Saturday 12 February 2011

Buddy, can you spare a dime?

Many people know that a bankrupt Germany defaulted on its WW1 war reparations. They were set at about $750 billion at today's prices. Later revised to a more realistic $341 billion and then just before permanent default to a mere $81 billion. It didn't really matter what the loans were set at. Germany couldn't pay them, what with 100,000% inflation and the Wall Street Crash and all. Germany had repeatedly defaulted. In fact the first default was in 1922, just a year after the payments began.

Germany was also forced to hand over coal and iron and steel. It defaulted on those too. In 1931, and after a truly heroic effort it admitted defeat and defaulted 57 years early, having not made many payments anyway.. Keynes believed that default was inevitable as only serious tax rises could have raised the surpluses required to pay off the debt. But that wasn't a realistic possibility in Weimar Germany.

In fact raising taxes to pay off debt was a factor in the 1926 general strike in the UK.
In 1931 the UK still owed a huge sum to the USA for the money we borrowed to fight Imperial Germany and her allies in the Great War. Great Britain had borrowed from the USA and used 85% of that money to finance her allies. At the end of the war Great Britain was owed $8 billion dollars and owed the USA $4.25 billion dollars. {About $50 billion today} In 1932 Great Britain followed Germany and defaulted on those war loans. Forever. We never paid them back.
The USA considered that the world was going to hell anyway and the debt burden was going to mean poverty for all of Europe for decades meaning poverty for America with no other notable economies to trade with.. So, without, too much fuss and grumbling, they forgot about them and retreated into neutrality and isolation, even passing actual laws forbidding the US government from ever getting involved with Europe again.

That was until 1939 when great Britain and France again came knocking on Uncle Sam's door asking for some more loans to re-fight the Great War.

This time the USA stipulated we could have all the guns and butter we wanted provided we came and collected them ourselves and we paid cash up front. This has long been seen by the British as a terrible slight by our close ally.
But from the American's point of view here came the limey's again. Pleading poverty while sailing around in the world's largest fleet, holding a 1/4 of the globe as their export markets, still the world's superpower .. Well the Entente-Cordiale didn't pay for the last lot of loans, {that the US government had to settle with the creditors as the WW1 inter allied loans act had stipulated all loans be only for goods from the USA} and they dragged the USA's armies into that war.
The Euro-powers had insisted on reparations from Germany and Austro-Hungry that the USA was sure would cause financial disaster {it did} and then they rejected all Woodrow Wilson's fourteen point league of nations {forerunner to the UN} proposals.

In 1939 the USA was neutral and forbidden by law {1935 neutrality act} to supply any sides in a conflict with goods or weapons. There was a $700,000 {modern equivalent} fine for breaching the neutrality act.

The Commonwealth handed over all the cash and bonds and gold we had. We handed over territory and promises. Then France surrendered, the major British army was defeated and Italy joined in with the Nazis and their semi partners, the USSR and Japan. UK PLC was looking a pretty poor investment. When the USA was sure we weren't holding out on them anymore, they finally agreed we could have whatever we wanted to fight the Axis powers. And for free. All the ships and planes and bullets we wanted. Heck, the USA would even supply all the ships to carry it all over on.

Some people believe that the USA charged us for all the lend-lease equipment we used to fight the war and made us pay all of the loans for war material and basic foodstuffs back. This is untrue.

The USA passed an act that determined that in a time of crisis it could give anything to anyone it liked and if they returned it , the borrower didn't have to pay. If it was used, like wheat or timber or oil, it was also OK not to have to pay for it. If it was destroyed in combat like tanks or trucks or planes, that was a freebie too. In fact the Commonwealth and the USSR and Nationalist China only had to pay for anything they wanted to keep at the end of the war. Everything else could be returned. In exchange the British empire had to agree to technology exchanges and open up to free trade. Still a pretty sweet deal, because without it the UK would have quit the second world war in December 1940 when the money ran out. An extra sweetener was when the war ended the USA wrote off everything already shipped overseas to Europe, and Britain could pay just 10% of the price of anything that was due to be shipped that they still wanted.

So where does our war debt come from? The UK only recently finished paying off those war loans in 2006. Great Britain had assumed that the USA would keep giving us free stuff after the war. They didn't. This came as a bit of a shock. The nation was bankrupt. A $4 billion loan had to be arranged almost immediately at the ending of Lend-lease {one week after the surrender of Japan.}
The incoming Labour government had just promised a new home and a new hospital for everyone. How to fund all of this and still be a global superpower?

The 1946 post-war
Anglo-American loan was where the UK's war debt came from. Britain borrowed the modern equivalent of $53 billion from the USA and another $15 billion from Canada at a generous fixed rate of 2% payable over 50 years to end in the year 2000.{we were late paying it off having had a few suspended payments in 1956, 1957, 1964, 1965, 1968 and 1976} And as the loan repayments didn't start until 1950, the USA wrote off our owing balance of payments of around $8 billion{today's prices} from the knock-down, 90% off prices at the end of the Lend-Lease, that we still hadn't paid for. Considering inflation and the fixed interest rates, doesn't seem such a bad deal. If only a mortgage could be had like that!

But still..those yanks..OK, so they gave us $435 billion-ish for free in lend-lease, and another $65 billion at 2% but hey, they did make us pay for all the things we bought in 1939 and 1940. .. 'Special relationship' guys.. how about some more easy loans?'
There wasn't another easy loan. Instead there was the Marshall Plan.

The Marshall Plan was a US foreign aid program firstly designed to stop Europe collapsing into the poverty and anarchy that had followed the Great War, and secondly to check the spread of communism. All European countries were eligible for Marshall aid. The USSR refused any imperialist dollars. Shattered Germany rebuilt its industrial economy to become modern West Germany with this money. Former Imperial Japan rebuilt its industry too with money from a separate aid program for the Pacific. France built its modern public transport and power generation facilities.

But the largest recipient of 'foreign aid' was the United Kingdom. $3297 {millions} out of a euro pot of £12,731 at 1948 prices. {$46158 millions at today's prices.} Germany, the industrial powerhouse for the next 60 years, got a little under half. $1448. This was foreign aid. There was nothing to pay back.

Bit of a myth about the conquered axis powers being able to rebuild their completely flattened economies while the UK shouldered the debt burden for WW2 and so was stuck with its obsolete factories and transportation. We had the money, far more money, than anyone else. Almost as much as France and Germany combined.

Where the hell did all that money go?


Mark Wadsworth said...

Good summary, but it's polite to link to sources.

As to the title, the answer is yes.

Old BE said...

We spent out money on goodies, France and Germany spent their on infrastructure. The something-for-nothing culture was born.

Timbo614 said...

At a guess, and my history is a hazy as my macro-economics...

The NHS (Established 1946?)
Social Housing.
The Welfare State.

measured said...

Hasn't it all gone into property?

Uncle Sam's generosity has allowed the States to protect the dollar and its interests. How times and actions change but money still talks. It is amazing how bad things became in Germany.

Right, off to buy to buy towels and sheets while I can still afford them.

Jim said...

What Timbo said. Building the land fit for heroes. Great job they made of that too.

Anonymous said...

Re "It didn't really matter what the loans were set at. Germany couldn't pay them, what with 100,000% inflation and the Wall Street Crash and all. Germany had repeatedly defaulted. In fact the first default was in 1922, just a year after the payments began." Even thirty odd years ago, the view that reparations were too harsh was being challenged so I also would be interested in your sources.

Budgie said...

I did know the Americans were very generous but not anywhere near the generosity you cite, BQ.

However, it is not as simple as that (it never is). When would the USA have entered the WW2 if they had not been attacked by Japan? 1943? 1944? Ever?

It is a lot cheaper to get someone else to fight your wars for you - even if the Americans did supply us with some ships and tanks.

It was a long standing aim of USA foreign policy to eliminate the British Empire. By standing aside in WW1 and WW2 for so long, despite the generosity of Lend-lease (enacted as late as January 1941), America achieved its aim.

Americans generous? Yes. And no.

Anonymous said...

Well noted Budgie. But the British Empire would probably have broken up to a greater or less extent in any event. What is undeniable IMO is that two world wars broke the back of Britain to the awful extent which we witness today.

Alan said...

Great article. As to the second question, where did all the money go...

France/Germany/Netherlands etc all have universal health care so I'm not sure you can blame (in part) the creation of the NHS.

The welfare state is more complicated. In post ww2 Germany economic development was seen as the best way to attaining social welfare. Germany still had unemployment pay etc. We spend all our time arguing about welfare handouts/NHS etc, rather than talking about economic development. And I get the impression that both parties now have blind faith in some magical jobs creation fairy.

German military was very restricted post ww2, unlike the UK where we had plenty of military conflicts post ww2 to pay for. And we spent (wasted) huge sums on nuclear weapons.

After ww2 the British Empire still technically existed, but we gave it all back very rapidly, except for Hong Kong which we returned in 1997. I'm unclear of the economic cost in closing down the British Empire.

Post ww2 Labour nationalized many key industries, and we all know how well that plan worked out.

Steven_L said...

The money didn't 'go'. the money supply has increased ever since as has, albeit with a few troughs along the way, the amount of wealth in the UK.

Bill Quango MP said...

Should have done it as a quiz. Where did the money go?

Naturally its very complex to discover. There seems to be near agreement that it WASN'T spent on creating the NHS. I'm sure this means 'directly created.' The NHS was not funded with Marshall Aid.
I've not researched it but it does seem to be a bit like the union modernisation fund argument. The unions do not give taxpayer's money to the Labour party. They give member's subs money.
But if the unions hadn't got the handouts then could they have run all their projects and conferences and recruiting drives AND given the money to the Labour Party? They say yes. I'm pretty sure

The main reason why the Japanese and Germans were able to soar ahead was because they didn't spend on a penny on defence, already being occupied and protected by the USA and in Europe by Britain and France too.
Defence was costing the UK 7- 8% of GDP even after all the post war cuts.

The first post war defence review planned for 10% of GDP to be defence, without nuclear as we didn't have any. The UK then fought 'actions' like Malaya, all over the world and full blown wars like Korea.
defence came back down to 7-8% in the mid 50's. Then down to about 5% by the mid 70's. The Labour government's reviews in 1975 were really the first time that the UK had attempted to budget a military for what it could afford, rather than what it would like.

Bill Quango MP said...

Industrialisation was the casualty of post war planning. It just wasn't, and possibly couldn't, be given priority.
Industry modernisation and infrastructure rebuilding was about 9% GDP in the UK post war. In Germany it was 19%, for reasons we have discussed.

Although they were old and inefficient, UK did still have factories and roads and railways and power stations.. Germany and France didn't. But its bizarre that technology seemed to have passed the UK by in the 1950's.

The Festival of Britain in 1951 had the UK proudly showing off its latest technology including next generation steam trains that would last the country through to the mid sixties.
The French had ceased using steam trains in 1949. The Japanese high speed bullet went into operation in 1964. Achieving operating speeds that UK trains's have only achieved since privatisation.

Post-war Britain chose banking and global power over industry.

Bill Quango MP said...

Good replies everyone.

BE: We really missed out on infrastructure. Germany had its motorways before the war. Ours were very slow to get built. The first Paris ring road was completed in the early 70's. We had the south circular..nothing more than a collection of road signs until the M25 in the mid 80s.

Timbo - All those things.. but not as much as you'd expect. Its the 1970's where welfare payments and healthcare really take off.

Measured. Land Values you mean? Better head over to Mr Wadsworth's for that.

Jim. Yes. It seems to be taking rather a long time. But we are undeniably so much richer and better cared for today.

Anon: You are right. Many historians disagree that Germany could have paid off its loans.
Its impossible to know. Would the country have accepted two decades of poverty without protest or just voting in a Hitler style Nationalist government earlier?

But anyway, they never would have after the crash of 1929.

Bill Quango MP said...

Budgie: The mistake is to see the USA as somehow a part of Europe. In 1921 both British and American naval plans were drawn up with the most likely threat being each other.
War plan red only ceased in 1939.

The United States was Neutral. Yet it was in the shooting war from 1940 with the neutrality patrol. The Reuben James destroyer was sunk in October 1941.
America could not have stayed neutral much into 1942. Not when she was attacking U-Boats and escorting convoys.
In early 1941 USA construction workers, thousands of them, were building airfields, military bases and dredging docks in northern Ireland. The men were civilians, but of course there with the full knowledge, approval and money of the USA to build facilities for the expected arrival of thousands of US troops once the real war{for them} began.

The famous Battleship Bismark was sighted and reported and shadowed by a Catalina patrol plane, part crewed by men from the USA navy,flying out of Northern Ireland. Its a very little known story as it was classified for years. At the time Roosevelt was terrified it would get out that US servicemen had been assisting the Commonwealth. "I will be impeached."

But it is true, and it was insisted, that the British Empire open up its markets. Yes, this was a long standing aim. Churchill had great difficulty reconciling 'fighting for democracy' whilst the empire ruled over subject peoples of India, Malaya, Borneo etc with no intention of giving that up.

Anon{2}. Agree. The first war did us in really. Then the crash and the weight of empire. the second war just finished us off.

Alan: An excellent summary. I agree with you. there are lots of factors but those are the main ones.I'm not sure either about de-empiring costs. But all investment is lost. All that money spent on railways, roads and so on.

Stephen_L: Quite true. A lot of money was spent in keeping the sterling zone alive. US dollars became reserve currency at Bretton Woods in 1944.
Pound to dollar seepage was all the rage. Did the UK retain the £ artificially high up until the 1970's? It didn't fall below $2 until 1976. How much wealth was squandered since 1945 propping up sterling?

This piece was really an addendum to your TUC/False Economy post. The expectation that if we just pay off our loans over a 50 year period, like after WW2, everything will be fine.

Do they mention any of the aid the UK has received or the soft war loans, or the soft loans of the 1950's/60's?

Anonymous said...

Where did the money go...well the mindset post-WWII was that central planning was best, the socialists took power and Britain was to have new everything, so easily robbed blind by capitalists. That's a recipe for squandering plenty!

Timbo614 said...

@BQ Thought provoking - thank you (glad it wasn't a quiz).

What you have related is surely being followed trough and repeated today. The combined cost of the Iraq and Afgan campaigns is now over 20 Billion. This is so obviously money that we in the UK can no longer afford.

Our industry whilst still surprisingly strong in some hi-tech markets is a bit of a mess with no coherent plan that I can detect (even given the Merlin agreement) for re-directing the tax incomes generated by our financial services industry to manufacturing for exports or even for domestic consumption.

The view from down here on the ground is that in general (there are of course many exceptions) our education system is turning out young people who have no grasp of the world around them, no proper grounding. Apprenticeships are a sound idea - but the tradesmen who want to take youngsters on are horrified (or I am) at the lack of fundamental abilities to reason with numbers, measurements, quantities etc. So many basic skills seem to have been lost or not realised in our modern youngsters. What has brought this about?

Loss of a coherent family life is certainly one aspect. Loss of "mothers" (male or female is irrelevant) mothers are children's anchor in life. With the advent of two working parent families mothering has been lost. Instead what we seem to have is closer to (badly) state guided mentors than parents.

With regard to our lost empire I think it's time we stepped back from it, got over ourselves a bit, the time for mourning is done. Maybe, the empire was, and still is, part of the expression of our culture - which is why we are little confused ourselves as to how to define "British culture". In the past it was expansion and conquest (not always by outright war of course) and bringing home the booty. But that defined us up until when, say, the massive cock-up of the 1st world war? or the following bank breaking 2nd?

We can't re-write history but we do need to start writing the future, like a wounded animal that sleeps and sleeps while it's body repairs itself, we should retreat from the world stage a little, we can't afford the entrance fees any more. We should sleep, rest, think and plan how build a another smarter, skilled, entrepreneurial, self-reliant Britain one that is built on the new era, no more dreaming spires.

I believe we can't do this until some, no, most, of the strangulating red tape and PC-like rules are relaxed or repealed and common sense guidelines put in their place. Brits in general like to be fair, we don't need "How to be fair rules". For those that break them both morally and actually we have a police force (sorry Service) and courts. Cameron has promised this, but again I don't see it happening yet.

Like in a poker game, the money from the past is in the pot and we are holding a busted flush.

Surely a better question is:

How do we accumulate the money, skill and attitude to stay in the game for the next hand?

With apologies for rambling.

Steven_L said...

Glad you did follow it up BQ! I've learned a lot, kind of like a potted post-war history of government debt.

Bill Quango MP said...

Timbo - A good piece you wrote that.
And none of the comments have mentioned North sea oil. Where did those Saudi style billions go?

Buts that's for another history corner.

Timbo614 said...

@BQ - Thank you.
I don't normally write such long pieces - it takes me too long! It's the thinking that hurts :(

On that note, I would like to thank you, ND and CU for a really engaging blog - many bloggers fail to respond or interact with their commenters, but here it feels like a conversation.

Until 3 years ago I was a complete numpty on this stuff, I probably still am, but understanding, of some things at least, is slowly dawning. Your blog has certainly helped my education.

Maybe I'd better stop niggling ND about renewable energy and finite oil in case he bans me :(

Please keep it up.


CityUnslicker said...

Nobody has managed to get banned here yet that I can recall.

Nick Drew said...

we thought about banning ToryBoysNGU ... but then he started agreeing with us !

where's the sport in that ??

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