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British National Debt After Ww1 Essay

'Financial Dunkirk'

Marshall Aid sugar is unloaded at London's Royal Victoria Dock, February 1947, watched by US and UK officials  © The root cause of this self-destructive British choice lies back in 1945, when Great Britain, as one of the 'Big Three' along with the United States and the Soviet Union, emerged from World War Two with the psychology of a victor but with her economic circumstances more resembling those of a defeated country. Despite the victory over Hitler, Britain was literally bankrupt, and faced the prospect of unbridgeable balance-of-payments deficits for years to come.

It was this victor's psychology that deluded both Labour and Conservative politicians into believing that Britain - at the centre of the Commonwealth and the Sterling area - could have a future that was similar to her past. British politicians saw the United Kingdom as a first-class power in the same league as the United States. And certainly Britain looked in many ways like a global power, with more than two million men in fleets, garrisons and air squadrons sprawled across the world, from their bases at home to those in Japan.

Nonetheless, John Maynard Keynes, the chief economic advisor to the new Labour Government, warned ministers in August 1945 that Britain's world role was a burden which '... there is no reasonable expectation of our being able to carry ...'

As he pointed out, the entire British war effort, including all her overseas military commitments, had only been made possible by American subsidies under the Lend-Lease programme. If the Americans stopped Lend-Lease, Britain would face a 'financial Dunkirk' - his words - unless Washington could be touched for a loan of $5 billion. Keynes wrote that such a 'Dunkirk' would have to be met by:


Dream of world power

Secretary of State George Marshall (right) faces the Senate Foreign Relations Committee, 8 January 1945, to argue for aid to Europe  © Well, a week after VJ-Day (Victory over Japan Day), the US Congress duly did stop Lend-Lease. What now? For the new Labour Cabinet, Keynes's 'Dunkirk' solution of packing up all our 'onerous responsibilities' and becoming a second-class power was unthinkable, certainly unthought.

So instead, the Labour Government successfully cadged a loan of nearly $4 billion from the Americans. Thanks solely to this American tick, Britain could continue to entertain the dream of being a world power at the centre of the Commonwealth. Even so, the war-bankrupted country was still desperately hard up. The Labour Cabinet therefore sought in the first place to reconcile the dream with economic reality by means of salami-slicing the armed forces. The result was worrying - as Herbert Morrison shrewdly judged in November 1949:

Just as true today, of course.

In the second place, the Labour Cabinet attempted to accommodate the costs of the world role and the expensive new welfare state by severely restricting capital investment at home. This of course served to handicap the much-needed modernisation of Britain's obsolete industrial system, and the country's clapped-out roads, railways and telecommunications.


Marshall Aid

The dream of Britain as a global power also included the 'invisible empire' of the Sterling Area, to which Britain chose to play the banker. This was despite the fact that her reserves of gold and dollars were well known in Whitehall to be far too scanty for this role. By the end of 1947, the American dollar loan had already been largely spent, but the gulf still remained between the cost of Britain's self-inflicted global commitments and her inadequate earnings from exports. Without another huge dollar handout, Britain would have to give up all her global strategic commitments, as well as her role as the banker to the Sterling Area, and accept that she was now only a second-class power.

In that same year, the American Secretary of State, George Marshall, proposed his European Recovery Programme to rebuild a war-shattered Europe. For Britain herself, the offer of the Marshall Aid dollars presented a last chance to modernise herself as an industrial power before her old trade rivals could recover from defeat and occupation. Instead, all the illusions and follies of post-war British policy now reached their climax in the wasting of Britain's Marshall Aid.

The French and German tenders for Marshall Aid resemble today's four-year business plans, being detailed technocratic strategies which give clear priority to investment in reconstructing industry and infrastructure. However, the British tender, originally drafted by a senior Treasury civil servant, resembled an Oxbridge economist's prolix prize-essay - with a tour of the world's economic horizon and Britain's place within it.

In the words of Sir Stafford Cripps, Labour Chancellor of the Exchequer, it was a 'general statement' rather than a set of 'detailed proposals'. Certainly it amounted to nothing like an action-plan with a clearly stated strategic objective.



In fact, far from Marshall Aid boosting British investment, planned programmes were heavily cut after the debacle of a Sterling devaluation in 1949, caused by a balance-of-payments crisis. In what had been intended as the 'decisive' Marshall Aid years of 1949 and 1950, investment was only a little higher than in 1948 - barely ahead of inflation.

In 1950, Britain's investment in industry and infrastructure came to only 9 per cent of GNP, as opposed to Germany's 19 per cent. Thus the actual total of the investment was a fifth less than the German total.

It followed that during the 1950s German industry would enter export markets with new plant and new machines. For instance, the Volkswagen factory at Wolfsburg was no longer the bombed-out wreck of 1945-6, but was poised to achieve sensational global success in coming decades. Then again, more autobahns had been constructed in Germany, whilst the German rail network - and the French and Italian - had been totally re-engineered, with all the main lines electrified.

In Britain, steam haulage, semaphore signalling and clapped-out track still prevailed, and were to do so until the 1960s. Moreover, the road and telecommunications network in Britain remained equally inadequate, ill-maintained and out-of-date.

The sad irony is that it had been in vain that the Labour Government had sacrificed the modernisation of Britain as an industrial country for the sake of using Marshall Aid to support a world power role - strategic and financial.

Britain's estimated defence expenditure for 1950-1 - the final year of Marshall Aid - amounted to 7.7 per cent of GNP - at a time when Germany and Japan were not spending a pfennig or a yen on defence. And in spring 1950, Hugh Gaitskell, Chancellor of the Exchequer, reported that the Sterling Area's dollar reserves were 'still at a lower level than when Marshall Aid began'.

What a monumental waste of a great and unrepeatable opportunity.


Find out more


Path to European Union: From the Marshall Plan to the Common Market by Hans A Schmitt (Greenwood Press, 1981)

The Lost Victory: British Dreams, British Realities, 1945-1950 by Correlli Barnett (Pan Books, 1996)

The Marshall Plan Fifty Years Later edited by Martin A Schain (Palgrave Macmillan, 2005)

The Origins of the Marshall Plan by John Gimbel (Stanford University Press, 1976)

The Second Victory: Marshall Plan and the Postwar Revival of Europe by Robert J Donovan (University Press of America, 1987)

The CIA and the Marshall Plan by Sallie Pisani (University Press of Kansas, 1991)

The Marshall Plan by Allen W Dulles, edited by Michael Wala (Berg Publishers, 1993)

The Marshall Plan: America, Britain and the Reconstruction of Western Europe, 1947-52 (Studies in Economic History and Policy: US in the 20th Century) by Michael J Hogan (Cambridge University Press, 1989)

Britain and the Marshall Plan by Henry Pelling (Palgrave Macmillan, 1988)

The Marshall Plan and the Future of US-European Relations (German Information Center, New York, 1973)


The history of the British national debt can be traced back to the reign of William III, who engaged a syndicate of City traders and merchants to offer for sale an issue of government debt, which evolved into the Bank of England. In 1815, at the end of the Napoleonic Wars, British government debt reached a peak of £1 billion (that was more than 200% of GDP).

At the beginning of the 20th century the national debt had been gradually reduced to around 30 percent of GDP. However, during World War I the British Government was forced to borrow heavily in order to finance the war effort. The national debt increased from £650m in 1914 to £7.4 billion in 1919. During World War II the Government was again forced to borrow heavily in order to finance war with the Axis powers. After the war the debt gradually decreased as a proportion of GDP, but in the 1970s, following a Sterling crisis, the British Government was forced to seek help from the International Monetary Fund (IMF).

As the 1980s and 1990s progressed, the proportion of debt to GDP fluctuated up and down according to how the wider economy was performing, remaining relatively constant during the early 1980s recession, falling in the latter half of the decade, and rising again as the Early 1990s recession reduced tax receipts. In the late 1990s and early 2000s the national debt again dropped in relative terms, falling to 29% of GDP by 2002. After that it began to increase, despite sustained economic growth, as the Labour Government led by Tony Blair increased public expenditure. By 2007 the national debt had increased to 37% of GDP. The deficit continued to grow and, following the Great Recession beginning in early 2008, both government borrowing and the national debt have risen dramatically, reaching around 70% of GDP by the end of 2012.


Main article: United Kingdom national debt

The origins of the British national debt can be found during the reign of William III, who engaged a syndicate of City traders and merchants to offer for sale an issue of government debt. This syndicate soon evolved into the Bank of England, eventually financing the wars of the Duke of Marlborough and later Imperial conquests.

The establishment of the bank was devised by Charles Montagu, 1st Earl of Halifax, in 1694, to the plan which had been proposed by William Paterson three years before, but had not been acted upon.[1] He proposed a loan of £1.2m to the government; in return the subscribers would be incorporated as The Governor and Company of the Bank of England with long-term banking privileges including the issue of notes. The Royal Charter was granted on 27 July through the passage of the Tonnage Act 1694.[2]

Public finances were in so dire a condition at the time that the terms of the loan were that it was to be serviced at a rate of 8% per annum, and there was also a service charge of £4,000 per annum for the management of the loan. The first governor was Sir John Houblon, who is depicted in the £50 note issued in 1994. The charter was renewed in 1742, 1764, and 1781.

The founding of the Bank of England put an end to defaults such as the Great Stop of the Exchequer of 1672, when Charles II had suspended payments on his bills. From then on, the British Government would never fail to repay its creditors.[3] About 3/7th of British national debt in 1776 and 1/3rd of major stocks like East India Co., were held by Dutch bankers.[4]

In 1815, at the end of the Napoleonic Wars, British government debt reached a peak of £1 billion (that was more than 200% of GDP).[5]

The South Sea Company[edit]

The Lord Treasurer Robert Harley established the South Sea Company in 1711. Nominally, this was a trading company, but its main activity was the funding of government debt. In 1720, a bill was passed making the South Sea Company responsible for the entire national debt. This led to a frenzy of interest in the company, whose shares reached ten times their original issue price. A liquidity problem and collapse followed. The company was responsible for at least part of the national debt until it was abolished in 1850.[6]

World War I[edit]

At the beginning of the 20th century the national debt stood at around 30 percent of GDP.[5] However, during World War I the British Government was forced to borrow heavily in order to finance the war effort. The national debt increased from £650m in 1914 to £7.4 billion in 1919.[7]

Britain borrowed heavily from the US during World War I, and many loans from this period remain in a curious state of limbo. In 1931, President Herbert Hoover announced a one-year moratorium on war loan repayments from all nations, due to the global economic crisis, but by 1934 Britain still owed the US $4.4bn of World War I debt (about £866m at 1934 exchange rates). Adjusted for inflation, that would amount to around £40bn today, and if adjusted by the growth of British GDP, to about £225 billion. During the Great Depression Britain ceased payments on these loans, but outstanding bonds such as the War Loan were finally paid off in 2015.[8][9]

Between the wars[edit]

By the mid-1920s, interest on government debt was absorbing 44% of all government expenditure, comfortably exceeding spending on defence until 1937 when, as war clouds drew near, re-armament began to get underway in earnest.[10]

World War II[edit]

During World War II the Government was again forced to borrow heavily in order to finance war with the Axis powers. By the end of the conflict Britain's debt exceeded 200 percent of GDP, as it had done after the end of the Napoleonic Wars.[5] As during World War I, the US again provided the major source of funds, this time via low-interest loans and also through the Lend Lease Act. Even at the end of the war Britain needed American financial assistance, and in 1945 Britain took a loan for $586 million (about £145 million at 1945 exchange rates), and in addition a further $3.7 billion line of credit (about £930m at 1945 exchange rates). The debt was to be paid off in 50 annual repayments commencing in 1950. Some of these loans were only paid off in the early 21st century. On 31 December 2006, Britain made a final payment of about $83m (£45.5m) and thereby discharged the last of its war loans from the US.

By the end of World War II Britain had amassed an immense debt of £21 billion. Much of this was held in foreign hands, with around £3.4 billion being owed overseas (mainly to creditors in the United States), a sum which represented around one third of annual GDP.[10]


After the war the debt gradually fell as a proportion of GDP, but in 1976 the British Government led by James Callaghan faced a Sterling crisis during which the value of the pound tumbled and the government found it difficult to raise sufficient funds to maintain its spending commitments. The Prime Minister was forced to apply to the International Monetary Fund for a £2.3 billion rescue package; the largest-ever call on IMF resources up to that point.[11] In November 1976 the IMF announced its conditions for a loan, including deep cuts in public expenditure, in effect taking control of UK domestic policy.[12] The crisis was depicted by the right-wing press as a national humiliation, with Chancellor Denis Healey being forced to go "cap in hand" to the IMF.[13]


In the late 1990s and early 2000s the national debt dropped in relative terms, falling to 29% of GDP by 2002. After that it began to increase, despite sustained economic growth, increasing to 37% of GDP in 2007. This was due to extra government borrowing, largely caused by increased spending on health, education, and social security benefits.[14] Since 2008, when the British economy slowed sharply and fell into recession as a result of the externally-caused financial Crash, the National Debt has risen dramatically, initially from the vast sums needed for bank bailouts, and then by the rapidly declining take from taxation on personal income and commercial activity.

In the 20-year period from 1986/87 to 2006/07 government spending in the United Kingdom averaged around 40 per cent of GDP.[15] As a result of the 2007–2010 financial crisis and the late-2000s global recession government spending increased to a historically high level of 48 per cent of GDP in 2009–10, partly as a result of the cost of a series of bank bailouts.[15][16] In July 2007, Britain had government debt at 35.5% of GDP.[16] This figure rose to 56.8% of GDP by July 2009.[17] As of June 2010 there were approximately 6,051,000 public sector employees in Britain (compared to approximately 23,107,000 private sector employees).[18]

See also[edit]


  1. ^Committee of Finance and Industry 1931 (Macmillan Report) description of the founding of Bank of England. Retrieved 10 May 2010 – via Google Books.  "Its foundation in 1694 arose out the difficulties of the Government of the day in securing subscriptions to State loans. Its primary purpose was to raise and lend money to the State and in consideration of this service it received under its Charter and various Act of Parliament, certain privileges of issuing bank notes. The corporation commenced, with an assured life of twelve years after which the Government had the right to annul its Charter on giving one year's notice. '''Subsequent extensions of this period coincided generally with the grant of additional loans to the State'''"
  2. ^H. Roseveare, /The Financial Revolution 1660–1760/ (1991, Longman), pp. 34
  3. ^Ferguson, The Ascent of Money, p.76
  4. ^Dutch bankers owned majority of British national debt in early 19th century
  5. ^ abcUK public spending Retrieved September 2011
  6. ^"South Sea Bubble Short History". Retrieved 2012-02-15. 
  7. ^Uk National Debt "Bombshell". Webpage discussing the National Debt. Retrieved September 2011
  8. ^BBC Magazine 10 May 2006 Retrieved September 2011
  9. ^"Better late than never! UK finally repays its First World War debts". 9 March 2015. Retrieved 27 April 2016. 
  10. ^ abFerguson, Civilization, p309
  11. ^Daily Telegraph account of 1976 UK debt crisis Retrieved September 2011
  12. ^"Good-bye Great Britain": 1976 IMFn Crisis, K Burk, ISBN 0-300-05728-8
  13. ^Daily Telegraph 23 January 2009 Retrieved September 2011
  14. ^Economics Help Retrieved March 2013
  15. ^ ab"Comprehensive Spending Review 2010"(PDF). HM Treasury. Archived from the original(PDF) on 22 November 2010. Retrieved 10 November 2010. 
  16. ^ ab"Britain's public debt since 1974". The Guardian. 1 March 2009. 
  17. ^"Britain owes £801,000,000,000". The Scotsman. 21 August 2009. 
  18. ^"Labour market statistics - October 2010"(PDF). Office for National Statistics. Archived from the original(PDF) on 14 November 2010. Retrieved 10 November 2010. 


  • Ferguson, Niall, The Ascent of Money: A Financial History of the World, Penguin Books, London (2008)
  • Ferguson, Niall, Civilization: The Six Killer Apps of Western Power, Penguin Books, London (2012)

External links[edit]

Interest payments on UK National Debt as percentage of GDP from 1900
The sealing of the Bank of England Charter (1694)
British national war bond advertisement

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