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How Dollar Diplomacy Spelled Doom for the British Empire

Author: Benn Steil, Senior Fellow and Director of International Economics
March 6, 2013


"The British Empire seems to be running off almost as fast as the American Loan," Winston Churchill thundered before the House of Commons on December 20, 1946. "The haste is appalling."

As if secretly synchronized, the pillars of Empire and sterling's international acceptability were crumbling in tandem. President Franklin Roosevelt's Treasury had a few years earlier treated Britain as a wartime ally that would soon become a peacetime rival, and carefully managed financial aid to Britain such that its room for maneuver on the world stage would be strictly limited. Immediately following the end of the war, in late 1945, the Truman administration only grudgingly agreed to provide bankrupt Britain with a $3.75 billion loan - but on the condition that Britain make the pound sterling fully convertible into dollars at the rate of $4.03/£ by July 15, 1947. This would allow Britain's colonies and dominions to dump sterling for dollars, satisfying a long-standing demand of U.S. exporters and anti-imperialists while depleting Britain's meager official reserves.

Now, dollars hung over every question of how the Empire would be dismantled. Back in February of '46, the great economist J.M. Keynes had been full of foreboding about Whitehall's inertial devotion to "cut{ting} 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. "Is it appreciated that we are paying the cost of keeping {troops in Egypt}," Keynes asked, "by borrowing it from Egypt? What is the answer if Egypt tells us . . . that she is no longer prepared to provide us with the necessary funds?"

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