The United Kingdom emerged from the Second World War in what seemed, in comparison with most of her continental neighbours, to be a relatively favourable position. In 1946 industrial production was as high as at any time before the war and rising quite fast. By the end of the year exports had regained their pre-war level. There was little unemployment and retail prices were relatively stable. All this contrasted strongly with the situation in France, Germany, and Italy.
Yet appearances were deceptive. The British economy was overloaded from the start and faced with acute balance of payments difficulties. From being an investor in foreign securities on an unprecedented scale, with nearly one-third of her wealth overseas, the United Kingdom had become the largest external debtor in history. The net change on capital account during the war had amounted to $20 billion and was equal to the amount that the USSR sought in reparations from Germany. It completely offset the net addition to domestic assets since 1914, leaving the country no richer than thirty years earlier.
Since most of the debts contracted in wartime were short term, they represented a continuing overhang of liquid liabilities with damaging consequences in postwar years in the form of an abundance of sterling not in firm hands and threatening a flight from the pound. This limited the freedom of action of the government and contributed to that jerkiness of postwar growth that came to be labelled 'stop-go'. The loss of income from foreign investments and shipping earnings, which had paid for 35 per cent of prewar imports, also added to Britain's balance of payments difficulties, and these were intensified by a sharp rise in the cost of imports in relation to the prices obtained for exports and by a large continuing outflow on military account as the United Kingdom undertook world-wide defence responsibilities in highly unsettled conditions.
The weakness of the postwar balance of payments had three important consequences for policy-makers. It was difficult to reconcile with the effort