By Max Harris
In 2014, during the centenary of the First World War, Her Majesty’s Treasury announced that Britain would repay its outstanding debts from that tragic conflict. The Allies had long since defeated the Kaiser, but Britain was still spending millions of pounds in interest every year on those age-old borrowings. Repaying (more accurately, refinancing) the remaining debt would not only strengthen the fisc but also, officials hoped, demonstrate London’s credibility. “This is a moment for Britain to be proud of,” Chancellor of the Exchequer George Osborne declared. “We can, at last, pay off the debts Britain incurred to fight the First World War.”
This feel-good story had only one problem: it was not true. Yes, the government was planning to redeem the outstanding domestic debt from the war, but it completely ignored Britain’s external debt to the United States. Britain had borrowed heavily from the U.S. government to equip its troops and feed its people, ultimately owing some four billion dollars. After years of frustrating negotiations on the interrelated issues of war debts and reparations, London stopped servicing this debt in 1934. But, as David James Gill explains in his enlightening new book, The Long Shadow of Default, London never repudiated it. And while Washington has not made any effort to collect for decades, it has never forgiven the debt. Indeed, the U.S. Treasury keeps a running tally as interest accumulates, the most recent public release showing a total due of $16,669,221,062. Osborne’s elision notwithstanding, the book for Britain’s war debt is by no means closed.
To be sure, it is a bit surprising that this debt still exists—after all, Britain and America fought another world war together, the latter lent again to the former, the former repaid those borrowings to the latter, and both speak frequently of their special relationship. Indeed, this reader simply assumed that officials had resolved the matter long ago. But, as Gill shows in his deeply researched book, far from being sorted, the war debts have hung over Anglo-American relations for decades.
To understand why, one must first navigate through the interwar thicket of war debts and reparations. Suffice to say that after the First World War, many countries were in debt to the United States, and many countries (though not the United States) had claims on German reparations. Britain made payments on its war loans into the early 1930s, but it questioned the debt’s legitimacy. Morally, the British believed they had repaid the debt many times over in the blood of its soldiers. Economically, they thought the vast web of intergovernmental claims was holding back recovery from the Great Depression. London joined other powers in calling for cancellation of reparations and debts. Washington, however, refused to countenance any connection between the two and insisted on full repayment—as President Calvin Coolidge once huffed, “They hired the money, didn’t they?”
After European powers effectively ended reparations at the 1932 Lausanne Conference, many countries stopped servicing their war debts, despite American objections. Yet Whitehall continued to make partial (token) payments for some time. Gill reconstructs the decision-making process, arguing that London feared outright default would set off a cascade of repudiation among countries in debt to it. Two years later, however, Washington forced London’s hand by essentially forbidding token payments. Confronted with the choice between resuming full payment or joining the many countries that had defaulted without much apparent cost, London took the plunge.
Despite prophecies of doom, Britain’s default caused little immediate consequence: “not a dog has barked,” noted Chancellor of the Exchequer Neville Chamberlain. The economy did not seem to suffer, and there was no wave of repudiation. But the default did strain Anglo-American relations. In the ensuing years, it was like a “grumbling appendix,” as one Foreign Office cable read. Not only did the United States continue to call for repayment, but, Gill demonstrates, the unpaid debt emboldened isolationists in Washington and complicated financial assistance in the run up to, during, and after the Second World War. Congress forbade Americans from purchasing bonds of governments in default. Senators denounced the British as untrustworthy. Successive Neutrality Acts severely constrained President Franklin Roosevelt’s room to assist Britain and France prepare for and fight a war against Germany. Necessity being the mother of invention, the Roosevelt administration eventually devised Lend Lease as a means to support the Allies without directly lending funds. While assistance arrived far later than Britain had hoped and only after it was essentially broke, American aid was thus on far more generous terms than during the previous war.
Even in victory, officials and politicians did not forget Britain’s default, and Gill argues that these memories influenced the swift termination of Lend Lease in 1945 and the hard bargaining around the Anglo-American Loan in 1946. It is, of course, difficult to isolate the effect of default on the terms of the 1946 loan—in the absence of default, would isolationists have pressured the administration any differently?—but Gill convincingly shows that the matter was at the least a common reference point. He goes on to trace the “enduring relevance” of the war debts in subsequent decades, adducing, for instance, a 1973 Congressional resolution calling for the administration to pursue repayment and the U.S. Treasury’s decision in the 1990s, for accounting purposes, to consider the debts payable rather than delinquent. These later events are fascinating, but given their sporadic nature, Gill perhaps overvalues their significance. The shadow of default seems to be quite faint after the 1940s.
Britain’s war debt will likely remain an open issue for the foreseeable future, stuck, according to Gill, in a “political limbo.” Even as this debt episode fades from view, there are sure to be new ones in the future. The economic strains from the pandemic have brought many emerging market countries to the breaking point, risking a wave of sovereign defaults on private and official debt. And now, with war on the European continent, the issue of financing the fight for freedom is once again live. As the West supports Ukraine, policymakers must decide in what form to provide this assistance. While political dynamics often favor loans over grants, the interwar experience suggests that saddling Ukraine with debt may create a host of problems in the future. The international community should thus focus on providing grants. After all, Ukraine is fighting for its people, its sovereignty, and the international order; it should not soon have to fight with its creditors as well.
Max Harris is Senior Fellow at the Wharton Initiative on Financial Policy and Regulation.