Anglo-American loan

Background

At the start of the war, Britain had spent the money that it did have in normal payments for materiel under the "US cash-and-carry" scheme. Basing rights were also traded for equipment, e.g., the Destroyers for Bases Agreement, but by 1941 Britain was no longer able to finance cash payments and Lend-Lease was introduced. The Lend Lease Act provided aid for free on the basis that such help was essential for the defence of the United States. Congress passed the final extension of the act on April 16th, 1945, extending the aid for another year while adding an amendment stating that no aid could be provided for postwar relief or reconstruction.

Large quantities of goods were in Britain or in transit when the Lend Lease Act was terminated on 21 August 1945. The British economy had been heavily geared towards war production (constituting 55% of GDP in 1944) and had drastically reduced its exports. The UK therefore relied on Lend-Lease imports to obtain essential consumer commodities such as food while it could no longer afford to pay for these items using export profits. The end of Lend-Lease thus came as a great economic shock. Britain needed to retain some of this equipment in the immediate post war period. As a result, the Anglo-American loan came about. Lend-lease items retained were sold to Britain at the knockdown price of about 10 cents on the dollar, giving an initial value of £1.075 billion.

Agreement

Terms

John Maynard Keynes, then in poor health and shortly before his death, was sent by the United Kingdom to the United States and Canada to obtain more funds. British politicians expected that in view of the United Kingdom's contribution to the war effort, especially for the lives lost before the United States entered the war in 1941, America would offer favourable terms. Britain was offered a loan at 2% interest to be paid over 50 years starting in 1950 by Canada and the United States.

Historian Alan Sked has commented that, "the U.S. didn't seem to realize that Britain was bankrupt", and that the loan was "denounced in the House of Lords, but in the end the country had no choice." America offered US$3.75 billion (equivalent to $ billion in ) and Canada contributed another US$1.19 bn (worth US$ billion in ), both at the rate of 2% annual interest. The amount repaid, including interest, was $7.5bn (£3.8bn) to the US and US$2bn (£1bn) to Canada.

The loan was made subject to conditions, the most damaging of which was the convertibility of sterling. Though not the intention, the effect of convertibility was to worsen British post-war economic problems. International sterling balances became convertible one year after the loan was ratified, on 15 July 1947. Within a month, nations with sterling balances (e.g. pounds which they had earned from buying British exports, and which they were now permitted to sell to Britain in exchange for dollars) had drawn almost a billion dollars from British dollar reserves, forcing the British government to suspend convertibility and to begin immediate drastic cuts in domestic and overseas expenditure. The rapid loss of dollar reserves also highlighted the weakness of sterling, which was devalued in 1949 from $4.02 to $2.80.

In later years, the term of 2% interest was rather less than the prevailing market interest rates, resulting in it being described as a "very advantageous loan" by members of the British government, as elaborated below.

Loan spending

Much of the loan had been earmarked for foreign military spending to maintain the United Kingdom's empire and payments to British allies prior to its passage, which had been concealed in negotiations through to the summer of 1946. Keynes had noted that a failure to pass the loan agreement would cause Britain to abandon its military outposts in the Middle Eastern, Asian and Mediterranean regions, as the alternative of reducing British standards of living was politically unfeasible.

Repayment

The last payments were made on 29 December 2006 for the sum of about $83m USD (£45.5m) to the United States, and about $23.6m USD (£12m) to Canada; the 29th was chosen as it was the last working day of the year. The final payments were made six years late, the British Government having suspended them in 1956, 1957, 1964, 1965, 1968 and 1976 because the exchange rates were seen as impractical. After the final payments, Britain's Economic Secretary to the Treasury, Ed Balls, noted: "We honour our commitments to [Canada and the United States] now as they honoured their commitments to us all those years ago."

References

Sources

• Callaway, C. Darden. The Anglo-American Loan of 1946: US Economic Opportunism and the Start of the Cold War (2014)

• Gardner, Richard N. Sterling-Dollar Diplomacy in Current Perspective: The Origins and the Prospects of Our International Economic Order (1980)

• Grant Jr., Philip A. "President Harry S. Truman and the British Loan Act of 1946," Presidential Studies Quarterly, (1995) 25#3 pp 489–496 online

• Skidelsky, Robert. John Maynard Keynes. Vol. 3: Fighting for Freedom, 1937–1946 (2001) pp. 403–58

• Wevill, Richard. Britain and America after World War II: Bilateral Relations and the Beginnings of the Cold War (I.B. Tauris, 2012)

• The Collected Writings of John Maynard Keynes, Volumes 24 (London: Macmillan Press, 1979)

References

1. Gannon, Philip. (2 January 2014). "The special relationship and the 1945 Anglo-American Loan". Journal of Transatlantic Studies.
2. Richard J. Evans, ''The Third Reich at War: How the Nazis led Germany from Conquest to Disaster'' (2008) p. 333.{{ISBN. 9781594202063
3. {{harvnb. Rohrer. 2006
4. Robert Skidelsky, ''John Maynard Keynes. Vol. 3: Fighting for Freedom, 1937–1946'' (2001) pp. 403–458
5. {{harvnb. International Herald Tribune. 2006
6. Philip A. Grant Jr., "President Harry S. Truman and the British Loan Act of 1946," ''Presidential Studies Quarterly,'' (Summer 1995) 25#3 pp. 489–496
7. McIntyre, W. David. (1998). "British Decolonisation, 1946–1997". Macmillan Press Ltd.
8. {{harvnb. Kindleberger. 2006
9. {{harvnb. Rosenson. 1947
10. Documentary evidence can be found at www.nationalarchives.gov.uk/cabinetpapers, see CAB128/10. For a good account of the convertibility crisis, see Alec Cairncross, ''Years of Recovery: British Economic Policy, 1945–1951'', (London, 1985), pp. 121–164.
11. Randall Bennett Woods. (1990). "A Changing of the Guard: Anglo-American Relations, 1941–1946". UNC Press Books.
12. Woods, p. 375
13. (10 May 2006). "What's a little debt between friends?". BBC News.
14. {{harvnb. Epstein. 2007