Darwin J. The Empire Project. The Rise and Fall of the British World-System, 1830-1970

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275 / The Edwardian transition

Germany’s, and six times that of America. And, unlike the investments

of the French and Germans, it was to be found not in Europe but

spread across the world, in the Americas, India, Africa and the Paciﬁc.

Taken together, the income from the export of services and from over-

seas investments contributed one-third of Britain’s external earnings

(the rest came from merchandise exports). Net export of services con-

tributed over 5 per cent and net overseas income over 8 per cent of

gross domestic product in 1913 – a greater proportion than that of any

other major power.

Thus Britain was quite unlike its main economic rivals. It was

not just an industrial state, but an agency state (providing commercial

services) and a rentier state as well, drawing a huge proportion of its

wealth from these latter functions where the growth of international

competition was much less acute. This distinctive pattern reﬂected

Britain’s comparative advantage as an economic power. In a seaborne

age, its location between Europe and America and its excellent maritime

communications made Britain a natural entrepot. A compact landmass

and a dense rail network had encouraged simultaneously the growth

of specialised industrial districts (like Lancashire, West Yorkshire, the

Potteries, the Black Country, Clydeside, Tyneside and South Wales) and

a centralised machinery of commerce and ﬁnance with its headquarters

in London – a winning combination. With the second largest reserves of

hard coal (thermally the most efﬁcient) in the developed world, energy

for industry and transport was abundant. With a large population,

rapid population growth but an agricultural sector that employed pro-

portionately far fewer workers than its German, French and American

counterparts, Britain had relocated much of its agricultural production

to overseas countries. In the ‘white dominions’ especially, this helped

to turn its emigrant demographic surplus into suppliers, customers

and borrowers on a grand scale. But it was the enormous growth of

world trade and the world economy (to which the British had con-

tributed heavily) that yielded a vital dividend of wealth in the last

decade before the First World War.

The value of international trade is usually thought to have

increased tenfold between 1850 and 1913. Between 1860 and 1880

it doubled from about £1.5 billion to £3.0 billion. The pace slackened

between 1880 and 1900, by which date it had reached nearly £4 billion.

Then, between 1900 and 1913, it doubled again to nearly £8 billion.

This phenomenal commercial growth was driven by the urbanisation

276 / Towards ‘The Sceptre of the World’

and industrialisation of Europe (which accelerated sharply after 1870)

and the opening up of new agrarian regions to supply the food and raw

materials it needed. The key was the ever-falling cost of transport by

sea and rail, the effect of which was initially to drive down the price of

many agricultural commodities. But, after 1896, when wheat reached

its lowest price for a century, commodity prices recovered, setting off

the long boom in world trade up to 1913. As rural producers around the

world reaped richer rewards, they bought more imports and borrowed

more money. Vast new tracts of land in Argentina and the Canadian

West were cultivated. Wheat was exported from India to Europe. West

African farmers took up cocoa. The demand for rubber and oil began

to soar.

Not surprisingly, in such dynamic conditions, the demand for

capital became intense. It was needed above all to ﬁnance the trans-

port infrastructure without which development would be retarded,

curtailing the proﬁts of speculation in land, mines and urban prop-

erty. Commodity-producing regions competed furiously to bring their

goods to market and capture the largest share. They needed the ser-

vices of shipping lines, shipping agents, insurers, banks and brokers.

They needed the fast accurate commercial information provided by the

telegraph. In turn, they spent much of the proceeds of their newfound

wealth on consumer goods, especially clothes and cotton goods which,

in non-industrial countries, typically made up between 15 and 30 per

centofimports.

And, as the trafﬁc in trade, capital and commercial

information grew in scale and velocity, they experienced its ‘globalis-

ing’ effects. Their port-cities, the hinge between hinterland and world

market, swelled in size and importance, especially those on the great

trunk routes of maritime trade across the North Atlantic, to the River

Plate and eastward via Colombo to Singapore, Hong Kong and Yoko-

hama. Commercial elites waxed richer and their views more inﬂuential.

Diasporas expanded and prospered as their networks became more

valuable. Information, fashion, opinion and news were more widely,

swiftly and sometimes accurately disseminated.

The principal great power beneﬁciary of these trends was

Britain. The growth of world trade after 1900 was a huge opportunity.

British steamship tonnage rose from 7.2 million in 1900 to 11.2 mil-

lion in 1913.

The ‘invisible’ income from commercial services shot up

from £109 million to over £168 million.

The value of British exports

rose from £291 million to £525 million,

forming by 1913 some

277 / The Edwardian transition

25 per cent of GDP.

The total of British investment overseas all but

doubled, and so did the income that it yielded – from £103 million to

£199 million. Returns on investment abroad was now twice the ﬁgure

for 1873, and four times that of the 1850s.

The overall surplus on

the balance of payments (current account) climbed like a rocket from

£37 million in 1900 to £224 million in 1913,

creating a huge new

fund for investment overseas. And, as if to reﬂect the broadening stream

of trade and capital, the number of emigrants from the British Isles to

extra-European countries now reached its highest level in the last three

years of peace, with Canada, Australia and New Zealand as the most

popular destinations.

This dramatic acceleration in global economic activity, and the

active part played in it by Britain and the countries of the British world-

system had important consequences for their stability and cohesion.

For Britain’s own role, the timing had been crucial. The fact that the

great rise in industrial competition had occurred in a period of such

exceptionally rapid growth in world trade sheltered British industry

from its worst effects. Two other circumstances eased Britain’s passage

into a global economy in which competition was now ‘multipolar’.

First, although the neatness of the boundaries should not be exagger-

ated, the three great industrial powers tended to concentrate in differ-

ent markets and (to a lesser extent) to specialise in different exports.

American exports to Europe were chieﬂy food and raw materials, like

cotton. American competition with British manufactures was strongest

in Canada, taking by far the largest share of that country’s imports

(Canada’s total imports in 1913 were $692 million: $441 million from

the United States, $139 million from Britain, and $14 million from

Germany),

and in Central America. In 1913, Germany’s most impor-

tant customers were in Europe, to which over three-quarters of her

exports were consigned. Sixteen per cent went to the Americas, but only

8 per cent to Asia, Africa and Oceania combined.

By contrast, two-

thirds of British trade lay outside Europe. The Americas took 21 per cent

of British exports; Asia, Africa and Oceania 43 per cent.

Of course, in

a hugely increased volume of trade, British exports no longer claimed

the same overwhelming predominance even in old-established markets.

But this had not prevented (as we have seen) a large increase in British

exports. And, while Britain imported a growing proportion of manu-

factured goods, it was notable that German exports achieved a lower

penetration there than in any other industrial country.

278 / Towards ‘The Sceptre of the World’

Secondly, Britain retained, and perhaps even enhanced, her

astonishing pre-eminence as the supplier of capital and commercial

services. Here, too, we should not underestimate the importance of

commercial rivalry. But no single grand challenger had emerged. The

United States had barely begun to export capital, and except in Canada

and Central America was of minor signiﬁcance as a foreign investor.

In Argentina, Brazil and Uruguay, where South American growth was

strongest, American investment was negligible.

The sole exception

in the ‘Southern Cone’ was Chile. France, second to Britain in for-

eign investment, was far behind in industrial output and French capi-

tal was concentrated overwhelmingly in Southern and Eastern Europe

and in Russia.

There was little prospect of Britain’s spheres being

sucked into a French commercial imperium. German investment was

much smaller in scale and, like France’s, mainly found in Europe. Out-

side Europe, its infrastructure was underdeveloped. In Latin America,

for example, German business found it easier to raise money through

London.

Where German capital competed most aggressively in the

extra-European world, it was usually where government pressure had

been exerted on German banks and the objects were as much political

as commercial.

In fact, the normal instinct of banks and investors in

continental Europe was to cooperate with London and use its services.

This was hardly surprising. So long as so much of world trade was

ﬁnanced by sterling bills (the medium for transactions between differ-

ent national currencies) – and two-thirds of sterling bills in 1913 served

trade between third parties – the City would be the natural magnet for

short-term funds and foreign exchange.

These in turn would draw

the foreign banks and their deposits to London, swelling still further

the mass of capital and credit located there.

In the long decade before the First World War, the impact of

commercial change on the British economy had been to alleviate indus-

trial competition and perhaps even to prop up industries – like cotton

and coal – that were labour- not capital-intensive. Far from weak-

ening London’s grip on its commercial empire, it helped the City to

‘annex’ new provinces (like Argentina), to consolidate old ones (like

India, South Africa, Australia and New Zealand), and to advance new

tropical bridgeheads into West Africa and Southeast Asia. In the pro-

cess, vast new assets were acquired and further claims piled up on

the productive capacity of new regions. All this signalled a deeper and

closer integration between Britain and the varied parts of the British

world-system.

279 / The Edwardian transition

For Britain’s associates, clients and subjects in that system, the

common experience had been the enormous growth of their foreign

trade and the inﬂow of new investment, much of it directed to the

improvement of their transport and communications. The weight in

their economies shifted further towards the international sector, ori-

ented if not always on Britain as a market then on London as the

hub of their trade and ﬁnance. In independent countries like Argentina

and Brazil, the City’s power was felt as keenly as in any colony. They

had adopted the gold standard (with its guarantee of convertibility) to

attract the foreign (usually London-based) investor. Having done so,

they were forced to accept its ruthless discipline. When their imports

outran their exports (as happened in the economic cycle), and their

foreign credits dwindled, they had either to borrow more abroad or to

rein in their home economies by monetary contraction, perhaps both.

They dare not offend the money power in London: the consequences

of an investment famine were too dire. Without capital imports, their

export production would stagnate; without foreign credits (and access

to sterling bills), trade would dry up; without foreign trade, public rev-

enues would collapse.

But the result was to transmit the ﬂuctuations

of export performance in exaggerated form into the internal economy:

booms were wilder and contractions sharper. Moreover, gold standard

countries on the ‘periphery’ soon felt the effects, if a correction was

needed in the British economy, to check an adverse movement in for-

eign exchange. By raising interest rates, the Bank of England could

swiftly draw gold and foreign credits into London at the expense of

peripheral economies – a technique at which it grew very adept in the

years before 1914. The City’s pivotal role in world trade (with all its

beneﬁts) thus went hand in hand with its tightening grip on the eco-

nomic life of extra-European states without money-markets of their

own and dependent on foreign capital.

The dominions, India and Africa

The white dominions also saw large increases in their foreign trade

and (with some variation) in their imports of capital between 1900 and

1913. Here, too, the result was to strengthen the pull of London and (in

different ways) to reinforce their attachment to the British system. The

most obvious case was Canada where ‘continental’ integration with the

American economy had been the main competitor. But the creation of

a wheat economy in the Prairie West after 1900 using largely British

capital checked this continental drift. The transatlantic route, and its

280 / Towards ‘The Sceptre of the World’

western extension to Winnipeg and beyond, grew busier. The great

transport empire of the Canadian Paciﬁc Railway (largely owned in

Britain) prospered. Montreal, local metropole of the wheat economy,

boomed. When reciprocity (free trade in natural products with the

United States) was proposed in 1911 by Laurier’s Liberal government,

it drew furious opposition not just from Montreal and the Canadian

Paciﬁc Railway, but (fatally) from Laurier’s Liberal allies in Ontario.

For Toronto interests, as much as Montreal, now saw continentalism as

a deadly threat to their vision of a national economy. The commercial

tie with Britain was the best guarantee of Canadian autonomy, the

continuing ﬂow of British funds and the regional primacy of Central

Canada in the confederation.

In South Africa, ﬁnally uniﬁed in 1910, the London connection

was no less critical to the dream of a ‘national’ future. Far more than

wheat or wool in the other dominions, gold was the foundation of the

South African economy, and the indispensable means of recovery from

the catastrophe of 1899–1902. In the years up to 1914, production and

employment on the Rand grew rapidly. Gold output rose from £16 mil-

lion in 1898 (the last year before the War) to £38 million in 1912.

The

workforce followed suit.

An authoritative estimate in 1914 claimed

that gold mining contributed nearly half of government’s public and

railway revenue. It may already have given half the population its

livelihood in what was otherwise (barring diamonds) an impoverished

agrarian economy. It was gold that attracted foreign capital; gold that

paid for the railway system; gold that made possible the Union of 1910

and the uneasy partnership of Boer and British. But the bonanza had

strings. In the age of the gold standard, the international price of gold

was ﬁxed and invariable. Yet the cost of recovering the low-grade ores

of the Rand rose remorselessly as the mines dug deeper. Proﬁt depended

upon driving costs lower, especially the cost of labour. Partly as a result,

ownership of the mines was concentrated in the hands of a few large

groups, of which the largest, the ‘Corner House’ group (Wernher, Beit,

later the Central Mining Investment Corporation) controlled 50 per

cent of production.

Corner House was managed from London – the

world centre of mining ﬁnance – to which its principals had retired. On

its fortunes depended much of South Africa’s commercial credit, and

hence the experiment in white self-government embarked on in 1910.

Powerful as it seemed, mining capital depended upon the

Afrikaner-led government of Botha and Smuts for political support. It

281 / The Edwardian transition

faced an increasingly embittered white working class in Johannesburg

furiously opposed to ‘dilution’ of the workforce by black or Chinese

labour.

Production, proﬁts and share price were dangerously vul-

nerable to strikes and sabotage. White opinion (and almost all voters

were white) was susceptible to swaartgevaar (‘black peril’): the fear of

black competition for jobs and a black presence in the towns. Afrikaner

opinion (and the majority of whites were Afrikaners) disliked and mis-

trusted ‘foreign’ capital and the ‘Randlords’. With their backs to this

white wall, Smuts and Botha drove a hard bargain. They insisted on the

expulsion of Chinese indentured labour – the red rag to the white bull –

and encouraged the Randlords to replace foreign-born (largely British)

mineworkers with local-born Afrikaners.

In the Mines and Works

Act of 1911, they imposed an industrial colour-bar on the Rand. But,

in return, they outlawed strike action, crushed white labour militancy

spectacularly in 1914 and sanctioned the huge increase in black migrant

workers. Behind this compromise, we can see an anxious attempt to

mitigate the political risks of exposure to external economic forces. But

in no other dominion did the political and social structure (with all its

racial conﬂicts and inequities) rest so completely on an industry bound

so inﬂexibly to the London market. Nor on one so perilously close (or

so it seemed until the mid-1930s) to commercial failure and terminal

decline.

Australia and New Zealand had suffered badly in the 1890s

when falling export prices, over-borrowing, a banking crisis (as overseas

deposits were withdrawn and their London assets shrank) and monetary

contraction plunged them into depression. The steady rise in commodity

prices in the new century brought relief and recovery. Australian exports

reached £80 million by 1913

and an ofﬁcial commission rejoiced at

the world’s insatiable appetite for Australian products.

Yet Australia

failed to attract new British capital. In London, disillusionment after

the crash of 1893 was reinforced by mistrust of the new Common-

wealth’s blend of economic nationalism and home-grown socialism.

The widening sphere of wage arbitration, state enterprise and protec-

tive tariffs caused irritation in the City.

Instead, Australians ﬁnanced

their capital needs and overseas debts from their rising export income.

But none of this meant secession from the commercial world centred on

London. Australian ‘socialism’ was not a reversion to autarky but (like

the insistence on all-white immigration) a tactic to reduce the domin-

ion’s exposure to the external shocks felt so sharply in the 1890s.

282 / Towards ‘The Sceptre of the World’

Economic realities dictated reliance on the British market for half of

Australia’s rising exports, and on the City for the short-term funds

that lubricated trade. As growth picked up, so did the need for British

capital. Whatever their ‘socialist’ leanings, Australian leaders showed

faultless conservatism when it came to banking. The Commonwealth

Bank, set up in 1912 to meet the need for a central bank, carefully

followed the ﬁduciary practice of the Bank of England.

Not coinci-

dentally, perhaps, there was a sharp rise in British investment thereafter.

In New Zealand, where the 1890s had been less painful, the British con-

nection was even more important. Nearly 80 per cent of New Zealand

exports were destined for Britain and perhaps 90 per cent of public debt

was held there.

Tariffs were moderate, compensating (if that) for the

fall in ocean freights and import costs.

Banking practice was cautious

to an extreme lest the London investor be frightened again.

Above

all, New Zealand farming was adapted to meet the surging demand in

Britain for frozen meat and dairy products. The reward was an aston-

ishing burst of economic growth. Between 1896 and 1911, production

rose by 60 per cent, the area under white occupation by 50 per cent

and population by 40 per cent. The fruit of this closer integration was a

virtual remaking of New Zealand society, forging a political economy

that would last for more than ﬁfty years.

For all the overseas dominions, the boom in global trade had

been a chance to strengthen their economies and stabilise their poli-

tics. But it had not brought greater freedom from London’s commercial

inﬂuence. In economic terms, as well as political, ‘nation-building’ in

the white dominions meant greater dependence not less on the British

market and the ﬁnancial machinery of the City of London. In a global

marketplace, access to capital, information and expertise from the com-

mercial centre was more essential than ever to dominion producers

whose fortunes depended upon good connections with London, per-

haps even a base there. In India, which lacked self-government, the

pattern was more complicated. In commercial terms, India’s pattern

of foreign trade was exceptionally valuable to London. India ran a

trade surplus with Europe, the United States and Southeast Asia but a

deﬁcit with Britain, whose best customer it was. India’s remittances

of foreign exchange helped London meet Britain’s trade deﬁcits in

America and Europe, lubricating the international payments system

without which world trade would have expanded much more slowly.

But India was also required to meet an annual bill for the interest

283 / The Edwardian transition

payments on borrowed British capital, for the pensions of British ofﬁ-

cials and for the ‘hire’ of some 70,000 British troops normally stationed

on the sub-continent. Since long-term borrowing was very difﬁcult in

India, and its own revenues were inelastic, the government of India

relied on British lenders to supply the capital it needed for spending on

public works like railways and irrigation.

In the 1880sand1890s, this economic relationship with Britain

had been strained. India had a silver-based currency and silver’s value

fell sharply against gold. The government of India had to ﬁnd more and

more silver rupees to pay its sterling debts. It faced a dangerous spiral

of rising taxation (increasing discontent), heavier borrowing (to cover

the deﬁcit), ever-heavier debt service and the spectre of a default –

a political and ﬁnancial catastrophe of unimaginable proportions.

India’s double function – in Britain’s payments balance and military

‘economy’ – was at risk. In practice, after 1900, this danger quickly

receded. At London’s insistence, the Indian government adopted a ‘gold

exchange standard’. The rupee–sterling exchange rate was ﬁxed, and a

fund of gold and sterling assets established in London to maintain the

value of the rupee and cover any shortfall in Indian remittances.

The

experiment was a success, but chieﬂy perhaps because it was launched

at a time when India’s foreign trade and payments surplus were also

rising rapidly. India’s surplus on commodity trade was about Rs 200

million in 1900 and Rs 700 million in 1910 and Rs 570 million in

1913.

It was true that India continued to run an overall deﬁcit with

London that arose in part from British loans and the service charges that

London imposed. This had to be met by further borrowing.

But the

scale was comparatively modest (perhaps £6 million per year) and part

of it was due to new investment in railways and irrigation in a period

of commercial expansion. It was also true that the domestic impact of

India’s deepening involvement in international trade was mufﬂed by

the vast scale of the rural economy much of it close to subsistence and

threatened by periodic famine – although export-producing regions

did experience rising living standards.

The bar on tariffs imposed

by London made diversiﬁcation into industry more difﬁcult. Overall,

however, the pre-war years saw the closer integration of India into

the British world-system. India remained Britain’s largest market. Its

export surpluses were larger. Its payments to Britain were met without

strain. Most important of all, perhaps, ﬁnancial stability and economic

growth underwrote the political system of the Civilian Raj. Relieved

284 / Towards ‘The Sceptre of the World’

by prosperity from the pressure to tax more heavily or intervene more

deeply in the agrarian economy, the Raj had no need to seek wider

cooperation from its Indian subjects or pay the price in concessions.

It could balance its imperial obligations and the Indian books. This

was the vital condition if it was to keep its freedom as much from its

overlords in London as its subjects in India.

But perhaps nowhere were the effects of trade so striking as in

Britain’s new tropical dependencies in Afro-Asia. The commodity boom

galvanised their economies after 1900. The rapid growth of production

and export sales attracted larger British-based companies with better

access to credit and capital than indigenous traders. In colonial Malaya

they took the lead in rubber and tin.

In British West Africa, rocketing

exports of cocoa and palm products transformed the prospects of the

‘Coaster’ ﬁrms.

100

The colonial states could push railways into their

vast new hinterlands as their credit rose with their (customs-based)

revenues. As the interior opened up, the scale of British business was

transformed. Large British ﬁrms crowded out their local African rivals.

The rush for Nigerian tin excited the City.

101

Shipping and banking

fell under the control of the self-made magnate Alfred Jones, chairman

of Elder Dempster and the British Bank of West Africa. Liverpool had

long been the real metropolis of the British West African coast. Now

its commercial reach extended to the fringes of the Sahara.

102

By 1905,

the Lagos Chamber of Commerce was exclusively white.

After 1900, then, the British exploited to the full their comparative

advantage as traders, shippers and ﬁnanciers and their dominance in

cotton textiles – the universal consumption good in Afro-Asian markets.

The demand for their capital and commercial services and the primacy

of London as the clearing-house of trade and investment deepened the

mutual dependence between the different elements of the British world-

system: the British Isles; India; the white dominions; and the property,

assets, concessions and installations that made up the City’s commercial

empire in non-British countries. By 1913, perhaps one-third of British

net assets were located overseas. British capital moved freely between

the informal empire, the white dominions and the tropical dependen-

cies. New business empires in railways and shipping combined interests