1939–1945: the Second World War

After war broke out between Britain and Germany in September, Britain imposed exchange controls. The British Government also decided to sell its gold reserves and dollar reserves to pay for munitions, raw materials and industrial equipment from American factories. By the third quarter of 1940 the volume of British exports was down 37% compared to 1935. Although the British Government had committed itself to nearly $10,000 millions of orders from America, Britain's gold and dollar reserves were near exhaustion. The American Government decided to prop up Britain as it neared bankruptcy, so on 10 January 1941 they produced a Bill entitled an "Act to promote the defense of the United States" (its number, H.R. 1776, was the year of American independence) which was put before the United States Congress and which was enacted on 11 March 1941. This Act became known as Lend-Lease, whereby America would lend Britain equipment which she would pay for once the war had finished. One month later British gold and dollar reserves had dwindled to their lowest ever point, $12 million. Under this new agreement with the American Government, Britain agreed not to export any articles which contained Lend-Lease material or to export any goods—even if British-made—which were similar to Lend-Lease goods. American sent officials to Britain to police these requirements. By 1944 British exports had gone down to 31% from 1938. Lend-Lease created problems in reviving Britain's exports after the war.


1945–1959: the post-War era

It has been suggested that this section be split into a new article entitled Modern economic history of Britain. After World War II, the British economy had again lost huge amounts of absolute wealth. Her economy was driven entirely for the needs of war and took some time to be reorganised for peaceful production. Anticipating the end of the conflict, the United States had negotiated throughout the war to liberalise post-war trade and the international flow of capital in order to break into markets which had previously been closed to it, including the British Empire's Pound Sterling bloc. This was to be realised through the Atlantic Charter of 1941, through the establishment of the Bretton Woods system in 1944, and through the new economic power that the US was able to exert due to the weakened British economy.

Immediately after the war had ended, the USA halted Lend-Lease. This had been fundamental to the sustainability of the British economy during the war and it was expected by the British that it would continue during the period of transition. Instead, the Labour Government under Clement Attlee sent John Maynard Keynes to negotiate a loan, known as the Washington Loan Agreement in December 1945. The terms of this were not as favourable as the British had hoped for and included crucially a convertibility clause, in line with the US policy of liberalisation. In this, the USA expected that within two years, the British currency would become fully convertible.

The winter of 1946–1947 proved to be very harsh curtailing production and leading to shortages of coal which again affected the economy so that by August 1947 when convertibility was due to begin, the economy was not as strong as it needed to be. When the Labour Government enacted convertibility, there was a run on Sterling, meaning that Sterling was being traded in for dollars, seen as the new, more powerful and stable currency in the world. This damaged the British economy and within weeks it was stopped. By 1949, the British pound was over valued and had to be devalued though this is often considered a measure of last resort for Governments.

The Labour Governments of 1945–1951 enacted a political programme rooted in collectivism including the nationalisation of industries and state direction of the economy. Both wars had demonstrated the possible benefits of greater state involvement. This underlined the future direction of the post-war economy, and was supported in the main by the Conservatives. However, the initial hopes for nationalisation were not fulfilled and more nuanced understandings of economic management emerged, such as state direction, rather than state ownership. Throughout though, the basis remained the same: applying the economic theories of Keynes and continued state involvement.

Two world wars had taken their toll on the Empire. Decolonisation began with Indian independence in 1947. For many countries formerly part of the Empire, they argued that, in effect, they had won their independence by fighting for Britain during the two wars. However, British power was already shown to be weakened as it became impossible to resist the tide of self determination which ensued. What began under the Labour Government of 1945–1951 was continued under the Conservatives from 1951–1964 with the exception of the Suez Crisis of 1956. After Suez, the Conservatives made it a central feature of their foreign policy rhetoric with Harold Macmillan's Winds of Change speech.

The loss of Empire and the material losses incurred through two world wars had affected the basis of Britain’s economy. First, its traditional markets were changing as Commonwealth countries made bilateral trade arrangements with local or regional powers. Second, the initial gains Britain made in the world economy were in relative decline as those countries whose infrastructure was seriously damaged by war repaired these and reclaimed a stake in world markets. Third, the British economy changed structure shifting towards a service sector economy from its manufacturing and industrial origins leaving some regions economically depressed. Finally, part of consensus politics meant support of the Welfare State and of a world role for Britain; both of these needed funding through taxes and needed a buoyant economy in order to provide the taxes.