ESF: from financial backstop to foreign policy tool
Tooze’s central argument in this post is that the proposed UAE swap line marks a qualitative shift in how dollar liquidity tools are being used, namely from financial stabilization instruments to geopolitical weapons. He cites Anna Schwartz’s 1996 paper on the Treasury’s Exchange Stabilization Fund (ESF), “Obscurity to Notoriety,” written after Clinton used it to bail out Mexico in 1995. The title of this paper captures how the ESF periodically resurfaces from bureaucratic obscurity whenever an administration wants to move money fast without congressional approval. Tooze’s main points are:
- The ESF vs. the Fed : the critical distinction
The UAE deal is being structured through the Treasury’s ESF, not the Federal Reserve’s swap network. This matters enormously: the Fed’s swap lines are governed by the FOMC, require a genuine dollar funding crisis, and are extended on technocratic grounds. The ESF requires only the President’s consent and the Secretary’s discretion. - The Argentina template
Bessent already ran this playbook in October 2025, extending a $20 billion ESF swap to Argentina timed explicitly to Milei’s legislative elections. Argentina repaid it, Bessent claimed a profit, and this “success” has now become the model for Gulf diplomacy. - The UAE doesn’t need the money
With $298 billion in FX reserves and $2.35 trillion in sovereign wealth, the UAE faces no dollar shortage. The request is a diplomatic signal, a reminder that Abu Dhabi has the option to pivot toward yuan-denominated oil trade and Bessent’s willingness to entertain it is Washington’s signal back that dollar system membership has geopolitical rewards. - The deeper danger
Tooze’s real concern is systemic. The Fed’s swap network worked in 2008 and 2020 precisely because it was perceived as apolitical and unlimited, namely a pure financial stability backstop. Once swap lines become instruments of political alliance-building, conditional on geopolitical alignment, they lose the credibility that makes them effective in a genuine crisis.
“Obscurity to Notoriety” – Bessent, the UAE and how “swap lines” morph into “slush lines”
By: Adam Tooze – Columbia University
The Exchange Stabilization Fund: origins, politics, and the making of the dollar bloc
In this paper Juan Flores Zendejas and Gianandrea Nodari make the argument that the ESF was never merely a currency stabilisation tool since, from its inception, it was a geopolitical instrument for building and policing a dollar bloc, and that the current moment of economic fragmentation and currency bloc formation closely mirrors the 1930s. The U.S. established the ESF via the Gold Reserve Act of 1934 explicitly to counter the British Exchange Equalization Account and stabilize the dollar. Crucially, the ESF was designed as a self-financing entity without congressional oversight, making secrecy of operation essential to its effectiveness as a geopolitical tool. The authors’ historical analysis shows that:
- Political conditionality shaped every loan. Rivalries with Germany, Japan, and even the UK significantly influenced which countries received ESF loans and on what terms. Conditions evolved from purely economic to explicitly political as World War II approached.
- The dollar bloc was actively constructed. ESF loans deepened commercial ties within the bloc while facilitating the exclusion of rival powers. The ESF operated in coordination with Export-Import Bank loans to secure raw materials, protect U.S. financial interests, and deny resources to the Axis powers.
- The design was adaptive. Despite operating by trial and error, the ESF demonstrated a “remarkable ability to adapt to evolving global conditions,” laying the groundwork for dollar internationalization and the post-war Bretton Woods system.
Relevance to the UAE case
The paper directly anticipates Bessent’s swap diplomacy: just as the 1930s ESF used loan conditionality to bring Latin American and allied nations into the dollar bloc against Axis influence, the 2026 ESF is being used to bind Gulf states to the dollar system against the backdrop of Chinese yuan competition and the Iran war.
Globalization 2.0: the geopolitics of the U.S. Exchange Stabilization Fund, 1934–45
Authors: Juan Flores Zendejas, Gianandrea Nodari
From: Université de Genève
