Early in the Second World War the Treasury recognised that the postwar balance of payments would be difficult, but just how difficult emerged in memoranda during 1944 and 1945 (Pressnell 1986; Cairncross 1985: chs 1, 4-5). There was a huge current account deficit, with exports in 1945 at only 30 per cent of the 1938 level and imports 60 per cent; the export industries and Britain’s traditional invisible earning capacity had been disrupted by war (Chapter 8). In 1945 the Treasury expected a transitional period of between three and five years before the export industries recovered fully, during which the current account would have gone £1.25 billion further into the red. On capital account, the position was even worse. More than a quarter of Britain’s prewar foreign investments had been sold and very large debts had been incurred. In 1938, the sterling balances (debts to sterling area countries) had been roughly equivalent to the gold and dollar reserves at £500 million. In 1945, the sterling balances stood at approximately £3.5 billion but the reserves were just over £600 million (Cairncross 1992:47). Keynes (1979:410) described the position as a ‘financial Dunkirk’.
The drastic balance of payments position left the postwar government with few real choices (Tomlinson 1991). It had to retain controls over imports and dealings in foreign exchange and needed measures to boost exports. Britain would have to borrow to cover the deficit on current account during the transitional period. The only country with funds available was the USA, and the Attlee government sent a team led by Keynes and Lord Halifax to Washington in autumn 1945 to seek financial assistance. The British delegation hoped for a grant (rather than an interest-bearing loan) to cover the entire £1.25 billion ($5 billion at 1945 exchange rates) projected current account deficit for the transition period (Bullen and Pelly 1986; Pressnell 1986).
The US government wanted to treat its former wartime ally fairly but