The reasons: The control of Imports, Exports, Credit, Inflation

Start by briefly considering the British economic position at the end of the war. The war was expensive, government debt was high. Domestic debt was high but could be dealt with safely, foreign debt was even more crucial. Britain had ran significant trade imbalances from countries within and without the Sterling areas since the very late 30s during the rapid increase in rearmament after the Munich crisis. Trade imbalances within the Sterling area (Dominions and India for example) were basically held as debt and there was a lot of it. Imbalances outside the Sterling area needed to be settled through the transfer of foreign currency or gold. Simply Britain had ridden up a lot of debt, sold their assets and securities, run down their foreign currency (especially dollar!) and used most of their gold. Enter Lend Lease…Lend lease had enabled Britain to do several things. A) ignore the pressing demands to export to balance imports, b) To commit a far greater proportion of its industries to produce war material. and to specialise and rationalise its imports and productions. C) Temporarily ignore dollars and their lack of them. Basically as the US were in the short term “giving” Britain materials it made sense for Britain to slowly stop buying and selling things from other countries. Some historians such as RAC Parker, Corelli Barnett and George Peden view US policy through Cash&Carry to Lend Lease as a systematic attempt to strip Britain of its economic strength and to peacefully replace it as the sole economic superpower.

Regardless of US malicious intent or otherwise, the war ends and Lend lease stops abruptly and other governments would like their debts settled (or at least negotiated and accounted for). Britain’s economy was mostly geared towards the production of war materials using “free” (it wasn’t – it all had to be paid back) US raw materials. It had limited remaining cash, gold or credit. There was a sudden cashflow crisis and the new British government had to seek an enormous US government-government loan in order to secure the dollars to start importing the products it had just had frozen via Lend Lease. At a similar period the British also sought to minimise and renegotiate their debts with India and other Dominions. The whole period is described by some as a “Dollar Crisis”.

So while not in anyway Bankrupt, the British government had a huge short term problem that might spiral out of control. Short term it needed Dollars, credit and debt restructuring. Medium term it needed to promote exports in order to start clearing trade imbalances and allow the imports they needed and to try and “win” back markets entirely lost to the US. The other side of this coin is it needed to control the extent of already massive imports. In the longterm it needed to slowly reconfigure its economy back to something more suitable for peacetime, while undertaking significant domestic reforms of social spending. Doing all of this in a way that did not knock something out of alignment and cause further problems. They needed to do it in a way that retained confidence in the Pound and for credit.

Now lets think briefly of rationing. In general I think people get the wrong end of the stick when considering British wartime rationing. In part I suspect this comes via the general cultural led approach to remembering rationing. Its all “thrift” and “dig for victory”. That is not to downplay its importance to peoples lives or the way it is analysed in history, but It does tend to distort its image and purpose. I think the dwelling on food as the commodity rationed doesn’t help either. When people tend to think of rationing, I think they think of allocating (rationing) the supply of scarce things, like shortages after a natural disaster in order to be fair. But that clearly does not apply to wartime Britain. Shipping blockages aside, anything could be supplied if it was wanted enough. What British rationing was intended to do was rationing the demand. This sounds like a small difference but its massive. Rationing is a really powerful way for a government to control the economy in a way they would not normally be able to get away with. In wartime by controlling demand of just, for example, one commodity a government can help to moderate prices and wages, nudge labour use, nudge allocation of transport and power use, reduce imports, reduce the outflow of cash or accumulation of foreign debt, and promote savings and therefore availability of domestic credit. Theoretically, if done thoroughly and correctly, rationing of consumer demand might do enough to control imports, shipping, currency and labour that controls of those things might not be needed. In fact Britain put in place lots of controls on those as well.

In wartime those nudges and controls were aimed at maximising war effort. In the financially chaotic first years of peace, they were aimed at controlling imports and maximising exports as well as controlling any scary changes in prices and wages.

Lets use a hypothetical family/couple. By 1946 they might be the wealthiest they have ever been. They might have had 2 incomes since the start of the war, where before only the man worked. On top of that, the skilled man had actually received several wage increases to entice him to more war beneficial work, and both had plenty of overtime. Rationing had been in effect, so there was relatively little to spend their money on, so it all went into the bank or war bonds. Either way it was available for government credit. Now its peace and they desperately want to splurge. “Lets treat ourselves to a steak on Friday and some lamb on Sunday, we can afford it and we havnt had any in years, don’t forget those bananas! (after the romantic Friday night meal) Lets have a baby! We will need a new cot and a little wardrobe. I will need some maternity clothes. We could even buy a car!”

Those items will probably need imports. Cloth from India, wood from Scandinavia, and metals from the US, beef from South America and Lamb from Australia. What’s more those manufacturers are importing materials for a domestic market. There could be a domestic consumption boom, wages and prices go nuts. Those manufacturers don’t feel any pressure to sell clothes to the US, cars to South America and furniture to Europe. Normally this wouldn’t be so bad. A domestic spending boom worked well for the US post war. But the difference is that Britain is desperate to reduce foreign spending, boost exports, and to find easy credit to dig themselves out of their hole.

However, by controlling domestic demand for consumer products a government can try and assist all of that. Businesses are incentivised to produce manufactures for exports. Britain’s new agricultural sector can now start exporting back to Europe. Domestic spending is controlled and untoward inflation is managed. Domestic savings can be ploughed safely back into government credit to fund slum clearances, social housing and an NHS. Precious foreign currency, especially dollars, instead of being spaffed on every possible domestic consumer demand, can be carefully controlled to purchase only the most critical imports of fuels and raw materials.

I think its also worth considering that at this point rationing itself was accepted and people and government were now good at it. State controls over large parts of the economy were something that some people had grown accustomed to. There were arguments for the complete removing of domestic controls and allowing the financial chaos that might ensue to rectify itself along market lines. But the new Labour government, elected in part in its belief for maintaining standards of living for the poorest and pursuing radical social spending was unlikely to risk it. Possibly a democratic socialist government like Labour who were planning nationalisation and other forms of planned economy during peace were perhaps more inclined to see how further rationing worked during peace. As it did allow for greater fairness in consumer good supply. But that is complete speculation on my part. In the end it became deeply unpopular and more dysfunctional over time.

Basically rationing was continued and actually increased because the government felt that the financial situation of the country continued to require tight economic controls in order to get back on track. Foreign spending needed to be controlled and exports promoted in order to balance trade, pay off debts and generally make it appear that Britain was back functioning normally again. I think I will end with a couple of telling quotes from the classic Sidney Pollard:

On the driver for exports and the trade imbalance “To meet at the same time the need for repaying the sterling debt and of rebuilding the reserves of gold, dollars and investments…it was estimated that exports would need to reach 175% of pre war levels.”

On the rationale for continued rationing: “ a consequence of the shattering of productive capacity in the war without the parallel reduction either in peoples expected real income or in their monetary resources”. People had more money than things that could realistically be bought without spiralling inflation and imports while suppressing export drives.