Policymakers in the U.S., Britain, Canada and the Netherlands remained convinced that throwing money at Gorbachev was no cure for his country’s crippling economic ills.

Though it was mercifully short-lived, the specter of a totalitarian regime in Moscow and a revival of the cold war badly frightened the world’s major industrial powers. The nightmare evaporated quickly, but it left the wealthy democracies facing an urgent question: What were the best ways to help ensure that…