By Krish Thacker
In 1920, Britain had one of the biggest empires in history. Ranging from Canada all the way to Australia, the British Empire covered nearly ¼ of the world's land. With its strong military, industrialized economy, and robust intelligence, Britain ruled the world, establishing itself as the global superpower of that era. However, fast-forward to the mid-20th century, and Britain had lost most of its empire, supremacy, and influence. Its economy was in shambles, and it had to rely heavily on American loans just to survive. But how did Britain get into this situation? What drained its economy so much? And why did it suffer more economically than any of its allied counterparts? The answer lies in the two biggest wars in history, events that didn't cripple the empire militarily, but economically.
While everyone points to World War II for its collapse, the bleeding would really start during the first world war. Before the war, Britain was the largest creditor nation, the pound was the supreme currency, and Britain owned massive financial assets which it stored in the most powerful banks in the world. But when the war hit, Britain had to entirely mobilize its economy to support the war effort. In fact, the net cost of the war to the British government was estimated at about 6.7 billion pounds by March 1919. This made up a significant proportion of Britain's GDP, which led Britain to take several actions to finance this war. This would include suspending the gold standard, issuing war bonds, and heavily borrowing loans from the U.S. While Britain would eventually win the war and even expand its empire, the war would leave it in huge amounts of debt, especially to the United States. In just a few years, Britain would go from the largest creditor nation to a major debtor.
While World War I would put a strain on the British Empire, World War II would nearly destroy it. By the time of the war's beginnings in 1939, Britain already had been dealing with the economic harms of the Great Depression and debts from World War I. Britain again had to mobilize its industrial economy on a much larger scale than in the previous war.
Britain's most important expense was its military. Britain had to fund aircraft, bombers, warships, naval vessels, tanks, artillery, and communication technologies. They also had to pay their soldiers and armed forces in order to supply their air force and Royal Navy. Overall, military spending accounted for a huge portion of Britain's war funding.
Another thing Britain had to do was import food and natural resources. As an island nation historically, Britain never had much access to important natural resources such as oil or rubber. This problem is often credited as one reason for why Britain involved itself in colonialism, in which Britain extracted natural resources from overseas territories and exported them back home. However, the process of extraction, overseas shipping, and manufacturing is very costly. In a war like World War II, this would be put on an even larger scale as every resource was necessary to power the British war machine. In this case, oil was imported to fuel ships and tanks, steel and iron were used to build weapons, rubber was used for tires, and food was imported to supply soldiers. Ultimately, these imports took up a significant amount of Britain's wartime expenditures.
Britain's own infrastructure also suffered enormously. During the Blitz, German bombers destroyed factories, railroads, ports, and hundreds of thousands of homes. Cities such as London suffered enormous damage with many buildings reduced to rubble. In order to rebuild, the government had to spend billions of dollars repairing factories, transportation networks, military equipment, and homes for civilians. Reconstruction would last all throughout the war and far beyond it, creating additional pressure on an already unstable economy.
But where Britain's economy would soon suffer enormously would be through heavy borrowing during the war, particularly from the United States. Although Britain had exhausted much of its gold reserves, it still heavily depended on the United States for financial assistance during the war. In order to prevent total economic collapse during the war, the United States would pass the Lend-Lease Act, which allowed Britain and other allies to receive military supplies, equipment, raw materials, and food without payment immediately. Britain would go on to receive about 31.4 billion dollars worth of aid during the war, which represented more than 60% of the program's roughly 50 billion dollar total. While this would help Britain fight the Axis powers, it would soon come to illustrate that Britain was completely dependent on the United States financially. At the end of the program in 1945, Britain suddenly lost access to new Lend-Lease supplies and had very little money to pay for imports from the United States. As a result, Britain would take out a 3.75 billion dollar loan in 1946, just to keep the country afloat and save it from collapse. However, this loan would be a caveat to the disintegration of the British Empire.
By the time the Axis had surrendered and the war had come to an end, Britain was exhausted. Its national debt had risen to over 250% of its GDP. It could barely support itself, and supporting a grand empire globally would be practically impossible. They just didn't have the money, the resources, and the willpower to keep their colonies. So one by one, British colonies gained independence. The first domino to fall was British India, the crown jewel of the British Empire. With a destroyed economy, growing nationalism, and international pressure for decolonization, Britain granted the independence of India on August 15th, 1947. Soon others followed. British colonies in the Middle East and Africa would soon start gaining independence. By 1960, much of the British Empire had disappeared. The greatest empire in history had fallen.
But now begs the question? Why did Britain suffer more than many other nations? One could argue that they too became one of the biggest losers of the war. Their two allies, the US and the Soviet Union, became global superpowers. Even nations like Germany and Japan had their economies rebuilt. But Britain lost most of its empire. So why was this?
Let's start with the USA. Unlike Britain, the US experienced an economic boom during the war, effectively ending the Great Depression. A big reason for this is because they largely suffered no damage to their infrastructure on the US mainland. Factories, railroads, and cities stayed intact, meaning the war hadn’t provided any economic damage back home. Another reason is that the US was among the greatest suppliers during the war. It supplied goods, weapons, equipment, and food to its allies and other countries fighting the Axis, including through Lend-Lease. This managed to make the USA very wealthy and contribute to the postwar boom. The USA had not just emerged victorious, but now boasted the number one economy in the world with the most global influence.
The Soviet Union, however, is not so simple. While the Soviet Union emerged victorious after a grueling war against the Germans, it suffered enormous losses. Around 27 million of its people perished during the war, the most of any country. Cities were left in rubble, infrastructure was destroyed, and millions more were displaced. However, it didn't suffer the same financial consequences as Britain. This is largely because, unlike Britain, the Soviet Union did not need to finance this war through borrowing from other countries on the same scale. Instead, it used a centrally planned and government-controlled economy to direct all resources toward the war effort. The Soviet government owned or controlled factories, railroads, farms, etc. This vast control over each aspect of their economy and production allowed them to put in more labor, resources, and equipment into the war without having to massively depend on foreign borrowing or private investment. The Soviet Union did, however, receive around 11 billion dollars in Lend-Lease aid from the United States. So although the Soviets suffered massive losses and damage from Operation Barbarossa at first, the government's ability to control all resources was critical in helping fight the Germans. The Soviets ordered the production of steel, tanks, aircraft, and other military equipment, which helped keep them afloat militarily while fighting the war. Beginning in 1941, factories were moved east, including beyond the Ural Mountains, and Soviet industrial production recovered as the war continued. However, this would still come at a cost as consumer spending was reduced, wages were kept low, and military production was prioritized over food and clothing, which left much of the economic burden onto Soviet citizens.
After the war, the Soviets, along with the USA and Britain, emerged victorious. The Soviets' centrally planned economy allowed the government to rapidly rebuild factories and infrastructure, helping it recover from much of the economic damage caused by the war. The USSR also gained a massive sphere of influence in Eastern Europe, where communist governments were established stretching from Romania to East Germany. This also allowed the Soviet Union to gain equipment and machinery through reparations in order to restore Soviet industrial capacity. By the late 1940s, the Soviets had emerged as another superpower, beginning a long four-decade Cold War with the United States of America.
The British Empire today is considered one of the greatest and one of the most influential empires in history. Its long-lasting effects are still felt all over the world and still influence various countries today. Its legacy is unmatched and will likely never be forgotten. Ultimately, the British Empire’s fall was not due to military loss or a weak government, but the large economic costs suffered from two of the most brutal wars in history. The costs of fighting two world wars, maintaining the biggest empire the world had ever seen, and using foreign loans slowly weakened the British Empire economically until it no longer could support itself. And so, the British Empire would fall into the history books. The sun had officially set.
For more stories on the economics of historical events, make sure to follow this page for more updates!
