The Labour government elected in 1945 faced a possibly unprecedented degree of economic problems. While the end of the war came quicker than expected – Japan surrendered in August 1945 following the destruction of the cities of Hiroshima and Nagasaki by US atomic bombs – many difficulties lay ahead as Britain adjusted from war to peace. The country was to all intents and purposes bankrupt after six years of total war: the National Debt had quadrupled and capital assets worth around £1,300 million had been liquidated. The lifeline offered by Lend-Lease – through which the United States had provided Britain with war materials and other goods – was cut off by President Truman immediately at the war's end. The Treasury's influential economic adviser John Maynard Keynes warned that a perfect storm of adverse economic conditions – a weakened manufacturing base, dependence upon imports and a massive trade deficit – had left Britain facing ‘an economic Dunkirk’. Keynes was a member of a Treasury team that negotiated a loan of £938 million from the US government in November 1945 (US $3,750,000 million) but it was exacted at a high price: as well as annual interest of 2 per cent it came with the condition that sterling would become freely convertible against the dollar from July 1947.

At the same time as facing its economic Dunkirk, however, the Labour government had committed itself to an ambitious (and expensive) programme of social and economic reform. This included the introduction of a comprehensive welfare state ‘from the cradle to the grave’, a National Health Service free at the point of use and the nationalisation of key industries and public utilities.