The Empire Project: The Rise and Fall of the British World-System, 1830–1970 (56 page)

The British were rescued from this dilemma by the willingness of the American government to take on the burden of lending to the Entente powers until the end of the war. Financial disaster was averted. The threat of a famine in food and munitions disappeared, especially with the fall in Atlantic sinkings by the end of 1917. But, as Keynes insisted, Britain's dependence on American goods, the burden of American loans and the diversion of industrial manpower into the war of attrition in Flanders, was bound to debilitate her commercial power. ‘In another year’, he wrote at the end of 1917 (when the war was expected to continue into 1919 or 1920), ‘we shall have forfeited the claim we had staked out in the New World and…the country will be mortgaged to America.’
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Indeed, Britain's displacement by America as the commercial and financial superpower seemed all but inevitable. As the British rushed to sell their dollar portfolio and borrowed to their limit from American lenders, the United States was transformed almost overnight from a debtor to a creditor.
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Its foreign lending raced upwards towards the majestic level that the British had accumulated in 1913. With British exports sinking to 60 per cent of their pre-war value,
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and America's rising to unprecedented heights, the dollar replaced sterling as the most coveted currency. American banks began to emerge from isolation to set up branches abroad. American exports filled the gap left by the British shortfall. In Latin America, where Anglo-American competition was sharpest, the fall-off of British trade to long-valued markets was particularly steep.
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Nor was the Americans’ challenge confined to trade, investment and commercial transactions. In 1916 began the vast expansion of their merchant marine through government subsidy. By the end of the war, this commercial fleet was 40 per cent as large as the British.
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Behind this great American progress lurked the suggestion of a world reordered to America's design. ‘When the war is over’, Woodrow Wilson told his main foreign policy adviser, Colonel House, ‘we can force them [the British] to our way of thinking, because by that time they will…be financially in our hands.’ But, he added, ‘we cannot force them now’.
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The scale of British debts at the end of the war was certainly huge. By November 1918, nearly £1 billion was owed to the American government and private lenders.
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The backlog of payments made it considerably more by 1920,
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equivalent perhaps to some 20 per cent of overseas assets in 1913. Around 15 per cent of Britain's overseas wealth had also been spent on vital dollar goods in the first years of the war. Britain would have to pay back its American loans at £100 million a year, Keynes calculated gloomily in March 1919. ‘Such a burden will cripple our foreign development in other parts of the world.’
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To make matters worse, much of this debt had been incurred on behalf of Britain's wartime allies, mainly Russia, from whom it was unlikely to be recovered. Added to that, the huge domestic borrowing that had financed much of the war effort
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was likely to mean high interest rates and taxation, and a consequent burden on industry, for a long time to come. But the picture might have been worse.

Brutal though the strain had been, the British had defended the value of the pound in the vital arena of the New York market. By doing so, they kept much of their commercial empire in being. The sterling balances of their main trading partners remained in London. Battered though it was by submarine warfare, their vast merchant marine carried the great bulk of British goods and earned vital dollars in the Atlantic trade. When American troops were sent to the European war, more than half crossed the Atlantic in British ships. For that and other British supplies and services, Washington paid – nearly $2 billion (£400m) in 1918–19.
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British investments overseas continued to earn a substantial income. The returns for 1920 show overseas investment earnings at £200 million and other invisible exports at £395 million – a grand total of nearly £600 million, compared with £369 million in 1913.
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Against that must be set the huge rise in prices: by 1920, domestic wholesale prices were at three times their pre-war level,
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and the price of raw cotton – one of Britain's largest imports – showed a similar rise.
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1920 was also the high point of the post-war boom, before the huge backlog of deferred purchases gave way to the depressed conditions (in Britain) of the early 1920s. Nevertheless, the scale of their overseas commerce and the arduous defence of sterling had enabled the British to offset considerably the external effects of their war economy.

An important element in the safeguarding of the commercial empire had been the resources drawn from the dominions and India. The dominions (South Africa in part) paid for the forces they sent to the imperial war effort. To buy the supplies they needed, they borrowed from London. To help balance this borrowing, the British government bought much of their produce at generous prices: the entire Australian wool-clip in 1916–17. Except in the case of Canada, which was part of the North American dollar zone, no payments in gold were made to Empire countries which had to be content with sterling balances piled up in London.
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Gold was hoarded for the more vital task of propping sterling's value against the dollar. South African gold was exported to London, and the Treasury resisted the plaintive requests of South African banks for shipments to boost the supply of coin. ‘We keep sending away our vast gold production and yet cannot get enough sovereigns to carry on the business of the country’, complained one ‘English’ politician.
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As a non-sterling country, Canada's role was especially vital. It had the most industrialised economy of any Empire country. As well as sending the largest contingent of dominion manpower (over 400,000 men) in the Canadian Expeditionary Force, it supplied by the second half of the war a large fraction of the munitions Britain needed. By 1917, between a quarter and a third of Britain's artillery ammunition was being produced in Canada.
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An Imperial Munitions Board, staffed by ‘some of the ablest men of business in Canada’
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was set up in December 1915 to coordinate production among some 400 firms and 300,000 workers. Canada became a western extension of Britain's war production economy. In the quarter ending on 30 December 1916, the British ministry of munitions spent £66 million in the UK, £33 million in the US and £20 million in Canada.
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With the pressure on Britain's hard currency reserves by the end of 1916, it became something more: a source of dollars for British war purchases. Much of the cost of the munitions produced in Canada was met with advances from the Canadian government and the loans it raised at home. Britain borrowed in all $1 billion in Canada: an amount equal to the value of the dollar securities sold in the United States, and to a quarter of London's borrowing from the American government.
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It was heavily offset by the sterling expenses that Canada incurred in fighting the war (some C$714 million). In manpower, industrial production and dollars, the oldest dominion had been an indispensable ally.

India’s case was different, though no less important. India was rich in manpower but poor in industry. Even more than in the dominions, whose money-markets were under-developed by comparison with Britain's, it was difficult to mobilise capital there. Under rules laid down before 1914, London bore the cost of sending troops out of India – both Indians and the British garrison – to a theatre of war. But, in September 1914, the Indian government agreed to meet the ‘normal’ cost of such forces as if they were in India.
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This included Indian soldiers serving in France. By the end of the war, more than one million Indians had served overseas, and the Indian government had recruited over 800,000 volunteers to the army.
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The economic price was considerable. While India piled up credits abroad with the sale of exports and London's payments for the army, little of this could be remitted in earnings, still less in gold. Strict exchange controls prevented trade in non-essential goods, and an embargo on grain exports reinforced the effects of a shortage of shipping (heavily concentrated in the short-haul Atlantic) to the detriment of grain producers. After 1916, the burden of war became steadily heavier. In 1917, the Viceroy's government made a gift of £100 million to Britain, equivalent to India's annual revenue. It meant, remarked an Indian member of the legislative council (which was not consulted), that ‘for a lifetime of a generation internal improvements of even the most necessary kind will be considerably hampered’.
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Inflation accelerated. The tax burden per head of population rose by 65 per cent between 1914–15 and 1918–19.
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Public debt grew by half. In the last year of the war, as London faced the terrible wastage of British manpower, Indian resources were pressed more and more heavily. The Viceroy promised to raise a further half a million men in April 1918
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and to meet the ordinary costs of a much larger part of the Indian forces overseas. The military budget rocketed upwards, doubling government spending by the end of the war. Like the dominions, though without their freedom of choice, India made a critical contribution to the economic cost of defending the British world-system.

Imperial aid reduced British dependence upon the United States and eased the strain upon sterling. It helped blunt the danger that financial and naval primacy – the woolsack and the trident – would both cross the Atlantic at the end of the war. In fact, for a number of reasons, the American challenge proved curiously muted. The economic muscle on which Woodrow Wilson had hoped to rely was not strong enough. The war had ended too soon. ‘We cannot afford to enter into a competitive fight [with British shipping] for some time to come’, warned his Shipping Commissioner in late 1918.
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With two million Americans marooned in Europe, a shipping war with the British was out of the question. Nor were the British in need of American dollars once the shooting stopped. When the American treasury cut off its dollar loans, European countries ceased to buy American goods. Wilson's government also proved surprisingly reluctant to discuss economic cooperation with its European associates so that the universal free trade that was meant to accompany the League of Nations (and foster American industrial power) remained still-born. Indeed, the economic role of the American government shrank swiftly at the end of the war and there was little love lost between the Wilson administration and the money barons in New York, whom his finance minister (and also his son-in-law) described as ‘reactionary, sinister, unscrupulous, mercenary and sordid’.
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Nor did the war mark the prelude to the global triumph of American trade. In Latin America, there was a permanent shift in America's favour, although in Argentina particularly, British exporters staged a strong recovery.
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But the overall picture was much less positive. By the mid-1920s, the real value of American exports was hardly above its pre-war level.
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The United States had broken free from the commercial
imperium
once wielded from London. But it still lacked the means, and perhaps the motive, to build one of its own.

Rumours that the British had lost their premier place in the world economy by the end of the war were thus somewhat exaggerated. They remained the economic superpower with the largest foreign trade, the largest foreign income, the largest share of international services and the largest merchant fleet. Nevertheless, the war did bring a critical change, though it took time for the effects to become obvious. The place occupied by the City and its commercial empire in the British world-system was sharply modified. Before the war the City had enjoyed remarkable freedom from governmental control. It had been a commercial republic with its own
imperium
: cosmopolitan, self-interested and self-regulated. During the war it was brought brusquely to heel and its liberties cut down. Treasury control became stronger and stronger. By January 1917, it had the power to requisition all foreign securities.
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Its view, not that of the Bank of England, was now decisive on interest rates and the gold reserve.
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The Treasury decided where capital could be exported and for what purpose. After the war, ‘informal’ controls persisted, to channel investment into sterling countries, partly to protect the exchange rate.
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Secondly, there was no doubt that the City's place in international finance had been seriously weakened by the massive wartime sell-off of dollar securities, the most mobile and therefore the most valuable of assets.
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To have disposed of so much of its holding in the world's largest and strongest economy was bound to reduce the City's capacity to invest abroad and to aggravate Britain's dollar deficit, a marked feature even in pre-war times. Thirdly, the war had meant a huge rise in domestic borrowing in Britain: government debt rose tenfold from £700 million in 1914 to £7.5 billion in 1919.
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Financing this home-grown debt became a major preoccupation of both government and City, driving up interest rates and redirecting capital from export overseas. The war made the City poorer, more inward-looking and more vulnerable to external shocks.