On 29 December 2006, the government paid its final instalment of its post-war loan repayments to America, writes Eliot Wilson
Nineteen years ago today, on 29 December 2006, the recently appointed Economic Secretary to the Treasury, Ed Balls, made an historic announcement. The government was paying the final instalment of the loan given by the United States in 1946. It had taken six decades to clear, and was six years overdue, but Britain proved it was a reliable debtor and a reliable ally.
“We honour our commitments to [the United States] now as they honoured their commitments to us all those years ago,” Balls proclaimed.
In governmental terms, the instalment of $83m was a small amount of money, but it was the coda of a much larger and more important story, yet one which was quickly and conveniently forgotten by the public many years ago.
The Second World War had been an almost unbearably long haul for Britain, from its declaration of war on Germany on 3 September 1939 to the surrender of Japan on 2 September 1945. British forces had fought around the world – Burma, the South Atlantic, Libya, Somaliland, the Arctic Ocean – and by the end of the conflict the armed forces numbered five million. Britain’s death toll was 450,000.
Victory had come at a crippling financial cost too. In the first two years of the conflict, Britain had used up an enormous proportion of its overseas holdings and gold reserves on supplies from the United States on a “cash and carry” basis. It had traded basing rights with long leases in a number of British possessions for 50 ageing American destroyers.
Lend-Lease
Under the Lend-Lease Act of 1941, America had given the UK $31.4bn worth of food, oil and material at no upfront cost. It proved essential in allowing us to prosecute the war, and did not require anything like full restitution. Nevertheless, when Clement Attlee’s Labour government took office after its landslide election victory in July 1945, Britain was more or less broke.
The National Debt was £21bn, 270 per cent of Britain’s GDP; just servicing it cost £475m a year. Defence represented four-fifths of government expenditure, housing stock and infrastructure had been devastated by bombing, and rationing, introduced in 1939, not only continued (coal was restricted until 1958) but became stricter. Labour had come to power promising to implement the Beveridge Report and create a welfare state, but ministers quickly realised that they would need financial aid just to keep going. The only choice was to turn – again – to America.
In September 1945, a delegation was sent to Washington DC. It was headed by John Maynard Keynes, by then Lord Keynes, 62 years old and suffering from an incurable heart infection. He had warned for months that Britain was facing a “financial Dunkirk”, and hoped to obtain either a grant in aid or an interest-free loan. The UK had, after all, stood alone during the darkest days of the War, before America had joined in 1941.
His US counterpart was William L. Clayton, a millionaire cotton trader who had been appointed Assistant Secretary of State for Economic Affairs. He was a passionate advocate of free trade, and had no intention of simply giving away American money. Attlee’s socialist government was regarded with suspicion in Washington, and Clayton would go no further than a commercial loan.
The American offer was a loan of $3.75bn with an annual rate of interest of two per cent, repayable over 50 years starting in 1950. In addition, sterling had to be made convertible and imperial preference – tariffs on goods from outside the Empire – was to be phased out.
In Britain there was shock at this transactional treatment by our wartime ally: Hugh Dalton, the Chancellor of the Exchequer, reportedly described America as “Shylock”. In the House of Lords, Keynes said that “a primary emphasis on past services and past sacrifice would not be fruitful”, but peers foresaw dire consequences. Lord Balfour of Inchyre called the agreement “the start of the downhill road for the British Empire”, while Lord Beaverbrook, the former minister who owned The Daily Express, raged:
“Destroy the sterling bloc, disperse that dollar pool, eliminate Imperial preference, and we throw away this Empire.”
The government had no choice and no cards to play. The agreement was signed on 5 December 1945 and came into effect the following July. By then Keynes was dead after another heart attack in April 1946. But he had warned that rejecting the loan would have forced Britain to abandon its overseas military commitments in the Far East, India, the Middle East and the Mediterranean, since even harsher austerity at home was politically impossible.
When sterling became convertible in July 1947, there was an immediate crisis, and within a month £1 billion of the Bank of England’s reserves had been withdrawn for conversion by foreign countries. The policy was suspended after a month before it threatened the country’s gold reserves. The economy was then aided over the following four years by $3.2bn in aid from the US Marshall Plan. But conditions would not improve until well into the 1950s.
In the end, the Anglo-American Loan served only to formalise what was becoming clear in political and economic terms. The United States was a global superpower now with ambition to match, and Britain’s time as “Top Nation”, in Sellar and Yeatman’s phrase, was at an end. But we still had our pride. On this day in 2006, later than planned and with its architects long gone to Valhalla, the UK paid off its debt.
Eliot Wilson, writer and historian; Senior Fellow for National Security, Coalition for Global Prosperity; Contributing Editor, Defence on the Brink