When Americans think of the effect of World War II on Britain we are apt to think in terms of bomb damage and ships sunk. Certainly these were important parts of a generally disastrous picture, but the whole is much more impressive than the parts.
The inability to continue industrial maintenance and make replacements under the hammer of war, shipping losses, and bomb damage ran down the British economy by about £3,000,000,000. At the present rate of exchange this amounts to $8,400,000,000. The present cost of rebuilding ships and houses and factories is, of course, infinitely higher due to the upswing in labor costs and material prices since 1945.
This loss was accompanied by a drastic change in Britain's world trading position. To begin with, she lost almost all her overseas assets—those investments which had cushioned the shock of the falling export market and whose income had largely paid for imports. The terrible appetite of war—a ship torpedoed, a division lost, a factory bombed—devoured them. Over £1,000,000,000 worth of overseas investments ($2,800,000,000 at the current rate of exchange) were sold to pay for war supplies. Of this amount, £428,000,000 (about $1,198,400,000) represented investments in the United States and Canada.
Yet even this expenditure of the carefully husbanded investments, the results of thrift and financial foresight, did not suffice to pay for nearly six years of war. Britain also accumulated overseas debts to the amount of £3,000,000,000, or, at current rates of exchange, $8,400,000,000. When the money was borrowed, the pound sterling was pegged at $4.03 and the dollar equivalent of the external debt was closer to $12,000,000,000.
The emphasis on armaments and the priority given arms-producing industries, the arrears of industrial maintenance and replacement, the concentration of manpower in the services and industries of national importance for the winning of the war, and the shortage of shipping all reduced Britain's export trade during the war years. By 1944 exports had fallen to less than one third of their 1938 volume.
This meant that, in some cases, nations whose economy had been less strained by the war were replacing British sellers in these markets. In other instances, nations long dependent on British exports began to make their own products. When the British were prepared to return to normal export trade, the markets were not so extensive as they had been before the war.
The war affected Britain's financial position in two other respects. At its end the real value of the gold and dollar reserves of the nation had been reduced to about one half of the pre-war level. But the physical destruction of the war had increased Britain's dependence, and that of other sterling-area nations and other countries, upon supplies of all kinds from the United States. Yet the dollar earnings by these countries were not enough to pay for their supplies.
Finally, and perhaps most important from the standpoint of a country that must live by trade, the terms of trade changed. The price of raw materials imported into Britain rose sharply after the war. By 1948 about 20 per cent more goods had to be exported than in 1938 to pay for the same amount of imports.