The Potsdam Conference, held from 17 July to 2 August 1945 in Potsdam in eastern Germany, decided how the Allies would deal with a defeated Germany and how they could best conduct the ongoing campaign against Japan as the Second World War (1939 to 45) drew to a close. With victory in Europe achieved, US President Harry S. Truman, UK Prime Minister Winston Churchill, and then his successor, Clement Attlee, and the Soviet Premier Joseph Stalin issued a surrender ultimatum to Japan, known as the Potsdam Declaration. The ultimatum was ignored until US aircraft dropped atomic bombs on the cities of Hiroshima and Nagasaki. Japan surrendered on 14 August.

In February 1945, as victory seemed imminent for the Allies in the Second World War, the leaders of 'the Big Three' met at Yalta in the Crimea: President of the United States Franklin D. Roosevelt, the British Prime Minister Winston Churchill, and the Russian Premier Joseph Stalin. On the discussion table were such topics as how to deal with a defeated Nazi Germany and Imperial Japan, and how to set up the United Nations, successor to the League of Nations. Poland's borders were to be shifted westwards, giving the USSR the eastern slice while acquiring a new western slice from Germany. It was agreed in principle to allow democratic elections in countries Nazi Germany had occupied. This sentiment was expressed in the Declaration on Liberated Europe.

Germany and Austria, in contrast, were to be divided into four zones of occupation (US, French, British, and Russian) with a joint military government established in each, the Allied Control Council in Germany and the Inter-Allied Council in Austria. Berlin and Vienna were similarly divided into zones of control. In addition, it was decided that each power had the right to conduct war crimes trials within its zone of occupation. Including France as an occupying power of Germany and Austria was a Western 'victory' at Yalta, as was the decision to allow France a permanent seat on the UN's governing Security Council.

Another major agreement at Yalta concerned the still ongoing fighting with Japan. In return for Russia's entering the war against Japan, certain Soviet demands would be met. These demands included control of the Kuril (aka Kurile) Islands, the southern part of Sakhalin Island (both of these are in the Sea of Okhotsk and had been occupied by Japan), and retaining the status quo regarding Mongolia, which had been a Russian client state since 1924. There were many issues still unresolved, and so the 'Big Three' planned to meet again in July, this time at Potsdam, in Germany, an area then under Soviet military control.

The Potsdam Conference was held at Schloss Cecilienhof, not an imposing castle but more of a comfortable mansion set in a grand park outside Berlin. The meeting at Potsdam was given the code name Terminal. As at Yalta, the leaders of Great Britain, the USA, and the USSR still considered themselves the legitimate decision-makers for the fate of other nations largely because of the size of the armies they commanded and their successes on the battlefield, at sea, and in the air. Roosevelt had died since Yalta, and Churchill lost the general election in the middle of the conference (the results were announced on 26 July). Consequently, the new leaders were President Harry S. Truman and, from 28 July, Prime Minister Clement Attlee (who had previously been attending the conference as Churchill's deputy).

Stalin, then, had the advantage of experience, and, further, he was, according to Anthony Eden, the former British foreign minister, "a cold, cool and a calculating negotiator who knew exactly what he wanted to get and went out to get it, never got excited, hardly ever raised his voice" (Holmes, 541). Germany had surrendered in April 1945, and the USSR's Red Army had occupied Berlin. As the Imperial War Museum notes, Stalin was determined to get the best possible deal from his two counterparts at Potsdam: "When asked if he felt great satisfaction at being in Berlin, Stalin replied 'Tsar Alexander got to Paris'". Truman, after his first face-to-face meeting with Stalin and a lunch of liver, bacon, and Californian wine, wrote in his diary that the Russian leader was "smart as hell" (Moskin, 203). Clearly, the negotiations on what the post-war world would look like were going to be tough.

The attempt to reach an agreement on the war reparations Germany should pay to the victors was not successful. Stalin was determined to squeeze the maximum possible from Germany to help pay for the tremendous damage inflicted on the USSR. Truman, on the other hand, was wary that if the terms were too harsh, they might provoke a lasting hatred of the victors, such as had been seen in Germany after the Treaty of Versailles of 1919, which formally concluded the First World War. There were some points of agreement regarding Germany at Potsdam. Germany's military industry was to be dismantled. Nazi race laws like the Nuremberg Laws would be repealed, and there was to be a systematic denazification of the judicial and education systems.

One point of discussion was the 'Poland Problem'. At Yalta, everyone had agreed there should be free elections in Poland, but Stalin had already interfered to make sure there was a pro-Soviet government installed there. Stalin was determined that Poland would be a huge buffer zone that would protect Russia from any future attack from Western Europe. The USA and Britain had, nevertheless, recognised Poland's new 'Provisional Government of National Unity' on 5 July. The reality was that the USSR's armed forces already had possession of the territory in question.

The make-up of the new governments in Bulgaria and Greece was likewise disputed, with the Americans and British wanting free elections, but Stalin wanted the placement of Communists within these governments, no matter what, just as had already been done in Romania. It was decided at Potsdam that a Council of Foreign Ministers would be formed to define the new borders within Europe and decide how to carve up the various colonies of the war's losing powers. This was, in effect, a postponement of several issues where no agreement could be reached; there were many. The Council was not held until February 1947. By postponing the more prickly problems, the three leaders were at least able to press on with their quasi-cordial discussions. One issue settled at Potsdam was the decision to continue the Lend-Lease programme (material and financial aid from the USA to its Allies) to British occupation troops in Europe.

The most important point of discussion at Potsdam was the peace terms regarding Japan. The United States had already developed the atomic bomb, a terrifying new weapon whose power was so great it was not fully understood. Indeed, Truman had delayed the Potsdam Conference in order for the first atomic bomb test to be completed in New Mexico on 16 July. Truman, then, knew by the time he arrived at Potsdam that he held in his hands the means to end the war almost immediately. The US Secretary of War, Henry L. Stimson, noted that news of the successful test had the following effect on Truman: "The President was tremendously pepped up by it…he said it gave him an entirely new feeling of confidence" (Liddell Hart, 438).

What has become known as the Potsdam Declaration was made on 27 July. The main message of the declaration was that Japan should immediately offer an unconditional surrender or else face complete destruction. The declaration was approved by both the British and Chinese governments. The declaration made no mention of the Japanese Emperor, and the Japanese government took this to mean he would not be obliged to abdicate. Japan was still fighting to hold on to each and every island and causing heavy casualties amongst the US forces. The Japanese military government ignored the declaration, despite having already made secret overtures to the government of the USSR that it was willing to consider a surrender. Inside the Japanese cabinet, it was felt that there was still some room for negotiation despite the stark terms of the declaration; certainly, they felt they had some time to further consider the ultimatum. The Japanese military government still hoped that a negotiated surrender might preserve it some vestige of power. The Potsdam Declaration, however, clearly stated this would not be tolerated and called for the removal of "the authority and influence of those who have deceived and misled the people of Japan into embarking on world conquest" (Dear, 864). This might or might not include the emperor. Further, the Japanese military must be disarmed, the state of Japan would henceforth be made up of only its four main islands, and war crimes trials would be conducted. The Allies hoped to foster a free and democratic Japan, where there was freedom of speech and religion and a respect for human rights.

Without a surrender, the US Joint Chiefs of Staff expected continued and desperate resistance from the Japanese military, which still possessed some 2 million soldiers, and that, as a consequence, the war could not be won before the winter of 1946. It was estimated that victory using conventional arms would result in at least 200,000 US casualties, perhaps five times more. Further, if the USSR entered the war against Japan, as was promised and expected, that state might then make territorial claims in East Asia. The USSR, by actively helping in the defeat of Japan, would also strengthen its position in a divided Europe. Truman felt that "only an actual atomic raid would convince Stalin of the irresistible force behind America's diplomacy" (Liddell Hart, 438). Truman had rather vaguely informed Stalin on 24 July about the bomb (information Soviet spies had already passed on to Stalin). Truman declared that the United States had a weapon of unusual power and that he was prepared to use it against Japan. Stalin replied that this intention was a good idea. With victory in the war already assured, Truman was concerned with the supremacy of the United States in the post-war world just as much as he was with defeating Japan as quickly as possible. It is also true that the Manhattan Project to develop the bomb had cost $2 billion. To many involved in the atomic programme, it seemed unthinkable not to use the bomb now that it was ready.

With no response to the Potsdam Declaration, the United States government, with the formal approval of the British government, decided to drop a single atomic bomb on the Japanese city of Hiroshima on 6 August and another bomb on Nagasaki on 9 August. The bombs were dropped by the Boeing B-29 Superfortress planes Enola Gay and Bockscar. Over 200,000 people were killed in the attacks. On 10 August, the USSR's Red Army invaded Japanese-occupied Manchuria. The emperor of Japan, Hirohito, announced his country's surrender on 14 August. Truman responded to the surrender later that same day by declaring to reporters in a press conference: "I deem this reply a full acceptance of the Potsdam declaration which specifies the unconditional surrender of Japan. In the reply there is no qualification" (Moskin, 319). The Allies had won WWII.

Potsdam, like the Yalta Conference, proved to be something of a disappointment for the West. At Potsdam, "agreements with Moscow were more the exception than the rule" (Dear, 878). Truman wrote to his mother near the conference's end: "You never saw such pigheaded people as are the Russians. I hope I never have to hold another conference with them" (Dear, 878). There was certainly a general feeling in the United States that as the USSR increasingly defaulted on the few commitments it had made at Yalta and Potsdam, the Americans had, in effect, "won the war but lost the peace" (Liddell Hart, 435).

It was felt by many in the West that their leaders had negotiated away control of Eastern Europe to the USSR and permitted a Soviet presence in East Asia, which could be used as a platform for further expansion of Soviet influence in that part of the world. For this reason, the United States kept occupying troops in Japan until 1952. Emperor Hirohito was permitted to keep his position, but after renouncing his divinity as claimed by the Shinto religion, his role was redefined as a constitutional monarch. Hirohito's efforts to curb the Japanese military and promote a surrender had saved him, although historians continue to dispute just how great those efforts had been in reality.

There has also been much debate ever since 1945 about whether Russia's declaration of war on Japan just before the attacks on Hiroshima and Nagasaki had any influence on the Japanese government's decision to surrender, and so whether the USA's compromises concerning Asia at Yalta and Potsdam had been, in the end, strictly necessary. Between the USA and USSR and their respective allies, there developed serious suspicions as to everyone's foreign policy aims. So the Cold War began, a decline in US-Soviet relations, which saw a prolonged period of international tensions and proxy wars throughout the second half of the 20th century.