The loan was made primarily to support British overseas expenditure in the immediate post-war years and not to implement the Labour government's welfare reforms. British treasury officials believed they could implement the Labour government's domestic reforms without the loan if Britain withdrew from all major overseas commitments. Additionally, Britain's lend-lease balance was paid off for $650 million (US$900 million) in 2006.
At the start of the war, Britain had spent the money that they did have in normal payments for materiel under the "US cash-and-carry" scheme. Basing rights were also traded for equipment, e.g., the Destroyers for Bases Agreement, but by 1941 Britain was no longer able to finance cash payments and Lend-Lease was introduced. Lend Lease aid did not have to be paid back, but the other loans did.
Large quantities of goods were in Britain or in transit when Washington suddenly and unexpectedly terminated Lend-Lease on 21 August 1945. The British economy had been heavily geared towards war production (around 55% GDP) and had drastically reduced its exports. The UK therefore relied on Lend-Lease imports to obtain essential consumer commodities such as food while it could no longer afford to pay for these items using export profits. The end of lend-lease thus came as a great economic shock. Britain needed to retain some of this equipment in the immediate post war period. As a result, the Anglo-American loan came about. Lend-lease items retained were sold to Britain at the knockdown price of about 10 cents on the dollar giving an initial value of £1.075 billion.
John Maynard Keynes, then in poor health and shortly before his death, was sent by the United Kingdom to the United States and Canada to obtain more funds. British politicians expected that in view of the United Kingdom's contribution to the war effort, especially for the lives lost before the United States entered the fight in 1941, America would offer favorable terms. Instead of a grant or a gift, however, Keynes was offered a loan on favorable terms.
Historian Alan Sked has commented that, "the U.S. didn't seem to realize that Britain was bankrupt", and that the loan was "denounced in the House of Lords, but in the end the country had no choice." America offered $US 3.75bn (US$51 billion in 2018) and Canada contributed another US$1.19 bn (US$16 billion in 2018), both at the rate of 2% annual interest. The total amount repaid, including interest, was $7.5bn (£3.8bn) to the US and US$2bn (£1bn) to Canada.
The loan was made subject to conditions, the most damaging of which was the convertibility of sterling. Though not the intention, the effect of convertibility was to worsen British post-war economic problems. International sterling balances became convertible one year after the loan was ratified, on 15 July 1947. Within a month, nations with sterling balances (e.g. pounds which they had earned from buying British exports, and which they were now permitted to sell to Britain in exchange for dollars) had drawn almost a billion dollars from British dollar reserves, forcing the British government to suspend convertibility and to begin immediate drastic cuts in domestic and overseas expenditure. The rapid loss of dollar reserves also highlighted the weakness of sterling, which was duly devalued in 1949 from $4.02 to $2.80.
In later years, the term of 2% interest was rather less than the prevailing market interest rates, resulting in it being described as a "very advantageous loan" by members of the British government, as elaborated below.