World War II: British Aftermath and Recovery

British World War II economic recovery
Figure 1.--Here London boys from a council estate use an old bus in a junkyards as play ground. The press caption read, "Bus boys: This old bus is busted, but it's still wheeling merrily along in the imagination of these London kids. The've made a noisy playground of the old double-decker, retired to a scrap yard after years of service." Britain's despite beginning the War as the most prosperous country bin Europe lagged in the post-War economic recovery. Despite continued rationing and years of lagging economic performance, British voters continued to support politicans promoting socialist, Keynesian economic policies.

World War I significantly damaged the British economy and financial system. Eveb so, in the inter-War era, British living standards were higher than on the Continent, including all the Western European countries (Belgium, France, Germany, the Netherlands, and Italy). British living standard was lower than America, but higher than the Continent. After the War, Britain was slower to recover from the War. War-time rationing continued into the early 1950s. The last rationing ended about the time of Queen Elizabeth's Coronation (1953). And after recovery from the War, British living standards had fallen behind those on the Continent. It is not entirely clear why Britain which was at the turn of the 20th century the world economic leader and major financial center managed to win both world wars, but did so poorly after World War II. BHritain had borrowed enormmous sons to finance the War, but payments to America, the primary debtor, were only partiallyb paid. There was of course considerable war damage, but Germany was even more damaged. A major event after VE Day was the election of Clemet Attlee's Labour Governmrnt committed to extensive and costly social reforms.

Europe in Ruins

When the Germans surendered (May 7), Europe was starving and in ruins. There were refgugees scattered all mover the Continent. The Axis countries were shattered by the fighting and strategic bombing, but enense damage also occurred in the occupied countries and the NAZIs had conscripted millions for slave and forced labor. Britain was in a much better state comparatively. Most of the British people had a roof over their heads, albeit perhaps not their own roof. The population were not under-nourished, although the diet was very limited. Manyb items such as butter eggs, meat, sugar, fruit, vegetables were in sjort supply. Nor had the the population been displaced to the exten that many other Europeans had been. The evacuated children were largely back with their parents by 1942.

British War Finances

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 depelting the British trasury. 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 Churcvhill 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 in essence a declaration of economic war against NAZI Germany. Hitler and the NAZIs recognized it as such. It mean 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 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.

Anglo-American Wartime Technical Cooperation

German ineffiency in coordinating with Allies stands in sharp contrast to the close copperation between Britain and America. President Roosevelt began mobilizing the Arsenal of Democracy, the vast American economy well before America went to war. Very extensive cooperation in weapons development and production also began btween Britain and American before American entered the War. Lend Lease not only helped keep Britain in the War, but equipped the Allies with weapons and equipment that amazed the Allies as well as the Axis. The production of Liberty Ships meant that the Allies ended the war with more merchant tonnage than they began the War. Production methods were to developed for mass producung radars and other equipment that once required involved production techniques. Major weapons like the P-51 Mustangs werethe result of a combined Anglo-American effort. The Manhattan Project to build the atomic Bomb was a joint Anglo-American project. Britain transferred a great deal of technology to America durung the War because America had the industrial capcity to actually produce weaponry. After the War, American companies proved more adroit than British companies in using that technology for commercial production. A factor here was British Governmrnt policy which ratherv than promote privste industry, significantly increased taxes wgivh limited the ability of compsnies to innovate and expand production.

General Election (July 1945)

A major event after VE Day was the British General Election (July 5). The result was not released for several weeks because of postponed voting in some constituencies and the delays on counting overseas ballots (July 26). It was the first General Election to be held since 1935. Elections were suspended during the War and a National (unity) Government was formed by the major parties. The results shocked many. Primeminister Churchill was enormously popular as a war leader. But the British people wanted change--meaning a peace benefit. British workers were convinced that socialism offered a more prosperous future than capitalism. They voted for Labour which promissed fundamental social reforms. Labour was a socialist party and ran on a platform of significantly chnging the British capitalist economy. It was a shatering electoral victory. Labour won nearly twice as many seats (393) as the Conservatives (197). Churchill used the term Natiojnal Government, but he ran essentially with the support of the Conservatives. The Labour MPs selected their leader Clement Attlee as the new primeminister. Churchill ran a poor campsign. He charged that Atlee would require a Gestapo-esque body to implement his program. Labour Party pledges included full employment, free universal health care, and a cradle-to-grave welfare state. Labour's campaign slogan was 'Let us face the future.' King George offered Churchill the Order of the Garter, a dejected Churchill commented, "Why should I accept from my sovereign the Order of the Garter when his subjects have just given me the Order of the Boot?"

Grey Britain

Britain was a grey place after the War. Many of the children returning home from overseas evacuations, most America, were shocked. The war damage was a fraction of what Germany suffered, but the Luftwaffe's bombing was still substantial and it would take years to be replaced with new construction. Rationing had for 6 years affected British life afecting the dinner table and how people dressed. It not only crimped the way the British celebrated, but normal every day life. People did not go hungry, but the foods people most wanted (suggar, milk, butter, eggs, and meat), itens needed to make tasty meals were hard to get. It also affected nutrition. You see incidents like Switerland taking in 'delicate' children to improve their health with good food anf fresh air. Clothing was also rationed making fashionable dressing impossible. Princess Elizabeth even had to get creative for her wedding dress (1947).

American Post-War Assistance

President Truman terminated Lend-Lease for all countries after the Japanese surrendered (August 21, 1945). suddenly after victory in Europe was declared. There were no consulations with the or the other allies. Truman was required to do this by the original Lend Lease legislation passed by Congress (1941). A factor here was that Britain had never paid off its World War I debt which is still outstanding and will never be paid off. Britain halted payments during the Depression and world-wide financial collapse (1932). Britain at the time owed the United Srates over $0.8 billion. President Roosevelt while trying to push the Lend Lease Bill through Congress to support Britain agreed to make Lend Lease a war measure. It was never intended as a general foreign aid program and would have not passed Congress. The United States after cutting off Lend Lease negotiated arrangements with Britin and China to continue shipments on a cash or credit basis of goods that had been earmarked for them under Lend Lease appropriations. Total expenditures under Lend Lease exceeded $50 billion. Britain and the Commonwealth received about $31 billion. The Soviets were the next major recipient, over $11 billion. The British Treasury at the time Lend Lease was terminated was virtually empty. The British economy was in shambles. Large areas of London and other cities were in fruin. Britain wanted an American recovery grant. Eventually a long-term loan was negotiated--the Anglo-American Loan. America provided very generous terms--2 percent interest with repayment over a 60-year period. There were some deferments, but Britain finally paid off the debt (2006). Britain was also a major recpient of American Marshal Plan aid (1947). A British reader tells us that "The Marshall Plan resources were largely directed to the Continent. There were shortages of building materials, as Europe had the first call." Actually Britain was the largest recipient of Marshal Plan aid, nearly $3.3 billion. This was the largest amount distributed to the various countries participating in the Plan. Some countries (Iceland and the Netherlands) got more percapita, but Britain got the largest amount, nearly 25 percent of total dispursements.

Socialist Economics and the Welfare State

Clement Attlee's Labour used their huge Parlimentary majority to fullfil their campaign promoses. They introduced major socialist policies to Britain. Attlee assumed that full employment could be achieved by the nationalization of major industries (coal, steel, utilities, and railroads) and Keynesian economic policies. They also expanded Government social services. These were steps that had been outlined in the wartime Beveridge Report. A cornerstine of the Labour program was the creation of the National Health Service. The Conservative opposition to Keynesian fiscal policy was at loud and vocal, but ineffectual as a result of Labour's control of Parliament. Taxes were sharply increased to pay for the new programs. Labour geberally dismissed the idea that higher taxes would discourage economic growth. The British public generally accepted Labour's economic policies for more than three decades. Even Conservative governments during this period did not dare attack the fundamnental economic and social structure established by Labour. Public opinion can affect politics and impact laws in a democracy, but what it cannot do is bend the iron laws of economics. And what we know now is that socialism does not work despite its political appeal. Btitain had been before World War II the most prosperous country in Europe. Under Labour, Britain fell behind its European neighbors. It even fell behind Germany which had been left a pile of rubble after the War. The result was that while the German Economic Miracle led Europe into a huge economic expansion, Britain had to continue World War II rationing into the 1950s. But even Conservative Governments did not dare attack the pillars of the welfare state wrected by Labour.

Failure to Recover

World War I significantly damaged the British economy and financial system. Even so, in the inter-War era, British living standards were higher than on the Continent, including all the Western European countries (Belgium, France, Germany, the Netherlands, and Italy). British living standard was lower than America, but higher than the Continent. Britain began rationing immediately after the declaration of War. And with the fall of France, the rationing became severe and the Goverm,ent moved the economy toward full mobilization. The commitment to the War was much more complete than that of Germany. After the War, Britain was slower to recover from the War. British War-time rationing contunied into the early 1950s. It is not generally appreciated that the rationing of food and clothes was MORE severe in the UK after the war than during the war. The last rationing ended about the time of Queen Elizabeth's Coronation (1953). And after recovery from the War, British living standards had fallen behind those on the Continent. It is not entirely clear why Britain which was at the turn of the 20th century the world economic leader and major financial center managed to win both world wars, but did so poorly after World War II. One factor was that thanks to Labour policies, thenew technologies developed during the war were mostly developed by American rather than British companies. BHritain had borrowed enormmous sums to finance the War, but payments to America, the primary debtor, were only partially paid. There was of course considerable war damage, but Germany was even more damaged. There were still areas of Birmingham and other cities where bomb rubble could still be seen after such areas had been rebuilt in West Germany. Britons continued to live in council housing without running water into the 1960s. Nationalized industries like coal and steel became incompetivie requiring enormous state subsidies. Rather than full employment, unemployment became a major social problem in Britain.


Primeminister Attlee decided to grant India independence after the War. India was granted independence (1947). India decided to pursue state socialism and pusue economic relatiojns with the Siviet Union. This was just beginning of the de-colonization program by which Britain granted independence to most of the Empire (1950s-60s). This must have reqquired considerable ecionomiv adjustment. Marxists would attribute some iof Britauin;'s economic problems to decolonization. We note, however, that the recivery of France and the Netherlands were not significantly affected. And the Nerherlands in percapita terms were more affected by the loss of the Dutch Wast Indies than Britain was affected by the loss of the Empire. We are not well acquainted with the ecionomic literatute here. Perhaps reades will know more.

Brain Drain

Somewhat related to the transfer of technology during the War was a brain drain after the War. Given that America also spoke English, British scientists and technicians could easily move to and work in America. And there was a great demand for comopetent scientists in American universities and corportations. These pdsitions were extremely enticing, both because reserarch labortories were better equipped uin America and wages were higher. British Government policies which did not promote industrial expansion helped to cause this exodus. High corporate and personal income tax levels in particular were a major factor. Corporations which could not finance modernization and inniovation had a difficult time holding on ton top scientists as did universities with low salary levels. We do not yet have any actual statistics on the dimensions of the brain drain and the time line, but British readers have mentioned it to us. We would be interested in any actual data.

Recovery on the Continent

The belief in Socialist, Kenseyan policies were also widespread among workers on the Continent. There were even strong Communist parties on the Continent (especoally Italy and France). But nowhere on the continent did the Socialists have massive majorities in parliaments like that voters gave Labour in Britain. The economic engine on the Continent was Germany and here American influence helped generate a free market response to recovery which led to the German Economic Miracle. Italy before the War was a country far behind Britain. In the post-War era, Italy rapidly closed the economic gap between it and a stagnating Britain. Other countries such as the Netherlands pursued prudent fiscal policies and moderate social reforms until the 1960s when the recovered and growing economies could adequately finance them.

Industrial Plant

Britain was wear the industrial revolution began. This was one reason that Britain became so wealthy ahd a world power. It also meant that even by the late-19th centurty, countries which bindusrtriaized laterv than Britain built more modern industrial facilities )especially Britain ahnd Germany). A profitable company is often loath to adipt new technology because it means that its existing plant and operations are made obsolete. This was essentially the problem faced by the American rust belt in the 1970s. Governments can incourage modernizatuion through industrial, fiscal, and tax policy. Profitable companies can finance modernization and innovation. Increasing taxes which reduces profitability impairs the ability of companies to modernize. In Britain this problem was confounded by the Goverment's nationalization program which include coal and steel companies. Coal and steel was at the time the back bone of an industrial economy. The Labour Government was primarily concerned with employment and wages. As a result, the competitive position of these induistries declined. A British reader writes, "In the 1970's I worked in a manufacturing company that was using machines brought from America duruing World war II and I know that other plants were operating pre-War machinery." Very little investmernt was made in the mines and mills. There was also underinvestment bin transport, both the nationalized rail industry and modern highways. There were few major roads like the German Autobahn or the American interstate highway system.

European Integration

One major difference betweenBritain and the other major Western European nations was that Britain did not participate in the process of European integration that lead to the Common Market (Inner-Six). This must have had an important impsct on British industry. Somewhst belatedly, Britain helped form the Outer-Seven with Sandinavian countries. Eventually Britain and these countries decided to join the Common Market, although President DeGualle delayed Britain's entry.

Britain's Recovery

Only as Britain gradually fell further abnd further behind the Continent did people in Britain began to ask questions. Finally Conservative politicans began gaining some sucess with defending capitalism. Margaret Thatcher became Prime Minister in 1979 and what some called neo-liberalism became mainstream. It was in fact a full throated embrace of capitalism.

Reader Comments

A British reader writes, "The rate of recovery from nothing is going to be faster compared to the improvement where the country has a transport and manufacturing infastructure. Britain had to re-tool to start making domestic rather than War related products. Although we had this infrastructure, it was antiquated, but deemed serviceable. Raw materials were short, and again, like the food went to the mainland. [HBC note: I believe our reader is expressing the general British attitude as to what happened. I am not entirely sure that the statistics bare this out. Britain was by far the largest recipient of both Lend Lease and Marshal Plan aid.] I didn't go to France or Germany until 1960. I was struck by the modern looking cities. They of course were largely new, replacing what had been rubble. Parts of London still had old bomb sites. It was great because most of them were car parks! We really didn't get off our butts until Harold MacMillan came along. My view is simplistic, but basically, Britain had to make do until Europe caught up. They had the momentum and did perhaps overtake us once they were on their feet. Parts of Europe of course - The Eastern Bloc were in dire trouble until the Wall came down. Then West Germany went into economic reverse to pay for the development of East Germany. The Eurozone is now paying for the new poorer members such as Greece and Poland."


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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Created: 4:18 AM 6/15/2010
Last updated: 10:41 AM 3/28/2017