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.

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 curring off raw materials and food imports. This strategy was defeated by the quick Germansuccesses (1939-40), espexcially the fall of France. 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.)

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

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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