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The Anglo-American loan was a post World War II loan made to the United Kingdom by the United States on 15 July 1946, and paid off 29 December 2006.

Contents

Context

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.[1] Additionally, Britain's lend-lease balance was written off for $650 million.

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. Territory was also traded for equipment eg. the Destroyers for Bases Agreement, but by 1941 Britain was in a terrible financial state and Lend-Lease was introduced.

Large quantities of goods were in Britain or in transit when Washington suddenly and unexpectedly terminated Lend-Lease on 29 August 1945. The British economy had been heavily geared towards war production (around 55% GDP)[2] 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.

Terms

The loan amounted to $3,750m in line of credit (£930m in 1945) and was to be paid off in 50 annual repayments, with the United Kingdom having an option to defer payment of interest and principal if circumstances warranted. This option was exercised six times, resulting in the loan being paid back in 2006, rather than in 2000. The rate of interest was 2 percent, beginning after five years.[3]

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 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.[4]

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).[5][6]

The final payment of $83.3 million (£42.5 million) due on 31 December 2006 (repayment having been deferred on several occasions) was made on 29 December 2006, it being the last working day of the year. 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 installments 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 lend [sic] 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 erroneously claimed that the loan was primarily needed to pay for the Labour government's welfare reforms.

References

  1. ^ Richard Clarke, Anglo-American Collaboration in War and Peace, 1942-1949 (Oxford, Clarendon Press, 1982).
  2. ^ Richard J. Evans, The Third Reich at War: How the Nazis led Germany from Conquest to Disaster, (London, 2008), p.333.
  3. ^ Kindleberger, Charles P. A Financial History of Western Europe. London: Oxford University Press, 1984. ISBN 0-19-507738-5, p. 415.
  4. ^ 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.
  5. ^ "What's a little debt between friends?". BBC News. 10 May 2006. http://news.bbc.co.uk/1/hi/magazine/4757181.stm. Retrieved 2007-11-11. 
  6. ^ "UK pays off WWII debt to US". http://www.abc.net.au/am/content/2007/s1820797.htm. Retrieved 2007-11-11. 

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