The Empire Project: The Rise and Fall of the British World-System, 1830–1970 (64 page)

The balance was swung. At the Washington conference in 1921–2, the British and Americans settled their naval differences by agreeing to parity in capital ships, and a ten-year ‘holiday’ in construction. The new rapprochement had a further consequence. Hesitation over giving up the alliance derived partly from British alarm at the semi-colonial expansion of Japan into China and especially her reluctance to give up the large Shantung concession seized from Germany.
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Without the alliance, argued its champions, restraining Japan would become even harder. In fact, the show of Anglo-American unity helped to push Japanese policy towards economic rather than military expansion in China, in financial partnership with American business.
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The Japanese agreed to attend the conference which framed a post-war settlement for East Asia. They gave up Shantung and agreed to limit their battleship strength to 60 per cent of the British and American figure (the 5:5:3 ratio). They also signed the Four Power treaty alongside Britain, France and America, guaranteeing the independence and integrity of China, and the Nine Power treaty, promising no expansion of existing foreign rights and concessions in the country.

The ‘Washington system’ was a promise of stability in East Asia. But its strategic implications were only gradually clarified. To British naval planners, the Washington logic was straightforward. To conciliate Japan, the treaty had forbidden new fortifications across a vast area of the Western Pacific. Henceforth, if a British fleet were sent to East Asia, it must use Singapore as its base, not vulnerable, underfortified Hong Kong. Indeed, the need for a great new naval base at Singapore had already been agreed by British ministers in 1921. Secondly, the post-war navy should be built and trained for a war against its likeliest enemy, now Japan. Yet, as financial stringency bit deeper, governments in London scaled down or postponed the Singapore base and questioned the need for an East Asian strategy. Matters came to a head in 1925 when Winston Churchill, as Chancellor of the Exchequer, dismissed the navy's spending plans as ruinously expensive. They would infuriate taxpayers, he told Baldwin, the Conservative prime minister, and unite Liberals and Labour in a campaign for economy.
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The Japanese threat was chimerical. ‘Why’, he asked, ‘should there be a war with Japan? I do not believe there is the slightest chance of it in my lifetime.’ No Japanese government would risk a war against the united strength of the Anglo-Saxon sea-powers. The Cabinet agreed. Churchill had his way. Navy spending was cut down and the Admiralty forbidden to prepare war plans against the Japanese navy.

In the seven years that followed the end of the war, the strains and tensions of imperial politics had been magnified by persistent geopolitical uncertainty. For the British, the defeat or exhaustion of their international rivals had been the main guarantee that the simultaneous emergencies they faced in Ireland, Egypt, China, India and the Middle East would not escalate into a general crisis of their global system. By 1925, they could be more hopeful. The settlements at Locarno and Washington (as Churchill had interpreted its meaning) revealed an emerging world order whose imperial consequences seemed reassuringly benign. International tranquillity at both ends of Eurasia dispelled the nightmare of war on fronts 12,000 miles apart. With Germany tied to the Liberal Concert (underwritten financially by American capital), and Japan constrained by Anglo-American friendship, only Russia could threaten the defences of empire – though more by ideological subversion than by military challenge. The gates of the British world would be guarded by the self-interested caution of its most likely predators: an agreeably cheap solution. The revolutionary excitement of 1919 had passed. The siren call of Wilsonian self-determination had modulated into the League of Nations mandate system, under the watchful eye of the two main colonial powers.
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With little risk of external attack, the internal enemies of the British system could be dealt with in detail by an army freed from its old strategic burdens. The defence costs of empire could be axed to pay for its debts and fund social reform. As escape from the British system seemed less likely, colonial resistance would grow less fervent. The politics of empire could pass from the maelstrom of the aftermath to the calmer waters of the post-war world.

Rebuilding commercial empire

The necessary counterpart to international tranquillity was the revival of London's commercial
imperium
. Churchill's furious opposition to naval rearmament sprang from the fear that its costs would unhinge his financial strategy. Stringency, especially in defence, was necessary partly to pay for social spending – the price of political survival in the age of universal suffrage – but even more to fund the return to a gold-based currency. In the City, at the Bank of England and in the Treasury, it was axiomatic that London's reputation as a financial centre depended upon the restoration of the gold standard.
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‘Gold’, said Montagu Norman, the Governor of the Bank, ‘is the guarantee of good faith.’
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But there was a catch. If sterling was once more to be based upon a fixed value in gold, bullion had to be attracted to London. It would only come if London offered the safest haven or the highest rates. On both counts it was vital to reduce government spending and borrowing (hugely inflated by the war) to the minimum. Foreign depositors would be reassured by the strict management of public finance, and the interest rate needed to attract them would fall back gradually to a level that domestic industry could afford. Britain's return to gold in October 1925 was intended to signal the end of post-war economic turbulence, and London's resumption of its pre-war status. As we shall see, however, its old commercial empire was not so easily revived.

Before 1914, London's pre-eminence had been based upon the vast scale of its commercial and financial transactions. A huge proportion of the world's international business was conducted in or through the City. The City exerted its influence on the financial and commercial practice of states inside and outside the Empire to protect or enhance Britain's overseas wealth – perhaps one-third of her total by 1914. As the centre of the world's information network (all cables led to London), it was the principal engine of Britain's ‘soft power’: transmitting news, ideas and intellectual fashion to audiences abroad. Above all, perhaps, its claims on overseas production (the real meaning of its foreign investment) and its portfolio of foreign property formed a grand ‘war-chest’ to be drawn on in times of imperial emergency.

This commercial empire had survived the war. Its prospects in peacetime were much less certain. The rupture of the pre-war commercial and financial system was prolonged by the struggle over debts and reparations, the violent fluctuations in currency values, the proliferation of new states and frontiers and the revolution in Russia. To restart the flow of trade, from which the City drew its profits, required a massive injection of loans and credits. But the City lacked the ready cash. With a large dollar debt to service, small hope of recovering its wartime advances (especially to Russia), and so much British saving tied up in government borrowing at home, capital for once was in short supply. To make matters worse, the end of the war cut off the flow of American credits just as government spending was reaching its peak. The result was a wave of inflation and an outflow of gold. The gold standard was suspended, deterring short-term lenders from depositing their funds in London and further weakening the City against its great rival, New York. Orthodox remedies merely enfeebled the patient. Interest rates were raised and expenditure slashed. As dear money at home drove up its costs and dried up demand, British industry struggled to compete in foreign markets. Its failings were reflected in the balance of payments, the value of sterling and the credit of the City. Here was a vicious circle of decline from which no escape seemed easy.

Indeed, the post-war turbulence seemed to have drastically worsened the structural problems of the British economy, some of which had been visible before the war. The heavy dependence upon exports of cotton textiles and coal became an increasing liability. Cotton exports fell back heavily from £125 million in 1913 to £85 million in 1925 and £72 million by 1929.
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Under the pressure of Japanese and local competition, the Indian market, Lancashire's great stand-by, began its inter-war collapse. Coal was damaged by cheap competition and the increasing use of oil as fuel. The index of all exports by volume declined from 173 (1913) to 119 (1922) and recovered only to 134 (1927).
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But imports rose from 81 (1913) to 86 (1924) to 96 (1927) (1939 = 100). The result was ever-growing pressure on the balance of payments. As imports surged and exports faltered, the strain was taken up (as it had been before the war) by the income from invisibles. Before the war, however, the merchandise gap was narrower and invisible income far more buoyant. In the five years from 1922 to 1926, the income from both overseas investments and other invisibles fell well below their equivalent pre-war values.
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Shipping, a huge source of pre-war earnings, was particularly hard-hit. One-fifth of the British merchant fleet was laid up in the 1920s.
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Competition from the United States, Japan and the Scandinavian countries drove down the British share of world trade carried from 52% in 1913 to 40% in 1936,
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and Britain's share of world tonnage began its long descent from 40% (in 1913) to 30% (in 1930), to 26% (1939).
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The shipping giants of the pre-war years fell on hard times.
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British shipping was slow to modernise by adopting oil instead of coal, and its share of the booming trade in oil transport was soon only half its pre-war level.

The full significance of these economic difficulties emerged only gradually after 1918. For seven years after the armistice, the British economy seemed on a roller-coaster: boom, followed by slump, followed by signs of recovery, a further setback and then cautious optimism as the Dawes Plan in 1924 promised to settle the problem of reparations and stabilise the European economy, to which one-third of British exports were normally sent. To the City, it was vital to rebuild the pre-war world, if need be by an active financial diplomacy. This was the role assumed by Montagu Norman, the Governor of the Bank of England, an idiosyncratic, highly strung and emotional figure of remarkable tenacity. Norman's recipe was the close cooperation of the main central banks, with London as the intermediary between New York and Europe. The severity of the depression after 1920 encouraged others to propose more radical solutions. The grudging nod by the wartime British government towards imperial preference, ‘imperial development’ and subsidised empire settlement was converted by post-war tariff reformers like Leo Amery into a full-scale programme to relieve unemployment and reorient the economy. Budgetary cuts and Treasury opposition meant that little came of this.
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But it was desperation at the prospect of deepening economic crisis at the end of 1923 that led Baldwin, the Conservative prime minister, to declare a sudden conversion to protective tariffs. The occupation of the Ruhr, he told the House of Commons, meant that ‘the restoration of Europe had been postponed for years…[W]e are…in a position of emergency that we have never had to meet before.’ ‘Radical and drastic measures’ were needed.
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Tariffs were rejected by the electorate. The 1924 Labour government and the second Baldwin ministry (1924–9), with the free-trader Churchill as Chancellor of the Exchequer, turned back to the orthodoxies of the gold standard as their escape from the economic labyrinth.

With the return to gold, the City might have hoped that the worst of its post-war uncertainties were over, and that it could begin to profit from the revival of the world economy. In reality, the economic damage revealed by the recovery period proved much more lasting. The gold standard was meant to restore confidence in London as the financial centre of the world economy. But the strain was felt by domestic industry struggling to compete abroad while an over-priced pound and high interest rates drove up its costs. Nor was going back on gold a cure for the most serious weakness of the City's commercial empire after 1918: the shrinkage of its foreign investment and the shortage of capital with which to rebuild its pre-war holdings. Indeed, in the effort to keep sterling high against the dollar and prevent interest rates at home (driven up by the enormous scale of government debt) from rising further, the Treasury and Bank of England had actively discouraged investment overseas except to sterling countries.
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When the Bradbury Committee recommended ending the embargo on foreign issues in 1925, it remarked that Britain could not afford to lend abroad more than £100 or £120 million a year, far below the pre-war figure.
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British investors seemed to heed this advice. Where British foreign investment in 1911–13 had taken some 8 per cent of national income, after 1925 the figure was 2.5 per cent.
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By 1929, the nominal level of British capital abroad was the same as in 1913, but its real value had fallen by perhaps 40 per cent. High interest rates at home and uncompetitive exports reduced both the incentive and the means to invest or reinvest abroad. Well before the great depression, the old pattern of commercial empire practised since the 1870s was in retreat.

The shortage of British capital was not the only culprit. The operating conditions for British commerce and capital were also changing. In Latin America as a whole, American capital and trade competed much more heavily than before the war. The British position was strongest in Argentina. In 1914, Argentina had been the third largest destination for British capital after the United States and Canada.
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British investment had boomed on the back of its exceptionally dynamic growth as a producer of meat and grain. In the 1920s, it still seemed of huge importance to British wealth. ‘Argentina must be regarded as an essential part of the British Empire’, remarked the British ambassador in 1929.
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There were 40,000 British passport-holders in the country (substantially more than in the Rhodesias). It paid some £36 million a year to Britain in dividends and interest, perhaps 10 per cent of Britain's foreign property income. Its credit-rating was on a par with Canada and Australia.
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Its British-owned railways were ‘the backbone of our whole position out here’,
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not least because they bought most of their supplies, including coal, from Britain. But Argentina's growth was slowing down as the supply of new land dried up. British exports were declining. British-owned railways and utilities faced growing local resentment over rates and charges. Little British capital was forthcoming. Indeed, the Anglo-Argentine connection was becoming increasingly politicised, just as London began to press hard for import concessions to bring its visible trade into balance. It was only Argentina's extreme dependence on the British market after 1929 that checked for the time being the more vigorous expression of economic nationalism. In China, by contrast, political conditions in the 1920s were already having a direct impact upon British commerce. The lure of the China market (as opposed to its existing value) was strong, but London's apparent reluctance to abrogate the ‘unequal treaties’ and give up the extra-territorial privileges of the treaty-ports made British interests the prime target of Chinese nationalism after 1919. From Canton, where the nationalist movement (or Kuomintang) was concentrated, anti-British activism was aimed at nearby Hong Kong. In 1925, after the ‘30 May incident’ in Shanghai, when several Chinese were killed by the municipal police of the Anglo-American (but mainly British) settlement, the Canton nationalists organised a highly effective sixteen-month boycott of British trade along the coast and a general strike in Hong Kong itself.
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By the end of 1926, the damage was bad enough to push London (under pressure from the large British firms in China) towards the appeasement of Chinese nationalism. Official policy was now to move towards the surrender of extra-territorial rights and the concession of tariff autonomy – China's power to set import duties independently, taken away from Peking in 1842. British enterprise would now have to make the transition (welcomed by the larger firms) towards fending for themselves in their dealings with customers, politicians and warlords.