The Empire Project: The Rise and Fall of the British World-System, 1830–1970 (75 page)

The causes went deeper than the apparent shortcomings of the British economy. Much of Britain's prosperity before the First World War had been due to the relative openness of markets in Europe and Latin America, as well as in Asia, where free trade was imposed by rule (as in India) or by force (as in China). Free trading conditions encouraged the investment of capital, whose dividend could be paid from the proceeds of exports that reached the world market through London. They made it natural for many primary-product economies to rely on British shipping, insurance and banks to get their produce to market and manage its sale. But, after 1918, there was no real return to the age of free-ish trade. Instead, the disruptions of war, the burden of debt (requiring new revenue sources) and the break-up of empires in Europe and the Near East fostered economic nationalism: to safeguard domestic prosperity against external upheaval and (in new states especially) to reinforce weak political bonds with the glue of economic self-interest. Agrarian protection became almost universal in Europe.
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With the onset of slump, things got far worse. Soviet Russia and Germany became closed autarkic economies. The United States withdrew behind massive walls of protection – the Smoot–Hawley tariff of 1930. Existing tariff barriers (as in the ‘white dominions’) rose higher. Exchange control became widespread, threatening the multilateral pattern of trade with bilateral bargains and barter. None of this boded well for British finance, trade and industry. Nor, at least in the short term, did another new feature of the global economy, the industrialisation of Asia. It was the intense competition of Japanese cottons, combined with the growth of textile manufacture in India, which destroyed so much of Lancashire's market. Even in China, where mechanised production had developed more slowly, it was a similar story. There, British cottons sold barely 1 per cent of their 1913 figure in 1936.
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Despite all these setbacks, the decade of depression in the world economy did not bring a collapse in British economic power. But it did lead to big changes in the way that it worked. The impact of the crash on the New York stock exchange in October 1929, and the trade contraction that followed, were soon felt in London. Unemployment rose steeply from 1.2 million in 1929 to 1.9 million the following year and 2.6 million in 1931. The balance of payments grew less healthy and then crashed into deficit. Public spending shot up to meet the new burdens of borrowing and benefits. As American lenders began to call in their loans to meet obligations at home, they sparked a banking crisis in Europe where too much had been lent ‘long’ on the back of American funds. Soon, those who held sterling in London (attracted in part by the high interest rates offered there) became anxious to sell it or exchange it for gold (the pound was freely convertible) for similar reasons. By August 1931, the loss of gold was acute, while the ‘unbalanced’ budget stoked fears of financial collapse, as the government borrowed more to meet its current outgoings. Governing without an overall majority, Ramsay MacDonald accepted the need for an all-party coalition, a ‘national’ government to meet the emergency. What began as a temporary measure, to last for a few weeks, became a coalition regime that endured for a decade. Likewise, its emergency actions to forestall the danger of sterling's collapse shaped an economic regime that lasted until it was overcome by disaster after June 1940.

The National Government took two crucial decisions. The first was to abandon the fixed price of sterling in gold, allowing the pound to ‘float’ against other currencies. In effect, the pound was devalued. Since sterling was still the most widely used currency in international trade (and thus a source of great profit to the City of London), such a move might have seemed exceptionally risky, to be reversed as quickly as conditions allowed. But that is not what happened. Instead, sterling was left to float for the rest of the decade, while remaining convertible. For much of that time, between 1933 and 1938, its value was stable, and the pound kept its status as the principal medium of international exchange. There were two reasons for this.

The first was London's success in forming a large ‘sterling bloc’, whose members pegged the value of their currency to sterling, and kept much if not all of their reserves of foreign exchange as sterling. This formed a huge trading zone – the largest in the world – whose currencies enjoyed a stable relationship. Parts of this zone had little choice in the matter. The monetary affairs of Britain's colonial territories were run by local ‘currency boards’. A colony's money supply was directly controlled by the size and value of its sterling reserve in London. When London devalued, so did the colony. Much the same was true – although with considerably more argument – in the case of India. India suffered badly from the fall in commodity prices and the fragile state of its public finances (with their heavy dependence on customs receipts and agrarian revenues) threatened to damage the value of the rupee – a situation made worse by the protracted uncertainty over India's new constitution. A further large complication was India's sterling debt – the so-called ‘Home Charges’ – made up of pensions, loan interest and the annual bill for the large British garrison, all of whose costs fell on the Indian budget. London insisted that the Home Charges be paid, whatever the price. It demanded that the rupee remained pegged to sterling, and vetoed any idea of reducing its value in sterling terms. The reason it could do so was that, although the Viceroy and his government enjoyed some fiscal autonomy (and would have liked more), ultimate control over India's external finances was kept firmly in Whitehall, even after the promise of dominion self-government in the 1935 Act.
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With other users of sterling, London relied not on rule but self-interest. In three of the six white dominions, Australia, New Zealand and South Africa, the local pound was now pegged to sterling, not gold.
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Here, the British market was all-important and commercial banking was too enmeshed with the City to make any alternative viable – although South Africa's gold and its nationalist politics kept it on the gold standard until 1933. Canada might have followed with its dollar except for the scale of its debts in New York: the fall of sterling against the American dollar had made this too much of a risk. Two ‘semi-colonies’ did follow: Egypt, which sold almost all its raw cotton to Britain (and sold little else), and Iraq (a British mandate until 1932). Lastly, there was a group of European states – the four Nordic countries and Portugal – for whom Britain's huge share of their exports and their dependence on sterling receipts, made pegging on sterling the key to financial stability.

Secondly, the attractions of sterling were greatly reinforced by the overall success of its management. This was jealously guarded in London and largely controlled not so much by the Bank as by the Treasury and the ‘Exchange Equalisation Account’ whose funds it supplied.
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The object of the Account was partly to prevent sterling rising or falling too sharply. But it was also meant to ensure that sterling's value was kept at a level that allowed ‘cheap money’ – interest rates of around 2 per cent – to prevail in Britain. A cheap money policy helped Britain recover from depression more quickly than most other economies (the main exception was Japan) and much more quickly than the United States. Financially conservative governments (pursuing balanced budgets) reassured overseas holders of sterling. The result, so it seemed, was a virtuous circle. The willingness of sterling bloc countries to keep substantial balances in London helped to strengthen the pound. The balances allowed London to keep up sterling's value, despite the large deficit in Britain's balance of payments, without drawing down its investment overseas. Indeed, they even permitted some modest new issues to sterling countries abroad – as the tacit pay-off for their discretion and loyalty.
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In the depths of the crisis in 1931–2, the British government had taken a second decision no less far-reaching than ‘going off gold’. At the Imperial Conference in 1930, the Labour government and its Cobdenite chancellor, Philip Snowden, had dismissed the idea of a graded tariff on imports to give dominion producers a privileged share in the British market. But, as economic prospects grew bleaker, the appeal of protection in Britain, once confined to sections of the
industrial
economy, became almost irresistible. Even the City, where free trade sentiment had usually been strong, had now been won over.
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Over the protests of its rump of free traders, the National Government (whose leaders had decided to seek an electoral mandate in October 1931) agreed to impose a new general tariff. The clinching argument was that action was needed to check the huge wave of imports and a further run on the pound.
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However, Neville Chamberlain's import duties bill in February 1932
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offered to delay tariffs against British Empire countries to allow time to arrange a system of mutual preferences. This was the purpose of the Ottawa Conference in 1932.

The Ottawa system marked the double departure of Britain from free trade. The British had adopted unilateral protection to save their balance of payments and the value of sterling, and to guard what remained of their agriculture against an impending disaster. With the Ottawa system they emerged as the leader of a large trading bloc, whose members favoured each other by discriminatory tariffs – the so-called ‘imperial preference’. Needless to say, this did not mean that London imposed its commercial agenda – we shall see in a minute that the City's commercial empire had very mixed fortunes after 1930. If the British delegation had hoped for ‘empire free trade’ – giving their manufactures free entry to dominion markets, they were quickly disabused. Dominion leaders were determined to protect their own ‘infant’ industries, and would not have survived had they failed to do so. They were (as always) deeply suspicious of London's official ‘machine’ – the bureaucratic phrase-mongers who would tie them in knots – and its political masters. As Joseph Chamberlain's son, Neville Chamberlain might have expected a warm Canadian welcome, especially from Prime Minister Bennett, a Canadian tory. But Bennett, said Chamberlain (privately), ‘lied like a trooper and…alternately blustered, bullied, sobbed, prevaricated, delayed and obstructed to the very last moment’.
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The British delegates found themselves conceding preferential access to the British market. What they got in return was far from free entry: it was more like exemption from the still higher tariff rates that were piled on non-British imports. Hence the best estimate is that, while the Empire countries increased their share of Britain's imports by around 10 per cent, their share of British exports grew by only half that figure: the effects on British output were marginal.
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The Empire market, despite much excitable rhetoric,
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could not be the saviour of the British export economy.

Yet British leaders were not entirely dissatisfied. They wanted to protect Britain's own floundering agriculture, but could hardly have done so without some concession to dominion producers. They may have thought that offering imperial preference would help to silence demands for a general devaluation of dominion currencies against sterling, with dangerous consequences for its strength and stability. Ensuring the dominions’ access to the market in Britain would make it less difficult for them to remit what they owed in interest and dividends. They had also checked the drift upwards of dominion tariffs against British goods. Most of all, perhaps, they hoped that the agreed lowering of tariffs among all Empire countries would create a zone of recovery that would encourage other states.
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Meanwhile, they pressed on with the making of bilateral agreements with those non-Empire countries with whom their commercial relations were close. Denmark (which competed with Canada in supplying bacon to the British breakfast-table) was given a fixed share of the market in return for its promise to buy British coal.
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Similar agreements were made with the other Scandinavian countries. In 1933, the so-called Roca–Runciman pact allowed Argentina, which sent 40 per cent of its exports to Britain, to keep almost all its pre-Ottawa share of the British market for chilled beef. The price the British attached for throwing this lifeline (no other market existed for Argentine beef) was that almost all the foreign exchange that Buenos Aires earned from Britain would be used to remit the interest and dividends from the large British investment in the country's railways and utilities. These had been blocked by Argentina's exchange control since the onset of depression.
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Imperial preference and the pacts London made with the ‘agreement’ countries helped to stave off the worst effects of depression and also the danger that other countries would retaliate against the British recourse to devaluation and protection.
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They softened the blow of export weakness elsewhere – against Japanese and Indian competition, the closing of Germany, and universal high tariffs. But, by 1937, it was clear that they could not reverse the relative decline of British economic power since the First World War. In the ten years before 1914, the deficit on merchandise trade had usually been balanced by the income that poured in from investments overseas, so that when other invisible trade was added the result was a large current account surplus. In the 1930s, this ceased to be true, as imports surged up and invisibles fell back. This reflected in part the senescence of parts of London's commercial empire – its huge holdings in railways and shipping, now largely unprofitable – and the loss of income from commodity trades. Though the British kept their grip on telecommunications
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in other new industries like civil aircraft and oil (on which global pre-eminence would come to depend) they were much less well placed. Nor could the British deter even their closest trade partners from the quest for new markets (as Australia looked to Japan), and greater self-sufficiency in industrial goods. Neville Chamberlain admitted as much. The dominions, he noted in May 1936,