The Empire Project: The Rise and Fall of the British World-System, 1830–1970 (100 page)

Elsewhere in their ‘system’, the British could draw comfort from what still seemed the malleability of colonial opinion in their Asian and African empire. Even in Kenya, where they faced the Mau Mau uprising and resorted to drastic measures to ‘rehabilitate’ those suspected of Mau Mau sympathies, they could rely on a much larger group of anti-Mau Mau ‘loyalists’.
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In Northern Rhodesia (now Zambia) and Nyasaland (now Malawi), they dismissed African opposition to the making of a white-ruled federation as a temporary ebullition fomented by ‘extremists’ and insisted that it would die away once federation's material benefits were seen.
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Nor by the mid-1950s had London given up hope of Anglo-Indian friendship as Eden's diplomacy at the 1954 Geneva conference revealed. Once the policy of colonial self-government was fully established, or so it was thought, much of the friction in Anglo-Indian relations would be soothed away. The one region of British influence where the prospects seemed gloomier (although not so gloomy as they later appeared) was the Middle East.

This formed the context in which British governments tried to set their course through the 1950s. They were eager for detente to ease the strain on their overloaded economy. They were also determined to uphold if they could their regional pre-eminence among the Western European powers and check any change there that threatened their interests. They expected to enjoy a privileged status as Washington's closest and most valuable ally in the evolving Cold War. They attached huge priority to rebuilding the strength of the sterling economy and restoring as much as they could of Britain's old commercial role in the world. They were anxious to retain Britain's Middle East
imperium
as much for the leverage it conferred geopolitically as for the access it promised to oil – rapidly replacing coal as the source of industrial energy. And they were keen to reinforce Britain's close relations with the ‘old’ dominions – especially Australia and New Zealand – and, where they could, to build new ones. We can trace the faint outlines (however opaque) of a grand design. Britain would remain at the centre of an empire of both influence and identity, the head of a civic association (the Commonwealth) and a ‘British world’ held together in part by ethnic and cultural ties. But, as British leaders half-acknowledged, and as their advisers insisted, the fate of this ‘project’ depended almost entirely on forces that lay beyond Britain's control. As the 1950s unfolded, these were to turn London's uphill struggle into a headlong descent.

The sterling economy

Any hope of restoring Britain's pre-war position as the centre of an independent world-system was bound to turn on its economic performance. This was not just a question of achieving a surplus on the balance of payments, and competing successfully in overseas markets, nor of attaining a steady improvement in the standard of living, depressed by the austerity of wartime and post-war conditions. Regaining the economic independence, commercial influence and relative wealth that Britain had enjoyed in 1938, let alone in 1913, was a much more demanding task. It required Britain to be free from external obligations and debts and the distorting effect these might have on its domestic economy. It meant reviving the capacity to be the prime source of overseas borrowing for established clients among the developing countries (like Australia and South Africa) as well as some new ones. It implied the steady (re-)acquisition of those overseas assets that had contributed so much to past British wealth and security. It needed Britain to serve as an expanding market for overseas produce, both for domestic consumption and for re-export to other ‘end-users’ – its old entrepot function. For this to work smoothly, it was vital to have a freely convertible currency that could be traded easily and which potential customers would be willing to hold. It also followed that Britain would have to supply in return a large portion of the manufactures wanted by its non-industrial partners if their commercial relations were not to become too unbalanced. And, of course, the efficient working of this commercial system would depend (as it had in the past) upon a vast network of services: shipping, insurance, banking and merchanting. Largely managed from London, these had been one of the most profitable elements of the pre-war ‘commercial empire’.

It was a daunting list. But British leaders in the 1950s were determined to restore Britain as an economic great power, and to use its economic strength to preserve a wide sphere of influence and a world-power status. They were acutely conscious of the enormous scale of the American economy, which produced almost two-thirds of the world's manufactured goods in the late 1940s. They expected the Soviet Union to become in time an advanced industrial power within its closed trading bloc. They were aware of how quickly Germany was emerging from the economic abyss of the end of the war to compete with Britain in industrial exports. They hoped nevertheless to exploit Britain's assets and its economic inheritance to construct a modified form of commercial empire to underpin the domestic economy and meet the overseas costs of a world-power role. It was a goal they pursued with gradually waning confidence until its futility overwhelmed them after 1960.

The economic crisis of 1951–2 could be blamed in part on the huge rearmament programme on which the Attlee government had embarked. It was eased quite quickly by imposing strict controls on imported dollar goods, and by restraining domestic demand through higher interest rates. But it was a painful reminder that, after six years of recovery, the British economy was still very vulnerable to sudden fluctuations in overseas trade. The reserve of dollars and gold to meet any emergency was still desperately slim. Despite the huge effort to raise British merchandise exports well above their pre-war level, building a margin of safety in the balance of payments proved very hard. A key reason for this was the drastic reduction in overseas income and the corresponding huge rise in foreign obligations since 1939. In 1913, Britain's net overseas assets (at £4 billion) had been nearly twice as large as its GDP.
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In the depressed 1930s, they had fallen just below the figure for GDP. But, in 1951, after wartime disinvestment and large-scale borrowing from other sterling area countries (incurring the so-called ‘sterling balances’), net overseas assets were actually negative: −0.05 per cent of GDP. In constant (1938) prices, they had declined from £7.3 billion in 1913, to £4.1 billion in 1937 to −£0.3 billion in 1951. Income from abroad as a proportion of national production was one-sixth of what it had been in 1913. The huge foreign earnings that had helped keep Britain solvent and fund ever more foreign investment had largely vanished. So had the means to restore the huge foreign portfolio sold off or mortgaged after 1940. In 1913, overseas assets accounted for over one-third of all British assets: in 1973, despite a wave of post-war investment, they stood at only 3 per cent.
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But the picture was not an entirely bleak one. The British may have lagged far behind the United States in industrial production but they remained at the centre of a far-flung system of trade. In the early 1950s, about half the world's trade was still transacted in sterling. Britain imported more foodstuffs and raw cotton than the United States. The Americans had built up their overseas assets to around $17 billion by 1950 – perhaps a total no larger than Britain had held before 1939.
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But nearly 70 per cent was concentrated in Canada and Latin America and both regulation and practice made lending difficult to many of those countries that had traditionally looked to London. The Soviet Union was not a foreign investor and showed (at first) little sign of offering economic aid to countries in the British ‘sphere’. The British hoped to restore the City's role as the banker and financier of the developing countries. They expected to profit from the surging demand for raw materials that had loomed so large in the post-war recovery. With much of the world's high-value minerals in their colonial empire or in ‘sterling’ countries, and with other raw materials like cocoa and tin under their economic control, they looked well placed to profit from the general expansion of trade. With a large part of the world's deep-sea shipping still British-owned, they could expect to earn a handsome dividend from supplying the services that kept commerce moving, just as they had before 1914. British merchant enterprise was still very active across much of the Afro-Asian world. Nor was it solely a matter of exploiting colonial windfalls or long-practised trades. Britain also seemed in the van of the new science-based economy. It had large investments in oil, the fuel of the future. Its large aerospace industry – partly the product of war – had built the world's first jet airliner (the ill-fated Comet) to transform long-distance air travel. The post-war commitment to building nuclear weapons promised economic advantages. With the opening of Calder Hall in 1956, the British pioneered the generation of electricity using nuclear power, an achievement revealed to an awed New Zealand prime minister.
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And, right through the decade, the British spent heavily on research and development (both civil and military), more heavily than any other Western country except the United States.
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We shall see later on that few of these ‘assets’ yielded more than a modest return in the quest for economic revival. The immediate task, which commanded a wide consensus in both Whitehall and the City, was to maintain and enhance the strength of the pound, and restore its position as a ‘top currency’: that is, a ‘top favourite for international monetary transactions, most often and most widely used for a great variety of monetary purposes…the choice of the world market’.
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The strong pound would enable Britain to profit from the growth of world trade. It would attract the deposits of other currencies to London, swelling the funds at the City's disposal. It would boost the appeal of the commercial services that London could offer, since overseas confidence in insurance and other financial arrangements was bound to be greater if sterling's value was impregnable. It would help to stabilise the domestic economy and reduce the threat of inflation which had briefly reached 9 per cent in 1951–2. A strong pound was the key to a strong British economy. The weak post-war pound had to put on weight and gain muscles. The question that tormented bankers, officials and their ministerial masters through the 1950s was how to achieve this goal.

What was generally agreed was that the sterling area was the essential platform for sterling's revival as a top currency. Under its rules, the member countries held their dollar earnings in a common pool managed in London, pegged their currencies on sterling, and imposed strict control over their dollar purchases and the exchange of sterling into other currencies. The incentive for Britain's sterling partners to observe these rules sprang from their fear that the shortage of dollars worldwide (a result of the huge demand for American goods and the difficulty of selling into the American market) meant that the freedom to exchange sterling at will would result in a crash of its value (as in the near-disaster of 1947). If that were to happen, their claims on London (the sterling balances) would be worthless, and the economic dislocation in Britain would wipe out their most important market. For the British, the sterling area's existence offered a guarantee that the sums Britain owed to the other sterling countries (mainly debts arising from the war) could be paid off at an affordable rate and without jeopardising sterling's value against the dollar. It averted the risk that a country holding large sums in sterling might suddenly sell them for dollars and wreck the British balance of payments. It also allowed a gradual resumption of British overseas lending but without the danger of that foreign investment being exchanged into dollars. It propped up the system of trading preferences (‘Commonwealth preference’ also extended to Canada) to which British industry was still deeply attached. More than 50 per cent of British exports were being sent to ‘British countries’ throughout most of the 1950s.
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As late as 1958, the sterling area's merits were still being trumpeted in the most influential quarters. It was well designed for its members’ interests and also for world trade, declared Sir Oliver Franks, a former ambassador in Washington and chairman of Lloyds Bank. Member countries had no need to worry about bilateral balances, and using the pound kept down the demand for gold – any shortage of which would restrain world trade. The sterling area also allowed Britain to earn gold (by its trade with South Africa), and encouraged the City to use its financial machinery to help expand British exports.
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It was not a system to be abandoned lightly.

But it was also acknowledged in the Bank of England, by Treasury officials and even by ministers, that preserving the sterling area as a closed currency zone was not a long-term solution to the problem of sterling. Sooner or later, the ‘one world’ economy envisaged in the Bretton Woods agreements at the close of the war would have to come into force. The alternative was return to the protectionist blocs of the inter-war years with all the consequences that might follow from that. Open disavowal of the Bretton Woods system would be hugely controversial. It might easily lead to an open breach with the United States, and perhaps the break-up of the Western Alliance. Washington had been patient with London's delays, but on the understanding that it intended to honour the promise of a convertible pound as soon as it could. There were other reasons as well. It was widely agreed that, before very long (the timescale was unclear), the dollar famine would end (as more countries recovered and were able to earn dollars). The case for restrictions would be harder to make. The sterling area countries were already eager to borrow American dollars for development purposes but were unlikely to entice the American investor if his dividend was paid in inconvertible pounds. Their interest lay in a looser system. And the British themselves knew perfectly well that, so long as the pound was ‘soft’ and the dollar was ‘hard’, they would lose the race to restore sterling's old status and win back for the City its central place in international trade. It was too much to hope for the long-lost pre-eminence of 1913. But, in the 1930s, as the head of the sterling bloc and with a convertible pound, Britain had been the world's largest trading economy.