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British World War II Economics: Financing the War

British World War finances
Figure 1.--This is a British Government poster promoting National Savings. This was a program similsar to American War Bonds that provided some of the money the government needed for the War effort. It shows a boy making a mechano model. Suggesting the importance of engineering for the future.

Britain at the turn-of-the 20th century was the richest power in Europe with a vast Empire that helped feed the national treasury. Londom was the center of world finance. Loans from America helped bank role the British war effort. British finances had been weakened by the vast cost of World War I. The Great Depression further weakended the country's finncial position. While Germany lost World War I, it did not pay a substantial part of the reparations. Most of the German payments were money borrowed from America. And the Germans could finance the War by looting the occupied countries. Britain could not do this. And the costs of the War were rapidly deplelting the British treasury. Britain to continue the War needed to import food and raw material in addition to armaments made in America. American Neutrality Laws placed this on a "cash and carry" basis. Britain after the fall of France (June 1940) found itself the only country still ar war with Germany. The Battle of Britain (July-Septmber 1940) had prevented invasion, but Britain now had to fight the Germanswho had much of the resources of Western and Central Europe at his disposal and as aesult easily able to finance the War. At the samr time, Britain's financial capability to finance the War was rapidly declining, both reserves and the ability to borrow money. Britain facing bankruptsy turned to the United States. Prime Minister Churchill wrote to President Roosevelt (December 1940). President Roosevelt's answer was Lend Lease (March 1941). This in esence was the American commitment to bank role the British war effort. It was basically a declaration of economic war against NAZI Germany. Hitler and the NAZIs recognized it as such. It meant that Britain could conduct the War indefinitely. (Hitler has his own plan to put Germany in a comparble position--Operastion Barbasrossa, the invasion of the Soviet Union. Yhe Japabese had a similar lan, seizing the Southern Resource Area.) Even with Lend Lease, World War II placed tremendous demands on the British people, Britain would finance the War throiugh donestic taxation and borrowing, both domestic and foreign. Britain borrowed �15.2 billion during the War--a staggering sum at the time. [Sayers, p. 193.] Foreign assetts were sold off in an Imperisal fire sale. The Government intoduced the National Savings Certificates. (Comparable to American War Bonds.) Normally Britain would pay for imports with the export of manufactured goods. But with the economy on a war footing, manufacturing was concereted to war production. Unlike NAZI Germany, Britain in 1940 began waging total war. Production of consumer goods for domestic consumption or export were cut back to the bare minimum. The War would leave Britain with a huge war debt. Britain would end the War as the greatest debtor nation in world history.

World War I (1914-18)

Britain at the turn-of-the 20th century was the richest power in Europe with a vast Empire that helped feed the national treasury. Londom was the center of world finance. Loans from America helped bank role the British war effort. The major economic constraint on Britain in pursuing the War was industrial rather than monetary. [Horn] British finances had been weakened by the vast cost of World War I. This was followed by the slump after the War. The Great Depression further weakended the country's financial position. While Germany lost World War I and was saddled with reparations, it did not pay a substantial part of the reparations assessed. Most of the German payments were money borrowed from America.

American Neutrality Acts (1935)

The Congress passed the Neutrality Act and President Roosevelt signed it into law (August 31, 1935). It provided for a mandatory arms embargo "... upon the outbreak or during the progress of war between, or among, two or more foreign states, the President shall proclaim such fact, and it shall thereafter be unlawful to export arms, ammunition, or implements of war to any port of such belligerent states." It was passed for a 6-month period, but Congress continued to renew it. Thus the Act is generally referred to in the plural as the Neutrality Acts. It was first invoked against Italy when Musolini invaded Ethiopia (1936). It was not at first invoked in the Spanish Civil War until an aviation builder (Glen Martin) began to supply planes to the Spanish Nationalists (Franco). The law was made permanent in 1937, but an exemption was made for "cash and carry" purchases, meaning orders paid in cash and not transported on American vessels. The exemption, however, only allowed non-military shipmnts. As war loomed in Europe, a September 23, 1938, Gallup poll showed 73 prcent of Americans were in favor of maintaining a mandatory arms embargo. Thislegislation is why the Japanese reffered to their invasion of China as the 'China Incident'. They did not declare war on China and thus the trade provisions did not come into force.

Declaration of War (September 1939)

Britain did not declare war when the Panzers crossed the Polish border (September 1). Prime-Minister Chamnberlain was still hopeful that Hitler could be oersuaded to pull back which tells you how poorly he had judged the Führer's character. Camberlain was still hopeful rthst contacts with Hermann Göring through Swedish businsman, Johan Birger Essen Dahlerus, would convince Hitler to cancel the invasion. It should be sressed that neither Hitler or Chamberlain wanted war with each other. In fact they both wanted an mutal alliance against the Soviet Union. Hitler's violation of the Munich Accords (September 1938) meant British leaders would not consider negotiating with him short of military defeat as did the French. And there was the proiblem of Poland and Czechoslovakia sepoarating Germany and the Soviet Union. This meant thsat he would have to reveal his character before getting to the Soviets. But just as Chsmberlsin misjudged Hitler, Hitler misjudged the British. He was convinced thst the British and French would not declare war. He had assured his military commanders that they wioykd not decklsre war, calling British and French leaders 'worms'. Of course, the British did declare war, honoring the recently signed Anglo-Polish military alliance. Chgamberlain announced the declaration of war 24 hours after issuing an ultimatum to Germany demanding the withdrawl of German forces from Poland. The British declaration of war came at 11.15 (September 3). The French followed suit a few hours later. The Prime-Minister spoke to the nation in a brief dislatory radio announcement--a feeble statement to join the greatest most consequwntal war in history. His central policy of appeasement had failed and in fact brought on the very war he had hoped to prevent. He was a defeated man and sounded like it. There was no clarion call to defend freedom and Western civilization as Churchill would later declare. British dominions colonies, as well as the Indian Raj found themselves at war alongside Britain, although this was not as automatic as it had been in 1914.

American Arms Embargo (September-November 1939)

After Britain declared war on Germany (September 3, 1939). President Wilson was forced to declare anarms emnargo as required by the Neutrality Acts. He declared this a few days to allow some ships to leaver and other shipments to cross the Canadian border, but his hands were forced by Isolationist Congressmen. The President immediately began pushing for a 'cash and carry' amendment that would allow arns sales to the British and French. This would allow the sale of war materiel to belligerents, as long as they used their own ships and paid immediately in cash, as well as assuming all the risk. The concerned was that German sinking of American ships had drawn the United States into World War I and the Isolationists wanted to prevent that from happening again. Senator Key Pittman (Democrat-Nrvada) has introduced the bill. He was cahirman of the powerful Senate Committee on Foreign Relations. The revision, however, has been defeated repeatedly in both the Senate and the House because of Isolationist opposition. President Roosevelt was determined to help the Allies and asked Congress to pass the bill again. Until the Neutrality Acts were amended an arms embargo remained in force. The Acts also prevented U.S. businesses from supporting the success or failure of any warring nation. The conclusion of the Nye Committee, with no real evidence, was that American involvement in World War I resulted from arms manufacturers--labeled 'the Merchants of Death'. The Merchants of Death were a plotically manufactured myth, but ironically, American industrialists were about to create the Arsenal of Democracy which would play a central role in saving nit only America, but Western Civilization. Many Americans boight the myth abd believed that trade and financial involvement with Britain and France would eventually lead to American involvement in the War. They were correct Ameican involvements, but of course terribly wrong about the threat Hitler posed to America and how American security was tied ip with Britain. U.S. shipping was prohibited from entering war zones and Americans traveling on foreign ships did so had to do so at their own risk.

American Cash and Carry (November 1939-March 1941)

The U.S. Congress finally passed the Cash and Carry amendment, ending the American arms emnargo. The Senate passed it (late-October). The House passed it (November 5, 1939). President Rooevelt signed it the same day. This allowed to the United States to remain officually neireal while behaving in a destinctly unneutral manner. The Amendmnebnt did nit soecfy Britain and France, but the administrauin was not about going to permit any shipments of war naterial to Germany. And at any rate, German bhas no significant funds in America or ability to slip through the British naval blockade. The policy benefitted both the Allies and America. It gave the Allies access to the huge American industrial economy. America benefitted as it help ed further the industral recovery from the Depression. It also set the future Amerivan Arsenal of Democracy in motion. Dash and carry was not a permanent sollution because Britain could nit afford to buy what was neededti fight the War for long, but it was a vital temprtatu fix.

Allied World War II Economic Strategy

Britain and France wanted to avoid the massive casualties of World War I. Thus they decided to avoid massed infantry assults and fight an economic war. Britain and France and their empires had vast financial and ecomomic resources. They planned to use those resources while art the same time using the Royal Navy and French Navy to blockade Germany as they did in World War I. Thus NAZI Germany would be gradually defeated by cutting off raw materials and food imports. This strategy proved ineffctive because of the NAZI-Soviet alliance signed jist before the War (Aihusy 1939). The Soviet as part of thatballiance began supplying the Geramnas with vast quantities of oil, strahegic metals, and food. In addition, the German success (1939-40) allowed them to occupy and exploit neighboring countries. The fall of France gave them access to war materail that the French had stockpiled. French copper stockpikes wereespecially important. Thrybalso had the French economy to exploit for most of the rest pf the War. Thus the Germans could finance the War by looting the occupied countries. Britain could not do this.

British Finances (1939-41)

The costs of the War rapidly deplelted the British treasury. Britain to continue the War needed to import food and raw material in addition to armaments made in America. American Neutrality Laws placed this on a "cash and carry" basis. Britain after the fall of France (June 1940) found itself the only country still ar war with Germany. The Battle of Britain (July-Septmber 1940) had prevented invasion, but Britain now had to fight the Germans who had much of the resources of Western and Central Europe at his disposal and as a result easily able to finance the War. At the samr time, Britain's financial capability to finance the War was rapidly declining, both reserves and the ability to borrow money.

British Bankruptsy (December 1940)

While the NAZI victories in the War, changed the German financial position for the better, the cost of the War was bankrupting Britain. Primeminister Churchill had to write to President Roosevelt to inform him that Britain was rapidly reaching the point tht it could no longer afford to pay for the war materials it was purchasing in America (December 1940). Churchill told Roosevelt that the financial situation would make it impossible for Britain to continue the War without American assistance. In fact Britain was already bankrupt. Presidenbt Roosevelt had been limited by an American electorate determined to stay out of the War. His reeelection (November 1940) made it possible to take more determined action.

Lend Lease (March 1941)

Britain facing bankruptsy turned to the United States. Prime Minister Churchill wrote to President Roosevelt (December 1940). President Roosevelt's answer was Lend Lease (March 1941). This in esence was the American commitment to bank role the British war effort. It was basically a declaration of economic war against NAZI Germany. Hitler and the NAZIs recognized it as such. It could have meant a declaration of War, but Hitler at the time was deeply involved in the great enterprise of his life--the desrruction of the Soviet Union. Lend Lease meant that Britain could conduct the War indefinitely. (Hitler has his own plan to put Germany in a comprble position--Operastion Barbasrossa, the invasion of the Soviet Union. Yhe Japanese had a similar plan, seizing the Southern Resource Area.) Lead Lease was primarily designed by President Roosevelt to assist Britain in its fight with NAZI Germany. Lend Lease was created in 1941 because Britain had essentially gone bankrupt fighting the NAZIs (December 1940). At the time, Britain and the Dominions were the only countries still fighting the NAZIs. The Act was specifically designd to aid Britain. Germany was financing the War by brutally exploiting the occupied countries, including the the seizure of food and the use of slave labor. America in 1941 was just beginning to convert the economy to war production. Thus there was only limited actual arms that could be delivered to Britain in 1941. The initial Lend Lease shipments, were food and industrial commodities. They were badly needed. The shipments arrived at a time when the German U-boat blockade was close to starving out the British. Food was available throughout the Empire. The problem was shipping it to Britain. Shipping would be the primary constraint of the Allied war effort throughout the War. And shipping food from Australia and New Zealsnd would have rquired much more shipping than shipping it from Amrericamnad Canana. Britain made a decision early in the War to focus on the Aur War and the straterhiuc bombardment of Germany. Abd the Bkitz meant that there sould be no cobtraints on that effort. But building aircrafy, especially long-range haevy bomberrs required a huge industrial effort. It is why the Luftwaffe had so few. Lend Leaase allowed the British to get much of their armds and military equioment so British industry could cocus on the Air War. Prime-minister Churchill in a speech at the Mansion House stated, "Then came the majestic policy of the President and Congress of the United States in passing the Lease-Lend Bill, under which, in two successive enactments, about £3,000,000,000 was dedicated to the cause of world freedom, without -- mark this, because it is unique -- without the setting up of any account in money. Never again let us hear the taunt that money is the ruling power in the hearts and thoughts of the American democracy. The Lease-Lend Bill must be regarded without question as the most unsordid act in the whole of recorded history" (November 10, 1941). [Churchill] As a result Lend Lease was in existence when the NAZIs invaded the Soviet Union. The propgram was quickly extended tyo the Sovires. President Roosevelt used Lend Lease to justify American North Atalntic convoy escorts. The President would eventualluy expanded this into an undeclared (an unannounced) naval war against Germany in the North Atlantic (September 1941). American by late-1942 war production was beginning to reach substantial levels. The first American tanks and planes reached the British Eighth Armny in time to be used in the Battle of El Alamein (October 1942). The British got the new Sherman tanks berfore the American Army. Britain without Lend Lease could not have continued the War. The Lend Lease Act was essentially giving the British a blank check. It allowed President Roosevelt to transfer war materiel to battered Britain without the payments required by the Neutrality Act of 1939. This enabled Britain to continue the fight until the United States would actually enter the War. And it managed to skirt the complicated issue of World War I debts. Britain was by far the major recipiant of Lend Lease aid. The decisive victory at El Alamain could not have been achieved without Lend Lease. America eventually provided The British Empire over $31 billion in Lend Lease assistance (in 1941-45 dollars). Britain itself was the major recipient. Britain eventually paid back about $0.7 billion, but much more in Reverse Lend Lease. Britain also surrendered posible rights and royalties to many important British technological achievements.

Financial Measures

Even with Lend Lease, World War II placed tremendous demands on the British people, Britain would finance the War throiugh donestic taxation and borrowing, both domestic and foreign. Britain borrowed �15.2 billion during the War--a staggering sum at the time. [Sayers, p. 193.] A British reader tells us, "Britain like America had war saving bonds. They were called National Savings Certificates. They were, however, not very attractive. The pay back did not occur until the 1980s. Interest was added so the cash value was alot when finally collected. The pond was, however, devalued as economic recovery was slow compared to many other countries." We think the buying power was less than invested. We do not yet, however, have precise details. Foreign assetts were sold off in an Imperisal fire sale. The Government intoduced the National Savings Certificates. (Comparable to American War Bonds.) Normally Britain would pay for imports with the export of manufactured goods. The British had introduced a similar system during World War I. We do not have details on the system yet. We do not think they introduced stamps in small denominations, as in America, so children could participate.

Total War

But with the economy on a war footing, manufacturing was concereted to war production. Unlike NAZI Germany, Britain in 1940 began waging total war. Production of consumer goods for domestic consumption or export were cut back to the bare minimum.

War Debt

Britain prevailed in the War, but the War would leave Britain with a huge war debt. Britain would end the War as the greatest debtor nation in world history--up to that time.

Labour Post-War Economic Policies

The Labour Party defeated CHurchill's Conservative Party in a General Election held after VE-Day (July 1945). Clemet Atlee formed a Labour Government. The Labour Governments passed a series of Socialist measures based on collectivism, including the nationalization of important industries (steel, coal, and railways) and state direction of the economy (1945-51). Atlee and his supporters were convinced that the capitalist free enterprise system was both inefficent and exploited workers. Here many Labour leaders were impressed with bthe state industries of the Siviet Union. The result to the surprise of Labour was not, however, improved efficency and earnings. The newly nationalized industries prived less efficent than the private industries of other countries. This inability of state industries to compete was not apparent in the closed Soviet economy, but Britain was a trading nation that had to compete with other countries. The econonomic [eoblens were further exacerbated because under Labour the Government took on widespread social obligations which it had to finance. The nationalized industry rather than producing recenue had to be subsidized, so the Government incrwased taxes on indivuduals ahd businesses. The impsct was to slow economic griowth and recovery. The Germans did just the opposite resulting in the German Economic Miracle. Britain had been the wealthiest, most prosperous country in Europe. As a result of the German Economic Miracle, devestated Germany was more prosperous than Britain. The Germans also enacted many social benefits like the British, but waited until the economy coukd support the benefits and also support private industry rather than enacting a counter-productive job killing tax burden.

Sources

Churchill, Winston. Mansion House Speech. (November 10, 1941).

Horn, Martin. Britain, France and the Financing of the First World War (Montreal: McGill-Queen's University Press, 2001), 262 p.

Sayers, R.S. "Financial Policy, 1939-45" in Sir Keith Hancock, ed. History of the Second World War: United Kingdom Civil Series (London: H.M. Stationary Office, 1956).







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