Anglo-American loan
The Anglo-American loan, officially the Anglo-American Loan Agreement, was a loan made to the United Kingdom by the United States on 15 July 1946. The loan kept the British economy afloat after the Second World War. The loan was negotiated by British economist John Maynard Keynes and American diplomat William L. Clayton. Problems arose on the American side, with many in Congress reluctant, and with sharp differences between the treasury and state departments. The loan was for US$3.75 billion, £2.2 billion at a low 2% interest rate; Canada loaned an additional US$1.9 billion £607 million. The British economy in 1947 was hurt by a provision that called for convertibility into dollars of the wartime sterling balances the British had borrowed from India and others, but by 1948, the Marshall Plan included financial support that was not expected to be repaid. Repayment was completed in 2006, after it was extended six years.
Background
At the start of the war, Britain had spent the money that it did have in normal payments for materiel under the "US cash-and-carry" scheme. Basing rights were also traded for equipment, e.g., the Destroyers for Bases Agreement, but by 1941 Britain was no longer able to finance cash payments and Lend-Lease was introduced. The Lend Lease Act provided aid for free on the basis that such help was essential for the defence of the United States. Congress passed the final extension of the act on April 16th, 1945, extending the aid for another year while adding an amendment stating that no aid could be provided for postwar relief or reconstruction.Large quantities of goods were in Britain or in transit when the Lend Lease Act was terminated on 21 August 1945. The British economy had been heavily geared towards war production 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 billion.
Agreement
Terms
, then in poor health and shortly before his death, was sent by the United Kingdom to the United States and Canada to obtain more funds. British politicians expected that in view of the United Kingdom's contribution to the war effort, especially for the lives lost before the United States entered the war in 1941, America would offer favourable terms. Britain was offered a loan at 2% interest to be paid over 50 years starting in 1950 by Canada and the United States.Historian Alan Sked has commented that, "the U.S. didn't seem to realize that Britain was bankrupt", and that the loan was "denounced in the House of Lords, but in the end the country had no choice." America offered US$3.75 billion and Canada contributed another US$1.19 bn, both at the rate of 2% annual interest. The amount repaid, including interest, was $7.5bn to the US and US$2bn to Canada.
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 devalued in 1949 from $4.02 to $2.80.
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.