The Empire Project: The Rise and Fall of the British World-System, 1830–1970 (101 page)

The terms and timing of ‘convertibility’ became the central issue in economic policy. Within the Bank of England and the Treasury, there were those who were eager to get it done quickly, arguing that sterling's prospects would not improve with delay. The sterling crisis that broke over their heads at the end of 1951 pushed them into a radical plan. Under the acronym ‘ROBOT’, it proposed to make sterling convertible subject to two drastic conditions. First, it would be necessary to persuade those countries with large sterling balances that the bulk of them should be frozen, leaving only the amounts they needed for normal trading purposes. This was the
quid pro quo
for the end of exchange control. Secondly (and much more controversially), the plan proposed that sterling should ‘float’ (just as it had in the 1930s). The reason for this was that defending a fixed rate (sterling had been fixed at $2.80 to £1 in 1949) might quickly consume much of Britain's reserve of dollars and gold (just as it had in 1947) and wreck the experiment almost before it had started. Allowing sterling to find its own level in the period of sharp adjustment that would follow free exchange would also reduce the risk of British exports becoming uncompetitive with the end of import controls and dollar restriction in sterling area markets.
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With the support of the Bank of England and his own expert advisers, the Chancellor of the Exchequer, R. A. Butler, presented ROBOT to his colleagues as the best solution to the financial crisis that the new Churchill government had inherited. The sequel was instructive.

For all its heavyweight backing, ROBOT soon attracted fierce opposition, not least from Lord Cherwell, Churchill's scientific adviser, known colloquially as the ‘Prime Minister's Adder’. Cherwell was scornful of the flimsy statistical basis on which ROBOT was built, and argued persuasively that the pressure on sterling could be relieved by the use of much less drastic measures. It was, he said, ‘a reckless leap in the dark involving appalling political and economic risks at home and abroad’.
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The objection to ROBOT was not just that Butler's medicine was unnecessarily strong. Four arguments sank it. First, although there had been ambiguous signals from across the Atlantic, floating the pound would breach the first commandment of the Bretton Woods doctrine. It was hard to believe that the American response would not be severe. Secondly, it was far from certain that all the other countries in the sterling area would adopt a floating exchange rate. Far from forming a bloc of like-minded states, the sterling countries might break up in anger and acrimony. Thirdly, floating the pound might lead to the break-up of the European Payments Union (a currency pool along sterling area lines) if the pound was devalued against some European currencies. At a time when London was also trying to promote defence cooperation among the Western European states, and soothing French fears of future German aggrandisement, such a large spanner in the European works was unwelcome at best. The Foreign Office and Foreign Secretary were among ROBOT's fiercest critics.
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Finally, since it was hard to predict how far sterling's value would fall under the ROBOT regime, it was hard to deny that, at least in the short run, the domestic effects might be very unsettling: rapid inflation if imports cost more; severe unemployment if other countries retaliated against a devaluing pound.

ROBOT was opposed by those who thought Britain's position too fragile to survive the shock treatment it promised and by those (like Cherwell) who argued that sticking to ‘the long steady task of building up our reserves’ was the best recipe for success. That it would be a long haul seemed amply confirmed in the next few years. In 1955, after two better years, inflationary pressure in the British economy and a sharp negative movement in the balance of payments led to credit restrictions to dampen home demand and strengthen sterling abroad. The following year was the year of Suez. The British invasion of Egypt triggered a flight from the pound; the cost of supporting its value from a fast dwindling reserve of dollars and gold was the critical factor in forcing the British withdrawal. In 1957, inflation in Britain and the devaluation of the French franc reopened doubts over whether sterling could hold its fixed dollar value. It took a fierce contraction of credit (the Bank rate rose to 7 per cent, its highest level since 1921) and an American loan to beat off the threat. It seems somewhat surprising after this ragged performance that the Macmillan government quietly made sterling convertible over the Christmas break in 1958. It was certainly true that the balance of trade had improved and inflation was down. But it was also true that its hand was being forced. Strict exchange control had already collapsed: it was the buying and selling of sterling in the market of currencies that now determined its value. Secondly, France had pre-empted the British in making the franc convertible (while devaluing again). At the moment when London was straining to persuade the new European Economic Community to include Britain in a ‘free trade agreement’, the pound had to look the
franc demi-fort
in the eye. But had the reserves that were needed to defend sterling's value been salted away? The Treasury's target for a payments surplus had still not been reached. Instead, reliance was now placed on being able to borrow from the International Monetary Fund if the going got hard.
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Convertibility, remarked
The Economist
in a phrase that ought to have struck a ministerial chill, was an ‘act of bravery’.
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British leaders knew of course that convertibility was not enough. To be an economic great power required a central position in the flows of world trade, and reasonable access to some of the world's richest markets. Before 1914, over one-third of British trade had been with Europe, and nearly one-quarter with the countries that became the European Economic Community (the ‘EEC Six’) in 1958. In the inter-war years, the share of British exports sent to the future ‘EEC Six’ fell to under 15%. After the Second World War, it fell even further, to less than 10% in 1948.
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But, by the 1950s, these were the countries that were growing most rapidly. More generally, it was industrial countries that made the best markets. Here, too, Britain lagged behind its main competitors. Its principal rivals increased the share of their exports to other industrial countries from 58% in 1950–2 to 61% in 1957–9. The British share rose from 39% to 45%.
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To keep up the momentum that had doubled British exports from their pre-war levels required a major effort in Europe.

For this reason alone, London kept a wary eye on the progress of European schemes for economic and political unity that were gathering pace in the early 1950s. Its negative attitude towards the plans that emerged for an Economic Community from the Messina Conference in 1955 has been much derided in hindsight. In fact, the British regarded the idea of forming an inner group (with discriminatory tariffs) within the larger collectivity of Western European states with considerable hostility. They thought it would damage the prospects for freer trade in general and for British trade in particular. They wanted it to fail, and thought that it would.
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They saw no point in lending it any support. But this was far from an attitude of indifference or hostility towards closer cooperation with Europe, although there were plenty of those in the Conservative party who took a ‘blue water’ view of continental commitments. Instead, in the late summer of 1956, the Cabinet agreed on a plan that was intended deliberately to seize control of the movement towards a European customs union and drive it in the direction that British policy favoured. This was ‘Plan G’, which proposed to sink the EEC project within a larger ‘Free Trade Area’ within which there would be free trade in manufactured goods but no common agricultural policy. The obvious merit from a British point of view was that this would allow continued preferential arrangements both for British farmers (heavily protected since the Second World War) and for Commonwealth producers. It would give Britain the benefits of a large open European market with few of the drawbacks of being tied to an economic bloc.

The plan was put to the Cabinet by Harold Macmillan, then Chancellor of the Exchequer, as a series of rhetorical questions, designed to flush out its fiercest opponents. ‘Is this a good plan for the British economy?’, asked the Chancellor,

Will it bring us strength in the long run…? Can the British economy survive alone, insulated and protected from European competition? Will it be able to maintain its exports to Europe…? Equally important, can it maintain its exports to other countries against the competition of European countries, either individually, as now, or in a unified Europe largely under German domination? Can we enter into a new structure and at the same time maintain the advantages of the Commonwealth, our preferences and all the rest? Can we retain them even if we keep out?
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Nor, of course, were the issues at stake of solely economic concern. Were the aims of Plan G ‘politically sound’? ‘Can we retain the leadership of the Commonwealth world

and at the same time seize the leadership of Europe? Would it help us to create a new period of British strength and power, or should we be foolishly throwing away what we have? Would it bring us promise for the future, or is it an abdication and betrayal of our past?
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Macmillan also spelled out the risk of division within the Conservative party, the threat posed by free trade to maintaining full employment and the need to reassure both Commonwealth countries and the United States. But there was no doubt that he wanted his colleagues’ approval for a plan which among other things, was intended to make London the centre for Europe's foreign investment. ‘The economic unification of much of Western Europe’, declared Peter Thorneycroft, President of the Board of Trade, ‘would create a new source of investment capital for overseas development which might be expected to flow out to Commonwealth countries through London under our management’.
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In the discussion that followed, there were predictable fears that the main Commonwealth countries would turn away from Britain towards the United States and ‘the status of Britain as a world power depends on her position as head of the Commonwealth’.
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But Macmillan insisted that, without a new basis for the British economy, it could not provide the market that the Commonwealth needed, nor secure the future of sterling. When Eden summed up, his view was decisive. There was little hope, he said, of an economic policy based on the Commonwealth: even Australia and New Zealand seemed to be turning towards the United States. The Asian Commonwealth could not be relied on. ‘Unless we were capable, acting alone, of meeting formidable European competition in oversea markets, there seemed no alternative but to base our policy on the proposed plan for closer association with Europe’.
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After further consultations, and some positive signals from the United States, Europe, the Commonwealth and domestic opinion, the decision was made in early November to press ahead and negotiate.

But, as it turned out, the British had badly mistaken the strength of their hand. They had coolly assumed that, if they took a firm line on the exclusion of foodstuffs from the free trade arrangements, they would get their way: ‘We should expect this condition to be ultimately accepted’, said Macmillan and Thorneycroft.
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They also assumed that, once they had given a lead, the idea of a free trade area would trump the plan for an economic community drawn up by the Six. One key to their thinking was the belief that France shared Britain's fear of a ‘German-dominated’ Europe, to which Macmillan had referred, but felt it even more deeply. French paranoia would give the British the lever they needed to switch the points towards the free trade line, or derail the train. All this proved wrong. The European Six signed the Treaty of Rome in March 1957. When the British began to negotiate in October that year, they met a stubborn refusal on the foodstuffs question. And, far from France proving the weak link in the EEC chain, the reverse was the case. In June 1958, General De Gaulle returned to power, first as prime minister in the dying Fourth Republic, then as president in the Fifth. It was De Gaulle who firmly put an end to the free trade area diplomacy. It was an unmistakable omen. All the British could hope (with some justification from history) was that his tenure would be short and his retirement long.

It was a major defeat. London tried to make the best of things. The British had already committed themselves (at the Montreal Commonwealth Economic Conference) to stand by the system of Commonwealth preference and to make up the shortfall of private investment in their colonial and ex-colonial territories through government aid and loans.
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All this was intended to hold the Commonwealth together as a system of trade and influence and provide reassurance of British aims and intentions. But it was starkly clear as the decade came to an end that what mattered most was the export competitiveness of the British economy. The 1959 Radcliffe Report on the British monetary system gave a ringing endorsement of ‘the general harmony of interest between the United Kingdom economy and that of the rest of the sterling area’,
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and insisted that it was in Britain's interest to invest more and more in the economic development of the Commonwealth countries.
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But it also warned that sterling's role as a reserve currency had been displaced by the dollar, and that the UK's reserves still formed only a fraction of sterling's liabilities. The only solution, as Cherwell had argued some seven years earlier, was to press on in the hope that export growth would build up the margin of safety to protect the domestic economy, make sterling secure and fund the export of capital to non-industrial countries.