe from Stettin in the Baltic to Trieste in the Adriatic.

The USA still did not commit itself unequivocally against the Soviets, but it acted with less regard for their sensitivities in prudent moves to safeguard Western interests. In December 1946 the British and American zones of occupa-tion in Germany were merged to form Bizonia. On 24 February Britain formally informed the USA that it could no longer give military a.s.sistance to Greece and Turkey: two key countries where the Soviets were thought to have ambitions. In response to this, President Truman, in a highly dramatic announcement, demonstrated internationalism's triumph over isolationism in the USA by announcing a peacetime commitment to help Europe and to support Greece and Turkey. The Truman Doctrine pledged help to resist aggression from internal or external sources and, more specifically, provided economic a.s.sistance to replace Britain's.

In May 1947 William Clayton, Under-Secretary of State for Economic Affairs, reported that economic distress in Europe was widespread and far worse than antic.i.p.ated. In his opinion, it would lead to political and social disaster unless action were taken. A month later the new Secretary of State, General George Marshall, who was less conciliatory towards the Soviets than Byrnes, proposed a European Recovery Programme (ERP) in a speech at Harvard University; this became the Marshall Plan. Technically, it was open to Soviet partic.i.p.ation, but in fact with its implementation came the economic division of Europe and, most important of all, the division of East Germany from West Germany. This was highly provocative to the Soviets, with the danger of capitalist infection spreading via a newly created Deutschmark into Eastern Europe. They reacted by closing ground access to the Western redoubt in Berlin, thus precipitating the first major Cold War crisis. The Western response was the Berlin Airlift of June 1948 to May 1949. The Soviets also clamped down in the rest of Eastern Europe, removing, most notably in Prague, the last vestiges of pro-Western elements from government. In 1949, after much hesitation and pressure from their West European allies, the USA established the North Atlantic Treaty Organisation (NATO).

Ineluctably, lines were being drawn. A sequence of actions and reactions, security concerns and clashing ideologies, economic incompatibilities, difficult personalities and the historical baggage of mutual suspicions were s.n.a.t.c.hing defeat from the jaws of victory. War was to be succeeded by Cold War, not by peace. The immediate threat from the Soviets was not conceived primarily as a military one, but as economic, psychological and subversive (though no one ignored the fact that the Soviet Union was also a serious potential military threat to the West). After Marshall took over from Byrnes as Secretary of State in early 1947, he quickly took steps to respond vigorously to these threats. To improve planning and strategy development in the State Department, he created the Policy Planning Staff (PPS) and appointed Kennan as its first director. Shortly thereafter, in July 1947 in Foreign Affairs, Kennan anonymously published an elab-oration on his Long Telegram ent.i.tled 'The Sources of Soviet Conduct': 'Soviet pressure against the free inst.i.tutions of the Western world is something that can be contained by the adroit and vigilant application of counter-force at a series of constantly shifting geographical and political points.'5 He believed that there were five key industrial centres in the world: the USA; Britain; Germany and central Europe; j.a.pan; and the Soviet Union. Four were in the West and one was in the East, and this was the way things should remain. Elsewhere, the West could afford to be flexible, because points on the periphery were expendable. This became known as containment and, with much help from Kennan, it developed into official US policy.

Notwithstanding Kennan's hard line, he did not believe that the Soviets had ever seriously considered a resort to arms against the West, and in April and May 1948 both a report from the US Moscow emba.s.sy's Joint Intelligence Committee and the consensus view of the British Foreign Office concurred with Kennan's a.s.sessment.6 Containment to prevent the spread of communism thus took the form of economic priorities. Both the Truman Doctrine and the Marshall Plan were cast in this mould. And it was not only the Americans who recognised the importance of this economic strategy. The British would not allow the Soviets to endanger the Marshall Plan: the Americans did not explicitly exclude the Soviets, but the British did. This is abundantly clear from a report on the initial planning talks by Foreign Secretary Ernest Bevin for the British Cabinet. Knowing that the Soviets would not supply the information necessary for the ERP, and aware that they could not allow their command economy to be infected by the free market through an integrated plan for European economic recovery, Bevin 'insisted from the outset on thrashing out the differences of prin-ciple...and making that the breaking point. Any other tactics might have enabled the Soviet Union to play the Trojan Horse and wreck Europe's prospects of availing themselves of American a.s.sistance.'7 There thus emerged a high level of congruence in British and American containment thinking in 19467, and this was important when the USA began to call for a multilateral approach to the task of inst.i.tuting a strategic embargo. This is not to say that there were no differences between the USA on the one hand and Britain and other allies on the other, but it is to indicate some, limit to the differences and to claim that they were of a tactical nature rather than about basic principles. Thus the Americans, with the help of the British, helped to nurture the economic recovery of Western Europe through the Marshall Plan, and thereby honed the economic instruments that were to play a key role in the grand strategy of containment.

The economic strengthening of Europe was part of America's policy to contain any attempt at the further expansion of communism. By March 1948 the US government believed that 'between the United States and the USSR there are in Europe and Asia areas of great potential power which if added to the existing strength of the Soviet world would enable the latter to become so superior in manpower, resources and territory that the prospect for survival of the United States as a free nation would be slight'.8 On 2 April the Congress approved the Marshall Plan and appropriated $5.4 billion for the first year of its operation. Thus, as soon as early 1948, the USA had a strong tendency to see the disposition of world power primarily in bipolar zero-sum terms, with great emphasis on the control of economic potential and resources: most important of all, it was vital to anchor Western Europe in the free world as a willing and cooperative ally and as a thriving economy. The Americans still discriminated between areas of key and lesser importance, but, nevertheless, global containment strategy developed quickly and soon changed that. Also, it did not take long for thoughts about negative types of economic strategy to take shape to complement the positive economic strategies of aid and a.s.sistance to Western Europe fathered by the Truman Doctrine and the ERP.

From the US national to the multilateral Western strategic embargo Churchill had pointed out in the First World War that in modern warfare it is not possible to distinguish between armies and people. Perhaps more specifically, the distinction between contraband and non-contraband goods cannot be sustained. Nothing may be excluded a priori from the category of strategic goods, because everything can contribute to the national effort in total war: this was very much in evidence in American thinking as the USA struggled to construct its strategies for waging an economic cold war. However, it does not follow that, because all economic activity and all goods contribute to the waging of total war, all trade should be embargoed. The case of Sweden in the Second World War demonstrated in practice that things were never so clear-cut and simple. In peacetime things were even more complex, because the Cold War was not hot war, and the Americans had to work under a number of legal constraints, with domestic and international political factors also influencing policy development. And they could not mount a naval blockade to prevent goods reaching the Soviets, nor could they bomb Soviet industrial plant as they had done Germany's in the Second World War. They were confronted not by war or peace, but by cold war. Hence, it is appropriate to distinguish between economic warfare and the strategies that the USA began to develop in the Cold War.

When policies of economic denial went beyond a pure military-strategic embargo and took the shape of an embargo designed to condemn Soviet behaviour or to convey messages, or if they were designed to weaken, damage, or cause the collapse of the Soviet economy or society, then the term cold economic warfare seems most appropriate. However, it is important to emphasise once again that this term was not used by the policy-makers of the time. They used either the term strategic embargo, or economic warfare. Changes to such usage will not be made in the narrative, but the term cold economic warfare will be used in any commentary or a.n.a.lysis. It is also important to remember that these a.n.a.lytical terms never fully capture the range of the complexity of practice. There are always some policies and events that evade them. Thus, during the missile crisis of 1962, cold economic warfare against Cuba was accompanied by a naval blockade, something one only expects to see in wartime. The use of air power against Iraq in the economic blockade following the Gulf War, and on into the new millennium, is another example.9 In the spring and early summer of 1947 the USA had taken two major steps along the path of developing a concerted economic response to the perceived threat from the Soviet bloc: the Truman Doctrine and the Marshall Plan. Simultaneously, East-West relations continued to deteriorate, and there was growing American concern about exports to the Soviet Union and her satellite states. US exports to the Soviet Union and Eastern Europe in 1947 amounted to approximately $150 million-not a great amount, but, when considered with other factors, they created a serious problem for the USA.

Authority to control exports still existed from wartime legislation, but now that measure of control was seen as inadequate by a number of influential groups and individuals in Washington. Pressures from Congress, worries about trading with the Soviets when materials were in short supply in the USA and Western Europe, and fears that some exports were directly contributing to the Soviet Union's war-making potential at a time when it was no longer seen as a friendly power caused much hard thinking. Actions of allies soon to receive US aid also helped to focus attention on strategic exports. In particular, the British sale of jet engines to the Soviets provoked US anger, even though Foreign Secretary Bevin tried to mollify them, professed himself ignorant of the details of the sale, and gave a.s.surances that British export controls over strategic items like this would be tightened up.10 However, moves by Britain to expand trade with the Soviets through a trade agreement in December 1947, and the continuing expansion of trade with the Soviets by other West European countries, worried the Americans and exasperated members of Congress. They found it hard to tolerate the idea that Marshall Aid to Western Europe might help recipients to export what many Americans considered to be strategic items to the Soviets. Such views were expressed ever more vehemently after the coup in Czechoslovakia in February 1948. All this led to congressional criticisms of the Administration for not cutting off trade with the Soviets, and Commerce Secretary Harriman had to speak defensively in response to questions from the House Foreign Affairs Committee. He said sanctions should only be used as a last resort, but in actual fact at that very time he was setting in motion interdepartmental consideration of a strategic embargo policy.11 Quite clearly, a whole range of difficult issues were taking shape, to do with strategic exports, European recovery, US aid and how best to limit the power of the Soviet Union and maximise the strength of the West.

Throughout September the Commerce Department, the State Department and members of the newly formed NSC considered these issues.12 By 14 November the Commerce Department had its position worked out, but the State Department was still tussling with problems.13 Its Eastern European Economic Working Party rejected any idea of economic warfare and recommended a free flow of exports apart from controls over those items in short supply or of direct military use. The PPS also developed a paper in which Kennan argued that the level of existing trade did not require drastic action, certainly not of the kind that Harriman and the Commerce Department favoured. Kennan thought that the USA needed to be careful not to fall foul of international agreements with the Soviets, particularly in relation to charges of trade discrimination. At the same time he noted that ERP demand for US goods would result in many more items falling into short supply, which would obviate most of the discrimination problem. However, Kennan did suggest that, if the situation deteriorated, then area controls should be applied to all exports to Europe. This appears to have been misunderstood by some of his colleagues in the State Department, who thought that he was suggesting harsher measures than was actually the case. The Under Secretary of State, Robert Lovett, did not approve Kennan's paper, and the State Department was unhappy and opposed the proposals from the Commerce Department.14 Nevertheless, on 17 December at the fourth NSC Meeting, after minor amendments and an understanding that the State Department would have a say in what was to be embargoed, members accepted the general proposals from Commerce.

Soviet opposition to ERP was deemed to const.i.tute a 'threat to world peace and, in turn, to US security' and therefore the NSC recommended, and it was approved: 'in the interests of economic recovery, world peace, and, in turn, US national security, that Europe, including the USSR, and such affiliate areas as the Secretary of State may designate, should be declared a recovery zone to which all exports should be controlled.'15 On 31 December the Commerce Department, under the authority of vestigial wartime legislation, announced destination controls on all goods in short supply in the USA, and on 15 January 1948 it further announced that all exports to Europe must have individual licences after 1 March. The actual formal criteria that were applied involved the following questions: i Was the need for the export justifiable? ii Would the export serve the interests of European economic recovery? iii Would the export of an item adversely affect the position of the USA?16

This amounted to a policy of restricting exports in short supply, or those which could contribute to the military potential of the USSR. But this was by no means the end of the story. The Commerce Department wanted to forge ahead and develop the US embargo as quickly as possible, but others, especially from the State Department, wanted to define policy more clearly 'regarding possible economic warfare'.17 It was by no means clear what did and what did not contribute to the Soviet military potential: if the line were to be drawn very inclusively, then the State Department feared that this could be provocative and be construed as economic warfare by the Soviets.

In the course of discussions on 16 March personnel from State and Commerce agreed that the 'objective of the US was to inflict the greatest economic injury to the USSR and its satellites and, at the same time, to minimise the damage to the US and the Western Powers resulting from (a) probable Soviet retaliation, and (b) inability of the East to continue exports of certain supplies to the West.'18 Already there was a broad canvas that covered 'contributing to the military potential of the Soviet Union', but the Americans were also aware of a central dilemma. How far could they go in weakening the Soviet bloc without risking repercussions that would make the embargo counterproductive? It was this type of consideration that limited America's express intention to 'inflict the greatest economic injury to the USSR': it also complicated the question of whether or not US policy went beyond a strategic embargo and amounted to what many in the State Department termed economic warfare. Both the State and Commerce departments had rather different ideas about where to strike the balance in American policy. At times the Commerce Department did not want to strike a balance at all: it simply sought to stop all trade.

In early 1948 the situation was still fluid. In addition to the differing views within the two departments most directly concerned with embargo policy, there was also another perspective that had to be taken into account: the dangers of hasty action from elsewhere on the embargo issue. In particular, the State Department was eager to devise a policy that would pre-empt such action from the Congress and the military establishment. In order to try to move things along an ad hoc subcommittee of the interdepartmental Advisory Committee on Exports19 was set up to help devise policy and look into the possibility of drawing the allies into the embargo enterprise. It did not report until May, but before then the State Department had already taken matters in hand and decisively set the aims of US embargo policy. Those aims were echoed later in the report of the ad hoc subcommittee, though the new Secretary of Commerce, Charles Sawyer, seemed bent on a total embargo (or as near total as he could manage), which was rather different to both the report and the proposals that Secretary Marshall put to the Cabinet on 26 March.

The concerns of the State Department were broader than those of Commerce and focused rather differently from those of the Defense Department. The State Department was concerned with implementing a strategic embargo, but one that harmonised with other major concerns: the reaping of economic relative gain, the success of the ERP, friendly relations with America's European allies, and avoiding damaging retaliation from the Soviets. The first of these factors was very evident in the way Marshall's proposals were put to the Cabinet. He pointed out that ERP trade with the Soviet bloc amounted to $1.5 billion and in consequence: A curtailment of this trade would mean increased demand on the United States, both in terms of money and in terms of physical supplies, much of which could not be supplied without the inst.i.tution of drastic domestic controls.'20 One of the main reasons behind the need for the Marshall Plan was the dollar shortage in Europe.21 If the embargo forced Western Europe to seek to replace lost supplies from Eastern Europe with alternatives that