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Given the immense stretch of the sterling area and the Empire it isn't immediately obvious why Britain became so quickly and utterly dependent on the United States. From early on Britain was buying large quantities of manufactured goods from the US, indicating that it's own productive capacity was inadequate for fighting the war it had declared. At the same time it was importing raw materials and foodstuffs from the Empire while its own exports were reduced dramatically. Skidelsky's biography of Keynes, p.134, (1) has a table showing Britain's reserves (gold and US and Canadian dollars) declining from £545 million in December 1939, to £70 million in March 1941. The contrast with the US and Germany was dramatic. Was one of the reasons that both the US and Germany, unlike the UK, had invested in large job creation schemes through the 1930s?

(1)  Robert Skidelsky: John Maynard Keynes, Fighting for Britain, 1937-1946, Macmillan 2000. This is the main source for the present article.

The German policy will be looked at shortly. In the US the 'New Deal' had been supported by government spending on an unprecedented scale which in turn had been backed by a massive accumulation of gold, a policy reminiscent of the German policy at the beginning of the First World War, discussed in the first article in this series. Morgenthau and Roosevelt launched a policy of compulsory purchase of gold. All gold holdings worth more than $100 had to be sold to the government at the then going rate which the government then increased dramatically, thus devaluing the paper currency while still accumulating large stocks of what could be called the hard value of gold. 

Prior to the 1930s the US had been largely self sufficient, able within its own economy to absorb its enormous economic power both in manufacturing and in agriculture. It wasn't thinking so much in terms of international trade. Indeed one of the first reactions to the 1929 financial crash was, in 1930, to impose the heavy 'Smoot Hawley' tariff on imports. It may be, however, that one of the causes of the crash was that the productive capacity was outgrowing the consumption capacity of the domestic economy. As the thirties progressed, and with the government supported reflation of US industry, Roosevelt and Morgenthau wanted a greater emphasis on exports and this ran up against the protectionist policy being pursued by Britain throughout the Empire and the sterling area (in which sterling had to be used in all international transactions). Britain had further offended by its own devaluation when it went off the gold standard in 1932, breaking the terms on which substantial loans had been negotiated with the New York Fed and the Banque de France, and defaulting on its First World War debt in 1934. The result in the US was a raft of legislation passed by Congress through the 1930s against supplying countries at war, legislation Roosevelt had to overcome when the golden opportunity provided by Britain's new state of dependence on the US was presented to him. 

In November 1939 the Neutrality Acts were amended by 'cash and carry' legislation devised by the financier Bernard Baruch, a key figure in the organisation of the US economy during and just after the First World War. This was a purely commercial arrangement in which all supplies had to be paid for immediately and carried in British ships. When the British fled from Europe in June 1940 they left behind an enormous amount of military material which had to be replaced. In November 1940 the British ambassador, Lord Lothian, arriving at La Guardia airport, said to the assembled press corps: 'Well boys, Britain's broke. It's your money we want.' According to Skidelsky (p.96) Britain 'needed to order more supplies than ever before, as well as more ships to carry them in because Germany's submarines were sinking so many. And American exporters were insisting on higher advance payments, which reflected "doubts about [Britain's] ability to pay all the bills she was running up" [quote from anther historian - PB]. Britain lost $668m (£167m) in the third quarter of 1940. At this rate it would be virtually out of gold and dollars by the end of the year.' He quotes Lothian referring to 'the fundamental question ... whether the [US] policy is to ... help Britain within the limits of the Neutrality Act but acquiesce in [its] defeat if these half measures do not suffice, or to adopt the policy in America's own interest that it is going to see Great Britain is not defeated whatever it may cost ...'

If the American's were anxious to see that Great Britain wasn't defeated it wasn't so much out of affection for Britain as hostility to Germany. Skidelsky again (p.99): 

'he [Morgenthau] was not so much pro-British as Germanophobe. With America neutral, Britain was the reed that had to be supported, faute de mieux, despite the inaptness of imperial Britain as a champion of freedom. Morgenthau also shared the New Deal suspicion of international finance. His aim was to shift financial power from New York and London to Washington. The dollar would become the instrument of a global "New Deal". At the same time, his lack of financial expertise made him dependent on a small group of trusted technicians. Gradually, Feis writes, Morgenthau became "more and more influenced by the viciously assertive staff assembled around him, led by Harry White. They used him, and he used them. . . ," (2) He would support Britain in the war against Germany, but not to preserve Britain’s world position. The United States, not Britain, would be the leader of the postwar free world, the dollar would replace the pound as the world’s leading currency. He would do all he could to help Britain, but as a satellite, not as an ally.

'In 1940 he started putting pressure on the British to sell off their big American companies - Shell Oil, Lever Brothers and Brown & Williamson Tobacco. The Secretary, writes his biographer John Morton Blum, "recognised that the loss of [Britain’s overseas] investments would cripple the British economy after the war, but he maintained that England could not afford to worry about this in 1940". (3) For the first time in its history, Britain found itself a suppliant for means-tested benefits, with Morgenthau running the benefit office. Little wonder he was cast as the villain in Keynes’s, and London’s, eyes.'

(2) Reference to Herbert Feis: 1933: Characters in Crisis, Boston/Toronto, Little, Brown, 1966, p.107.

(3) Reference to J.Morton Blum (ed): From the Morgenthau Diaries, Vol ii: Years of urgency, 1938-41, Boston, Houghton Mifflin, 1965, p.171.

Keynes (Skidelsky p.103) was to complain in March that Morgenthau 'was aiming to reduce Britain's gold reserves to nil, "treat[ing] us worse that we have ever ourselves thought it proper to treat the humblest and least responsible Balkan country."'

White and Morgenthau were both Jewish - as of course was Bernard Baruch - but regardless of any feelings they might have had as Jews a Fascist Europe would probably be striving for self sufficiency and would not be open to penetration by the newly expansionist US, and there was no reason to believe that Britain making a deal with Germany would bring the protectionist Empire, or even the sterling area, to an end. Hitler would certainly have argued that it was the best way of preserving them and we may easily imagine that that would have been the argument the very pro-British Rudolf Hess brought with him when he made his ill fated attempt at peace negotiations in May 1941 (originally planned in November 1940). (4)

(4) Albert Speer: Inside the Third Reich, New York, Avon, 1971, p.241, has Hess telling him in Spandau that his proposal was: 'We will guarantee England her empire; in return she will give us a free hand in Europe.'