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Economic Power, Postwar International Finance and the Original Use of ‘Conditionality’
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Critics of globalization frequently object first and foremost with the crippling policies of
the International Monetary Fund that are faulted with broadening economic inequality and deepening the rift between the rich industrialized North and the less developed debtor South. Invariably, the IMF is seen as ignoring the needs of the borrowers and stretching their already thin national capabilities with its stringent and unwavering policies of ‘conditionality’. That is, loans to needy sovereign borrowers are bestowed only if certain conditions are met, such as opening markets, deregulating industries, cutting budgets, etc. Critics wail that is not only unfair but an unacceptable imposition of conditions on states that can barely meet them. It is a criticism that the rich North is abusing the poor South. And this is often believed to be an effect of globalization.
This perception is not entirely correct. The forces of globalization have made aspects of
national economic policy difficult to manage, and the IMF has rightfully been criticized for errors in application of economic theory to cases. However, the policy of conditionality is neither new nor targeted at the less developed world. Moreover, it was first applied under circumstances far more devastating than those faced by any borrower today. And it was applied to wartime allies, both industrial states of the North. The application of US conditionality to postwar loans to the United Kingdom and the Soviet Union in the immediate postwar period was as tough as anything witnessed today. Its effect was to cause friction within the war-time alliance and contribute significantly to tensions that triggered the Cold War. However the reasoning for conditionality in US postwar finance was neither benign nor revisionist. Rather it was nested in considerations of power and security manifested in economic policy.
When did the Cold War begin? Many historians date its origin from 1945, 1946 or 1947.
For some the Truman Doctrine of March 1947 is widely assumed to be the decisive moment. Others have focused on American militance in early 1945, Soviet domination of Eastern Europe, the advent of the atomic bomb, the evolution of American public opinion, Churchill’s March 5, 1946 ‘iron curtain’ speech, Soviet belligerence at the London 1946 UN Security Council meeting, Stalin’s February 9, 1946 speech asserting the incompatibility of communism and capitalism and the likelihood of further wars, an inability to agree on the future of Germany leading to its permanent division, Kennan’s long telegram, the Marshall Plan and Stalin’s walkout.
1
. I look at George Kennan’s long telegram because it set the tone for how America
would view the Soviet Union over the next 40 plus years. Between the last days of 1945 and February 1946, relations between the world’s two most powerful states deteriorated sharply. However, the reason for the telegram was not to report on Soviet political activities, military intentions or ideological imperialism, which needed to be contained. The immediate occasion of Kennan’s cable lay in an inquiry of the US State Department and the Treasury as to why the USSR had not ratified the Bretton Woods agreements, negotiated over a year earlier, in July 1944. Thus it is relevant to look to Bretton Woods and postwar financial arrangements for some explanation of the origins of the Cold War. The clauses regarding the activation of the Fund included the provision that the articles required ratification by countries representing at least 65% of the total quotas allocated at Bretton Woods by the end of the December 1945; otherwise the initial deposits on subscriptions to the Fund would be returned. In the past, the reasons why the Soviet Union chose not to subscribe to the articles by December 1945 have been the subject of speculation. Only recently have documents from the personal papers of Molotov been made available by the Russian foreign ministry which show that Soviet officials were preparing to join the Bretton Woods institutions until the last moment. These documents show that the Soviets were influenced by what they saw as an unbalanced regime that added to American power and
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| | Authors: Xenias, Anastasia. |
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2
Critics of globalization frequently object first and foremost with the crippling policies of
the International Monetary Fund that are faulted with broadening economic inequality and
deepening the rift between the rich industrialized North and the less developed debtor South.
Invariably, the IMF is seen as ignoring the needs of the borrowers and stretching their already
thin national capabilities with its stringent and unwavering policies of ‘conditionality’. That is,
loans to needy sovereign borrowers are bestowed only if certain conditions are met, such as
opening markets, deregulating industries, cutting budgets, etc. Critics wail that is not only unfair
but an unacceptable imposition of conditions on states that can barely meet them. It is a criticism
that the rich North is abusing the poor South. And this is often believed to be an effect of
globalization.
This perception is not entirely correct. The forces of globalization have made aspects of
national economic policy difficult to manage, and the IMF has rightfully been criticized for
errors in application of economic theory to cases. However, the policy of conditionality is neither
new nor targeted at the less developed world. Moreover, it was first applied under circumstances
far more devastating than those faced by any borrower today. And it was applied to wartime
allies, both industrial states of the North. The application of US conditionality to postwar loans
to the United Kingdom and the Soviet Union in the immediate postwar period was as tough as
anything witnessed today. Its effect was to cause friction within the war-time alliance and
contribute significantly to tensions that triggered the Cold War. However the reasoning for
conditionality in US postwar finance was neither benign nor revisionist. Rather it was nested in
considerations of power and security manifested in economic policy.
When did the Cold War begin? Many historians date its origin from 1945, 1946 or 1947.
For some the Truman Doctrine of March 1947 is widely assumed to be the decisive moment.
Others have focused on American militance in early 1945, Soviet domination of Eastern Europe,
the advent of the atomic bomb, the evolution of American public opinion, Churchill’s March 5,
1946 ‘iron curtain’ speech, Soviet belligerence at the London 1946 UN Security Council
meeting, Stalin’s February 9, 1946 speech asserting the incompatibility of communism and
capitalism and the likelihood of further wars, an inability to agree on the future of Germany
leading to its permanent division, Kennan’s long telegram, the Marshall Plan and Stalin’s
walkout.
1
. I look at George Kennan’s long telegram because it set the tone for how America
would view the Soviet Union over the next 40 plus years. Between the last days of 1945 and
February 1946, relations between the world’s two most powerful states deteriorated sharply.
However, the reason for the telegram was not to report on Soviet political activities, military
intentions or ideological imperialism, which needed to be contained. The immediate occasion of
Kennan’s cable lay in an inquiry of the US State Department and the Treasury as to why the
USSR had not ratified the Bretton Woods agreements, negotiated over a year earlier, in July
1944. Thus it is relevant to look to Bretton Woods and postwar financial arrangements for some
explanation of the origins of the Cold War. The clauses regarding the activation of the Fund
included the provision that the articles required ratification by countries representing at least
65% of the total quotas allocated at Bretton Woods by the end of the December 1945; otherwise
the initial deposits on subscriptions to the Fund would be returned. In the past, the reasons why
the Soviet Union chose not to subscribe to the articles by December 1945 have been the subject
of speculation. Only recently have documents from the personal papers of Molotov been made
available by the Russian foreign ministry which show that Soviet officials were preparing to join
the Bretton Woods institutions until the last moment. These documents show that the Soviets
were influenced by what they saw as an unbalanced regime that added to American power and
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