Our ruling class has a track record of not protecting Britain’s national interest. One typical episode occurred at the end of the Second World War...
Once the Second World War was won in 1945 by the allies and peace became the next prospect, the precarious position of Britain’s economy, distorted by six years of total war, was apparent. Britain was exporting only around a fifth of what it had before the war and non-military imports were five times higher than in 1938. There were still 1.4 million people in the armed forces by 1946.
The Blitz, London, 1941: a devastated Britain emerged from the war in debt up to its eyeballs to the United States.
The British economy had been heavily geared towards war production at around 55 per cent of GDP, much greater than in the Soviet Union or America. To make matters worse, US President Truman abruptly ended in August the wartime Lend Lease arrangements that had run since 1941, by which war effort equipment had been donated. Suddenly, payment was expected for undelivered supplies, Britain found it did not have enough dollars, and bankruptcy loomed. As an emergency measure, the government sold gold and minerals, but this could not suffice for long.
Prime Minister Attlee dispatched John Maynard Keynes, the economist and government financial adviser, as Britain’s negotiator in Washington. Most of Britain expected a gift in recognition of the country's contribution to the war effort, which had predated that of the US, and Keynes believed he could wrest a multi-billion dollar grant-in-aid out of the USA rather than a loan. Despite three months of severe clashes and hard wrangling, Keynes returned with a loan and a heart-attack for his troubles. The Anglo American Agreement produced a business loan instead of a subsidy, with extra conditions stacked in America’s favour.
Unsurprisingly, the USA ignored sentiment and pressed its own imperial interests proving that a “Special Relationship” had never existed, except inside the confines of Churchill’s mind. Two determining factors were at work: our diminished productive base limited Britain’s ability to manoeuvre in a peacetime environment; and our rulers’ senseless wish to sustain the empire post-war (though it was clearly unaffordable) made them chase a costly external loan.
Although the granting of the loan did strain relations between the two countries, the agreement was never really threatened, despite some opposition in the House of Lords and the likening of America to Shylock by a Cabinet Minister. In December 1945, Attlee and the Labour Government succumbed, agreeing to not only a US loan of $4.34 billion (double the size of the then British economy) but also other onerous stipulations.
Contrary to the impression given by politicians in later decades, the loan was never used to finance the war itself, though outstanding Lend-Lease supplies still in transit when peace was declared were paid for within the overall loan. The loan (structured like a mortgage) was to be paid off in 50 annual repayments starting in 1950; payments were mostly interest in the early years and shifted toward capital later on.
Other stringent conditions were imposed on a submissive Labour government, namely acceptance of the convertibility of sterling and the liberalisation of trade. The convertibility of sterling directly caused the financial crisis of 1947, as Britain was forced to let holders of sterling convert their earnings into other currencies such as the dollar and allow these earnings to be spent outside of the sterling area. Convertibility meant the demise of British economic management at home and of economic control of the colonies. Gradually, America exploited liberalisation of trade to displace the position of British companies in former colonies.
Not for Britain
Despite assertions in subsequent decades, the purpose of the loan was not to rebuild Britain or aid domestic recovery but to meet expensive imperial commitments. As Keynes himself wrote in 1946, “...the American loan is primarily required to meet the political and military expenditure overseas.” Keynes estimated that Britain spent £2,000 million on policing and administering the Empire. This expenditure was largely responsible for the country’s post-war financial difficulties.
A telling comparison emerges if you look at the provision made available for essential sectors of the domestic economy on which working people’s livelihoods depended: between 1947 and 1949 only £320 million was invested in building manufacturing industry; £262 million in transport and communication, £160 million in energy industries and £85 million in agriculture and fisheries.
As there were six deferred instalments, this debt to the USA was only fully repaid by the British government in 2006. Although at the time Treasury Minister Ed Balls acclaimed it as “a sign that the UK repays its debts”, what is probably unusual is that the debt was repaid at all, as Britain has a patchy record on debt repayments. There are unpaid debts that predate the Napoleonic Wars, and debts still owed for the First World War. Moreover, at the height of the Great Depression in 1931, a moratorium on all war debts was agreed and no debt repayments were made or received after 1934.
It was complete stupidity to take on the burden of a huge loan when in 1946 Britain’s national debt stood at about 250 per cent of GDP and when the loan was not directed to the essential task of rebuilding our industrial capacity but squandered on a futile attempt to prop up a crumbling empire and support the obsolete role of world policeman. ■