How Dollar Diplomacy Spelled Doom for the British Empire
“The British Empire seems to be running off almost as fast as the American loan,” Winston Churchill thundered before the House of Commons on Dec. 20, 1946. “The haste is appalling.”
As if secretly synchronized, the pillars of empire and the international acceptability of the pound sterling were crumbling in tandem.
In late 1945, President Harry S. Truman’s administration had grudgingly agreed to provide the bankrupt U.K. with a $3.75 billion loan -- but on the condition that the pound sterling be made fully convertible to dollars at the rate of $4.03 to the pound by July 15, 1947. This would allow Britain’s colonies and dominions to sell sterling for dollars, satisfying a long- standing demand of U.S. exporters and anti-imperialists while depleting the U.K.’s meager official reserves.
Now dollars hung over every question of how the empire would be dismantled. In February 1946, the great economist John Maynard Keynes had been full of foreboding about the British government’s inertial desire to “cut a dash in the world considerably above our means.” The country, he observed, was “not prepared to accept peacefully and wisely the fact that her position and her resources are not what they once were.”
First there was the Middle East. Keynes noted that the British were paying the cost of keeping troops in Egypt by borrowing from ... Egypt. What would their answer be, he asked, if the Egyptians were “no longer prepared to provide us with the necessary funds?” The answer was simply to move them to Palestine. This, it was hoped, would buy time east of the Sinai until something -- anything -- could be worked out with the Arabs, Zionists and Americans. A pro-Arab approach, observed British Labor MP Richard Crossman, would be “certain to intensify anti-British and isolationist influences” in the U.S., “and might even endanger the loan” the U.K. so desperately needed.
A June 1946 State Department public poll found that only 38 percent of Americans approved of any sort of British loan, while 48 percent opposed. The loan would, in the words of one congressional opponent, “promote too damned much Socialism at home and too much damned Imperialism abroad.”
Growing fear of the Soviet menace, however, turned the tide of the debate in Washington. Churchill’s famous “Iron Curtain” speech on March 5, 1946, did much to rally skeptics, as did Stalin’s denunciation of it. In the end, Congress approved the loan only by the narrow margins of 46-34 in the Senate and 219- 155 in the House.
But it would not save the empire.
On July 22, the King David Hotel in Jerusalem was blown up by the Irgun Jewish underground. Zionists in Palestine were now in open revolt. Still, Churchill said hopefully, “Almost any solution in which the United States will join us could be made to work.”
The converse was much closer to the truth: Any solution to Britain’s costly imperial quandaries that lacked U.S. support was now hopeless. And Truman, unlike his predecessor Franklin Roosevelt, had no overriding strategic purpose (such as defeating the Nazis) for which he could profitably harness his government to British interests. In the case of Palestine, quite the opposite: He was edging toward recognition of a Jewish state.
The summer of 1946 also witnessed the collapse of British efforts to contain ethnic conflict in India. Following Mohammad Ali Jinnah’s announcement that his party would pursue an independent Pakistan, thousands died as communal violence spread from Calcutta.
Keeping British forces in India would require $500 million a year; the Middle East, another $300 million -- nearly a quarter of the entire American loan.
Meanwhile, things were going from bad to worse in Greece. British forces, which had fought the Nazis there during World War II, were now pinned down fighting Greek Communist guerrillas in the north. Precious borrowed dollars were evaporating. “I am beginning to doubt whether the Greek game is worth the candle,” British Prime Minister Clement Attlee wrote bluntly to his foreign minister, Ernest Bevin, on Dec. 1.
The U.K.’s far-flung military commitments might simply be unsustainable without American support, which wasn’t likely to be forthcoming. “There is a tendency in America to regard us as an outpost,” Attlee wrote, “but an outpost that they will not have to defend.”
The worst winter in 60 years strained the economic and political viability of Britain’s overseas commitments to the breaking point. Attlee signed an independence agreement with Burmese General Aung San on Jan. 27, 1947. Then, over a dramatic seven days in February, one pillar after another of British imperial might came crashing down.
On Feb. 14th, Bevin announced that Britain’s Palestine Mandate would be handed back to the United Nations. On the 18th, the cabinet agreed to withdraw the troops from Greece. And on the 20th, Attlee announced in the House that Britain would leave India.
“I know that if the British Empire fell,” Bevin had told the Commons a year earlier, “it would mean that the standard of living would fall considerably.” In 1946, it was still axiomatic for many in Britain’s ruling circles that the empire was a source of economic strength. Now it was clear that it had become an intolerable dollar drain.
“There are only two powers left,” said future U.S. Secretary of State Dean Acheson in February 1947, referring to the U.S. and the Soviet Union. “The British are finished.”
On March 12, Truman made a historic speech before a joint session of Congress, laying out what came to be known as the “Truman Doctrine.” The U.S. would pledge economic and military support to Greece and Turkey to prevent their coming under Soviet domination. This was the first in a domino-chain of geopolitical challenges the U.S. would face in the coming decades in filling the vacuum left by the implosion of the British Empire -- an implosion precipitated by American dollar diplomacy.
(Benn Steil is the director of international economics at the Council on Foreign Relations and the author of “The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order. The opinions expressed are his own.)
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