The United States has always put ‘America First’ – after Brexit it will be no different
Throughout history the US has acted ruthlessly to advance its economic interests. Brexiteers should be careful what they wish for.
Among those in favour of Brexit, there is a widely held belief that a favourable trade deal can easily be negotiated with the United States. But this flies in the face of the evidence: throughout history, the US has proved to be a ruthless negotiator where its economic interests are involved.
It is not simply a matter of chlorinated chicken and expanded access by private companies to the NHS. These are but indicators of the probable effects of opening British markets to US producers which are bound to be much deeper in their impacts. Wholesale de-regulation of systems of production and distribution are bound to be demanded by the US negotiators, with massive environmental destruction and a sharp worsening of employment conditions for the British workforce.
There are lessons of history which seem only too relevant to current economic policy in the UK. The following analysis discusses issues arising from US and UK relationships at a time of real crisis – the period of the Second World War between 1940 and 1945, and its immediate aftermath.
From this period there are three related issues that yield important lessons relating to any probable set of trade negotiations subsequent to Brexit. First, the process of negotiation and effects of the agreement known as Lend Lease. Secondly, the consequences of the Tizard Mission of 1940-41 and its effects on technical leadership in new emerging areas of industrial production. Finally, British and American collaboration in the development of nuclear weapons during the war period, where recent historical research supports the view that the US was determined not to share results with the UK.
Lend Lease: its negotiation and its effects
The British economist John Maynard Keynes was central to the negotiation of the 1941 agreement with the USA known as Lend Lease, and in the process became only too aware of the underlying conflict in key objectives of the two countries. Britain by this point had suffered the colossal loss of armaments at Dunkirk and was rapidly exhausting its gold and foreign currency reserves.
At the outbreak of war in September 1939 Britain’s gold and dollar reserves were worth £519 million. But by September 1941 these had been more or less exhausted, standing only at £69 million. The UK was desperately in need of armaments and other imports and had naturally turned to the US as a potential source of support. It was only a potential source of support since the US in fact did not have much industrial capacity for the production of armaments at that time.
The Act that passed in 1941 allowed the President to make materials available to belligerents for the ‘defence of the USA’. Britain would go on paying for what it could using its own resources and the US would ask for additional supplies and ‘lend’ these to the UK. Any materials left at the end of the War would be returned to the US although this was recognised as totally unlikely. This sleight of hand by Roosevelt was a way around Congress and the Debt Default Act of 1934 which disallowed any loans to countries who were in default on their obligations, which included the UK. Further Acts of Congress during the 1930s prevented the sale of armaments and of loans to belligerents.
But it became clear that the US was only prepared to provide support under rigorous conditions. The situation was such that Keynes in March 1941 finally exploded, accusing US Secretary to the Treasury Henry Morgenthau of “stripping us of our liquid assets to the greatest extent possible before the Lend Lease Bill comes into operation...He was aiming to reduce Britain’s gold reserves to nil, treating us worse than we have ever ourselves thought it proper to treat the humblest and least responsible Balkan country”.
The aim in part was to supplant sterling as a global currency by the US dollar and to ensure that American exports had unfettered access to the markets of the British Empire from which they had largely been excluded following the introduction of Imperial Preference in 1932.
The US Government was prepared to support Britain in the war against the Germans, but its ultimate aim was to supplant the UK in the world economy. From 1940 onwards Morganthau had pressured the British Government to sell off its large US investments in companies such as Shell, Lever Brothers, insurance companies and others, as well as investments elsewhere in the world. He also pressured Britain to run down its gold and foreign currency reserves which were already more or less exhausted by 1941.
It was well understood by the US negotiators that sales of UK overseas investments would weaken the UK economy post war, but the US was totally uninterested in the impact of their demands on the British economy. A diminished Britain would in any case give the US unfettered leadership in the process of post-war reconstruction.
At the centre of this dispute with Morganthau, and a good example of the ruthlessness of US policy, was the sale of the American Viscose Corporation. The company, which was a subsidiary of the British firm Courtaulds, was the largest producer of viscose in the US. It was forcefully sold off at a knock down price of $54million in 1941 as part of the negotiations preceding Lend Lease, which was about half its real value. The purchase also carried with it access to key technologies that were extremely valuable in the medium to long term to the new owners, which initially were 152 American investment firms led by the Morgan Stanley Bank.
Courtaulds was appalled at the forced sale and the poor price it received but the company was given no choice by the Bank of England, which was managing the compulsory sales of British overseas investments.
In part because of the financial and other needs of funding the War, by 1945 the UK found itself economically exhausted. Some 55% of national output had been absorbed by the War.
In the process the UK had liquidated most of its overseas investments, in part under pressure from the US for reasons noted above. The sale of overseas assets (a total of $4billion) had helped to finance the War but this left the UK exposed when US assistance under the Lend Lease programme was terminated unilaterally and suddenly in August 1945. The UK was able to negotiate a new loan from the US in 1946 worth $3.75billion at an interest rate of 2%. This was finally repaid in full in 2006, with a total repayment cost of $7.5 billion. Welcome though the Anglo-American loan was, it wasn’t exactly a hand-out to an impoverished ally.
It is also worth noting that one of the conditions attached to the loan was the convertibility of Sterling within one year of the signing of the loan agreement. This meant that countries holding sterling balances could liquidate them at a rate of their own choosing and in doing so inevitably cause pressure on the level of UK gold and foreign currency reserves.
The UK really had no choice in the matter. It had amassed huge sterling liabilities in the conduct of the war, totalling $14 billion, to meet critical import needs and in overseas military expenditures. The balances had been blocked since there was no way the UK could in the post-war period of readjustment meet their repayment. But the US insisted on sterling convertibility and the inevitable happened. There was a massive rundown of sterling debts as these were cashed and with immense pressure on the UK balance of payments. The result was a sterling crisis and the devaluation of the pound in 1948 from $4.02 to $2.80. This change in the exchange rate was directly caused by the US demand for convertibility of sterling at a time of severe economic conditions and post-war adjustment in the UK.
What about Lend Lease itself? As we have noted above the US still expected the UK to use its own financial resources to fund purchases of materiels including the disposal of overseas investments which were more or less eliminated during the War. These arrangements and additional restrictions relating to re-exports remained in place even after the US entered the War, and continued to be a source of dissent between the UK and the USA. In paying for the War the UK accumulated external deficits of around $40 billion, of which $22 billion was covered by Lend Lease. The rest was accounted for by sterling balances and sales of foreign investments. Without the Lend Lease system, the UK would have either had fewer resources to support the War or would have accumulated even greater levels of external debt.
As it was, the post-war adjustment of the British economy was bedevilled by the management of debts and persistent balance of payments crises.
The Tizard Mission to the USA
In September 1940, at the height of the Battle of Britain, the scientist Henry Tizard embarked on a mission to the USA with the support of Winston Churchill. It was Tizard’s second visit to Washington – after returning from his first visit he had set about collecting information on key technical innovations with a military potential.
It was evident that many of these innovative developments were beyond the capacity of the UK to develop, and it was hoped that collaboration with the US would lead to mutually positive outcomes. The Mission, which included the nuclear scientist John Cockroft, took the information on these scientific innovations to the US for discussions with other scientists and US officials.
The importance of the Mission was captured by James Baxter, the official historian of the US Office of Research and Development, who wrote: “When the members of the Tizard Mission brought one cavity magnetron to America in 1940 they carried the most valuable cargo ever brought to our shores.”
At this stage the UK clearly led the US in the development of radar, which became a key innovation in winning the War. Central to radar was the cavity magnetron, and the British delegation’s use of this amazed their US collaborators. Its exploitation became a key element in the growth of the Bell Company and the MIT Radiation Laboratory, and ultimately became critical in the development of the electronics sector in the US.
The Mission’s ‘cargo’ also included plans for the Whittle jet engine, which was vastly more advanced than the US development at the time. It became the basis for the development of jet engine technology by the General Electric Company. Both of these technologies were, important for winning the War, and became sources of great commercial benefit to US companies especially post war.
The Mission also brought detailed technical information in other areas to the US including rockets and plastic explosives. Importantly, it included the Frisch-Peierls memo which set out the scientific feasibility of nuclear weapons.
While the UK was hoping for joint development of these technical innovations, in reality most of the benefits accrued to the US. Although Britain sought access to some US innovations, notably the Nordern bombsight, the US Government refused to make it available.
It is widely believed that the US and the UK collaborated closely in the development of nuclear fission between the US and the UK post-1940. This is certainly the impression left by Margaret Gowing, the official historian of nuclear development in the UK.
However, interpreting the depth of collaboration at both the governmental and scientific levels in developing the atomic bomb is complex. Close analysis leads to the conclusion that the US intended to retain a monopoly of knowledge on nuclear fission. The US had no intention of developing a joint wartime programme, but was perfectly happy to collaborate at the scientific level and to draw down scientific knowledge. This is the case despite the particular contribution of British scientists to the Manhattan Project.
Throughout the 1930s there was a great deal of scientific research into nuclear fission across many countries. In 1940 the US had no special lead over anyone else. There was important work going on at the Lawrence Berkeley Laboratory in the US, and the world scientific community engaged in the dissemination of theories and the discussion of progress as normal.
A crucial step was made in 1940 when two emigre scientists working in Birmingham, England, demonstrated theoretically that nuclear fission was feasible. This is the famous Frisch-Peierls memo that was also part of the scientific knowledge given to the US by the Tizard mission.
Several conclusions seem to follow from the above experience of wartime collaboration. While there seems to have been reasonably open collaboration at the level of scientists, there was much less at the level of government. The US was perfectly happy drawing down scientific skills but had no intention of creating a joint atomic wartime programme. This was made perfectly clear in a communication sent by Roosevelt to Churchill on 11 October 1940, which offered discussions but nothing more. Nuclear collaboration is thus another area where the US pursued its own interests and was determined to own as far as possible the science and technology underpinning the production and use of atomic weapons. Being a close wartime ally did not matter.
The above examples cover a complex set of issues and relate to a specific historical period. But the historical evidence shows that where there are one-sided relationships, with one partner much stronger than the other, the outcome is often exploitative and unbalanced.
Brexiteers should therefore be careful for what they wish for. Our future is likely to be much more secure as part of the EU than it would be in a putative trade relationship with the US.
If US negotiators were ruthless under the leadership of Franklin D. Roosevelt, a Democrat New Dealer, imagine what they will be like under the instruction of Donald Trump’s ‘America First’ agenda?
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