Anglo-American loan

Signature of the loan. Economist John Maynard Keynes (seated left) led the British negotiators.

The Anglo-American Loan Agreement^[1] was a post World War II loan made to the United Kingdom by the United States on 15 July 1946, and paid off in 2006.^[2] The loan was negotiated by John Maynard Keynes. The loan was for $3.75 billion (US$57 billion in 2015) at a low 2% interest rate; Canada loaned an additional US$1.19 billion.

Background

The loan was made primarily to support British overseas expenditure in the immediate post-war years and not to implement the Labour government's welfare reforms. British treasury officials believed they could implement the Labour government's domestic reforms without the loan if Britain withdrew from all major overseas commitments.^[3] Additionally, Britain's lend-lease balance was written off for $650 million (US$8,544 million in 2016).

At the start of the war, Britain had spent the money that they 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.

Large quantities of goods were in Britain or in transit when Washington suddenly and unexpectedly terminated Lend-Lease on 21st August 1945. The British economy had been heavily geared towards war production (around 55% GDP)^[4] 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 million.^[5]

Agreement

Terms

John Maynard Keynes was sent by the United Kingdom to the United States and Canada to obtain more funds.^[6] 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 fight in 1941, America would offer favorable terms. Instead of a grant or a gift, however, Keynes was offered a loan on favourable terms.

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."^[7] America offered $US 3.75bn (US$57 billion in 2016) and Canada contributed another US$1.19 bn (US$16 billion in 2016), both at the rate of 2% annual interest.^[8] The total amount repaid, including interest, was $7.5bn (£3.8bn) to the US and US$2 bn (£1bn) to Canada.^[9][10]

The loan was made subject to conditions, the most damaging of which was the convertibility of sterling.^[11] 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 duly devalued in 1949 from $4.02 to $2.80.^[12]

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.

Repayment

The last payment was made on 29 December 2006 for the sum of about $83m (£45.5m), the 29th being the last working day of the year.^[2][5][13] The final payment was actually six years late, the British Government having suspended payments due in the years 1956, 1957, 1964, 1965, 1968 and 1976 because the exchange rates were seen as impractical.^[14] After this final payment Britain's Economic Secretary to the Treasury, Ed Balls, formally thanked the US for its wartime support.

Quotes

The original size of the debt and repayment terms (including deferments) can be ascertained from the debates in the House of Commons on 28 February 2002 and House of Lords on 8 July 2002 as recorded in Hansard:

"Bob Spink: To ask the Chancellor of the Exchequer (1) what outstanding liabilities there are to the United Kingdom of lend-lease loan facilities arranged during the Second World War; [38441]…"
"Ruth Kelly: The information is as follows..."
"Under the Agreement, the loans would be repaid in 50 annual instalments commencing in 1950. However the Agreement allowed deferral of annual payments of both principal and interest if necessary because of prevailing international exchange rate conditions and the level of the United Kingdom's foreign currency and gold reserves. The United Kingdom has deferred payments on six occasions. Repayment of the war loans to the United States Government should therefore be completed on 31 December 2006, subject to the United Kingdom not choosing to exercise its option to defer payment.
As at 31 March 2001, principal of £243,573,154 [$346,287,953 at the exchange rate on that day] was outstanding on the loans provided by the United States Government in 1945. The Government intends to meet its obligations under the 1945 Agreement by repaying the United States Government in full the amounts lent in 1945."

Similarly, Hansard records from a debate that took place in the House of Lords on 8 July 2002:

"Lord Campbell of Croy: My Lords, is this payment part of the lend-lease scheme under which the United States supplied munitions, vehicles and many other requirements including food and other provisions that were needed badly by us in the last part of the war?
Lord McIntosh of Haringey: My Lords, I referred to lend-lease in the context of the generosity of the United States throughout that period. However, the debt that we are talking about now is separate; it was negotiated in December 1945.

Lord Stoddart of Swindon: My Lords, will the noble Lord remind me as to exactly how much the loan was, and how much we have repaid since then in principal and interest?

Lord McIntosh of Haringey: My Lords, the loan originally was £1,075 million, of which £244 million is outstanding. The basis of the loan is that interest is paid at 2 per cent. Therefore, we are currently receiving a greater return on our dollar assets than we are paying in interest to pay off the loan. It is a very advantageous loan for us."

In television

Sir Christopher Meyer presented a history of the loan and its effects in the BBC series Mortgaged to the Yanks. Meyer claimed that the loan was primarily needed to pay for the Labour government's welfare reforms.

See also

• Atlantic Charter
• Cash and carry (World War II)
• Lend-Lease
• Marshall Plan

References

1. BBC 2005
2. "What's a little debt between friends?". BBC News. 10 May 2006. Retrieved 20 November 2008.
3. Richard Clarke, Anglo-American Collaboration in War and Peace, 1942-1949 (Oxford, Clarendon Press, 1982).
4. Evans 2008, p. 333
5. Rohrer 2006
6. Robert Skidelsky, John Maynard Keynes. Vol. 3: Fighting for Freedom, 1937-1946 (2001) pp 403-58
7. International Herald Tribune 2006
8. Philip A. Grant Jr., "President Harry S. Truman and the British Loan Act of 1946," Presidential Studies Quarterly, (Summer 1995) 25#3 pp 489-96
9. McIntyre, W. David (1998). British Decolonisation, 1946-1997. Macmillan Press Ltd. p. 83. ISBN 0-333-69331-0.
10. Kindleberger 2006, p. 415
11. Rosenson 1947
12. 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.
13. Epstein 2007
14. Thornton 2006

Further reading

• Block, Fred (1977). The Origins of International Economic Disorder. Berkeley, Calif.: University of California Press. pp. 32–69. ISBN 0520037294.
• Callaway, Darden. "The Anglo-American Loan of 1946: US Economic Opportunism and the Start of the Cold War." (Davidson College thesis, 2014). online, with detailed bibliography and links
• Clarke, Richard William Barnes (Sir.); Alec Cairncross (1982). Anglo-American economic collaboration in war and peace, 1942-1949 (1982 ed.). Clarendon Press. ISBN 978-0-19-828439-0. - Total pages: 215
• Grant Jr., Philip A. "President Harry S. Truman and the British Loan Act of 1946," Presidential Studies Quarterly, (Summer 1995) 25#3 pp 489–96
• Kindleberger, Charles P. (2006). A Financial History of Western Europe (2006 ed.). Taylor & Francis. ISBN 978-0-415-37867-3. - Total pages: 525
• Rosenson, Alex (March 1947). "The Terms of the Anglo-American Financial Agreement". The American Economic Review (American Economic Association) 37 (1): 178–187. JSTOR 1802868.
• 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)

Primary sources

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

Newspaper accounts of payoff

• BBC, FIRST (June 2005). "Great Political Mistakes" (Documentary). BBC. Retrieved 14 June 2010.
• BBC News (29 December 2006). "UK settles WWII debts to allies". BBC News. Archived from the original on 4 June 2010. Retrieved 8 June 2010.
• Epstein, Rafael (3 January 2007). "UK pays off WWII debt to US". Australian Broadcasting Corporation. Retrieved 14 June 2010.
• International Herald Tribune (28 December 2006). "Britain to make its final payment on World War II loan from U.S.". New York Times. International Herald Tribune. Retrieved 7 June 2010.
• Rohrer, Finlo (10 May 2006). "What's a little debt between friends?". BBC News. Archived from the original on 10 June 2010. Retrieved 14 June 2010.
• Thornton, Philip (29 December 2006). "Britain pays off final instalment of US loan - after 61 years". The Independent. Archived from the original on 12 July 2010. Retrieved 8 June 2010.

External links

• Oral History Interview with John W. Snyder