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

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365 / Making imperial peace, 1919–1926

terms over his bitter opposition and even his threat to resign (Bonar

Law went so far as to write to The Times under the soubriquet of

‘Colonial’ to denounce his colleagues’ views).

In doing so, they paved

the way for American credits to ﬂow to Europe as the severity of the

crisis, highlighted by the Ruhr occupation, sounded the alarm across

the Atlantic. With the Dawes Plan (1924), it at last seemed possible

to cut the Gordian knot of debts and reparations, and begin to nor-

malise the economic relations of the European states. In a more hopeful

atmosphere, the idea of a Liberal Concert revived.

For the British, the question was how large a continental com-

mitment they would have to make to ward off the danger of a new

European conﬂagration. Relations with France would not improve,

argued Austen Chamberlain (Foreign Secretary 1924–9), unless Britain

guaranteed her safety against Germany. Nor would the Germans ‘settle

down’ so long as they hoped to divide the wartime allies. Sooner or later,

a ‘new catastrophe’ would occur, into which Britain would be dragged.

‘We cannot afford to see France crushed, to have Germany, or an even-

tual Russo-German combination, supreme on the continent, or to allow

any great military power to dominate the Low Countries.’

There were

imperial arguments as well. If Britain was at loggerheads with France,

said Maurice Hankey, who, as secretary to both the Cabinet and its

Committee of Imperial Defence, exerted a powerful inﬂuence on minis-

terial thinking, ‘our imperial communications [through the Channel and

the Mediterranean] would be jeopardised’ and London in ‘extreme dan-

ger’ from France’s powerful ﬂeet of bombers. It was an ‘almost essen-

tial Imperial interest’ to be on good terms with France – which meant

a pact or guarantee.

Imperial defence, noted a Foreign Ofﬁce mem-

orandum, was ‘closely related to a policy of European security’. The

government should say publicly that the defence of the Empire entailed

a guarantee of France and Belgium.

But the arguments against were

formidable. Opinion at home was dead against a French pact. It would

be denounced by both Liberals and Labour. It would shackle Britain

to the Franco-Polish alliance and to the murky state-system of Eastern

Europe. It would be anathema to the dominions and disliked in India. It

would mean an intolerable strain on a post-war army barely sufﬁcient

for its imperial role.

In the event, Chamberlain achieved a triumph

of limited liability. In the Locarno Pacts of October 1925, he avoided

an outright guarantee of French security. Instead, France and Germany

exchanged pledges to uphold their post-war borders, with Britain and

366 / ‘The great liner is sinking’

Italy as joint guarantors of their mutual promises. The signiﬁcance of

this implausible formula was largely symbolic. It marked Germany’s

acceptance of the new European order (in the West), signalled by her

joining the League of Nations, not a new continental commitment for

Britain. By the same token, it revealed how dependent Britain’s imperial

position had become upon a Liberal Concert in Europe – as a substitute

for military power or a continental balance. The fragility of that concert

was soon to be seen.

European security was a precondition of imperial safety; but

it was not the only one. In his Locarno conversations, Chamberlain

bluntly told the French and German leaders that, whatever happened,

Britain could never be a party to economic sanctions that brought her

into conﬂict with the United States. ‘It is a fundamental condition of

British policy’, he insisted, ‘I might almost say a condition of the contin-

ued existence of the British Empire, that we should not be involved in

a quarrel with the United States.’

It was true, of course, that America

had drawn back from the role that Woodrow Wilson had imagined for

her in the post-war world, a role that promised friction with Britain as

well as partnership. To Isaiah Bowman, one of Wilson’s closest advis-

ers in Paris, the failure came to seem inevitable. America’s multi-ethnic

politics, democratic government and commercial self-sufﬁciency made

a deﬁnite foreign policy impossible. ‘Whatever degree of participation

we may ﬁnally come to have in world affairs’, he wrote, ‘it will be con-

ditional in many respects and limited in all.’

But this did not make the

US a negligible factor, least of all for the British. They treated American

oil companies and their Middle East claims with wary respect. They

needed the cooperation of American bankers for the ﬁnancial recon-

struction of Europe. They were conscious that Wilsonian ideals held a

powerful attraction for British opinion in the centre and on the left: a

fact of some weight in the ﬂuid politics of the 1920s. Above all, they

were anxious not to goad American leaders into an arms race at sea.

Britain had ended the war with a colossal navy: 70 battle-

ships and battle-cruisers, 120 cruisers, 463 destroyers and 147 sub-

marines. Once the German ﬂeet was conﬁscated or scuttled, the Amer-

ican navy, with some 40 battleships, 35 cruisers and 131 destroyers,

was the second most powerful. But these ﬂattering ﬁgures were not the

whole story. The British ﬂeet was far too large to be maintained in

peacetime: the naval budget crashed from £334 million in 1918–19 to

£54 million in 1923–4. Secondly, many of its most powerful units would

367 / Making imperial peace, 1919–1926

soon need replacing by more modern versions. Thirdly, it faced a post-

war strategic revolution as far-reaching as that of 1912. For now, its

main rivals were the American and Japanese navies: two potential ene-

mies at opposite ends of the globe. The strategy of concentration used

to bottle up Germany was obsolete. Worse still, American hostility to

a continental blockade – Britain’s key weapon in another war – meant

that British sea-power in the Atlantic could not be weakened to rein-

force the East except in a great emergency. At the very least, the Royal

Navy needed parity with the Americans, whose Paciﬁc commitments

would then serve to balance its own obligations in the eastern seas.

In the aftermath of the war, this looked improbable. The Wilso-

nians were committed to a big navy. Their programme for 1918 had

added 20 ‘super-dreadnoughts’, 12 large battle-cruisers and 300 other

ships.

The naval budget rocketed upwards from $37 million in 1914

to $433 million in 1921. As these new battleships came into service,

even a numerically smaller American navy would outgun its Atlantic

rival. At the end of 1920, British ministers anxiously debated how to

contain the American challenge. Lloyd George argued for the pre-war

view that America should be discounted as a possible enemy. But other

ministers insisted that naval supremacy could not be surrendered.

was agreed to seek negotiations, but from the Washington embassy

came warnings of growing antagonism to Britain even amongst the

incoming Republicans, exacerbated by friction over war debts and the

war in Ireland.

This analysis proved excessively bleak. In fact, much

American opinion regarded enmity towards Britain as unthinkable: talk

of British aggression, said the New York Times was ‘grotesque’.

The

reaction against Wilsonian involvement in international politics had its

counterpart in the revolt against ‘navalism’. A big navy would drag

America into overseas conﬂicts as surely as the League. Naval limita-

tion attracted growing support. This new mood gave the British some

much-needed leverage. They could hope to bargain their limited pro-

gramme of March 1921 for American concessions. More to the point,

by giving up their twenty-year-old alliance with Japan, whose renewal

was disliked by both the Foreign Ofﬁce and the Admiralty, they could

neutralise the strongest card of the ‘big navy’ school in Washington:

the fear that Britain would abet Japanese expansion in the Western

Paciﬁc. After a ﬁerce debate, into which both Canada and Australia

were drawn (on different sides), and amid much unease about the fate

of British interests in China, the alliance was abandoned.

368 / ‘The great liner is sinking’

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 construc-

tion. 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 reluc-

tance to give up the large Shantung concession seized from Germany.

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 expan-

sion in China, in ﬁnancial partnership with American business.

The

Japanese agreed to attend the conference which framed a post-war set-

tlement 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, under-

fortiﬁed Hong Kong. Indeed, the need for a great new naval base at

Singapore had already been agreed by British ministers in 1921. Sec-

ondly, 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 Exche-

quer, 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.

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

369 / Making imperial peace, 1919–1926

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 simul-

taneous emergencies they faced in Ireland, Egypt, China, India and the

Middle East would not escalate into a general crisis of their global sys-

tem. 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 reassur-

ingly 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 capi-

tal), and Japan constrained by Anglo-American friendship, only Russia

could threaten the defences of empire – though more by ideological sub-

version 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.

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

370 / ‘The great liner is sinking’

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.

‘Gold’, said Montagu Norman,

the Governor of the Bank, ‘is the guarantee of good faith.’

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 propor-

tion 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’: transmit-

ting 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 commer-

cial and ﬁnancial system was prolonged by the struggle over debts and

reparations, the violent ﬂuctuations in currency values, the prolifera-

tion 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 mas-

sive 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

371 / Making imperial peace, 1919–1926

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. Cot-

ton exports fell back heavily from £125 million in 1913 to £85 million

in 1925 and £72 million by 1929.

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)to119 (1922) and recovered only to 134

(1927).

But imports rose from 81 (1913)to86 (1924)to96 (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 invis-

ible 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.

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.

Competition from the United

States, Japan and the Scandinavian countries drove down the British

share of world trade carried from 52%in1913 to 40%in1936,

and Britain’s share of world tonnage began its long descent from 40%

(in 1913)to30%(in1930), to 26%(1939).

The shipping giants of

the pre-war years fell on hard times.

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,

372 / ‘The great liner is sinking’

followed by signs of recovery, a further setback and then cautious opti-

mism 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 encour-

aged 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.

But it was desper-

ation 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.

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 ﬁnan-

cial 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

373 / Making imperial peace, 1919–1926

at home (driven up by the enormous scale of government debt) from

rising further, the Treasury and Bank of England had actively discour-

aged investment overseas except to sterling countries.

When the Brad-

bury 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.

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.

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 chang-

ing. In Latin America as a whole, American capital and trade com-

peted 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.

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 ambas-

sador in 1929.

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.

Its British-owned railways were ‘the backbone

of our whole position out here’,

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 forthcom-

ing. 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,

374 / ‘The great liner is sinking’

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 reluc-

tance 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 national-

ist movement (or Kuomintang) was concentrated, anti-British activism

was aimed at nearby Hong Kong. In 1925, after the ‘30 May inci-

dent’ in Shanghai, when several Chinese were killed by the municipal

police of the Anglo-American (but mainly British) settlement, the Can-

ton nationalists organised a highly effective sixteen-month boycott of

British trade along the coast and a general strike in Hong Kong itself.

By the end of 1926, the damage was bad enough to push London (under

pressure from the large British ﬁrms in China) towards the appease-

ment 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 them-

selves in their dealings with customers, politicians and warlords.

In the mid-1920s, however, economic nationalism in London’s

commercial empire had yet to pose a major threat to its ﬁnancial and

commercial interests. The great ediﬁce of commercial primacy inherited

from 1914 still seemed largely intact. In some sectors, like oil, telecom-

munications and international banking, British ﬁrms seemed well posi-

tioned to exploit the new opportunities of the post-war world. But a

subtle shift was taking place whose full signiﬁcance only became visi-

ble after 1930. The shortage of capital, uncompetitive industry and (in

certain cases) outdated technology meant that overall the British were

poorly placed to proﬁt from the great expansion of international trade

in the later 1920s.

In both trade and ﬁnance they were drifting steadily

away from the cosmopolitan traditions of the pre-war City. Much more

of the City’s ﬁnancial business was now devoted to domestic loans.

Most of British industry was now protectionist in sympathy.

Bank-

ing and investment in Empire (rather than foreign) countries assumed

an ever-growing importance. British capital now ﬂowed predominantly

into the development funds of Empire governments – Indian, dominion

and colonial.

The City’s foreign income, and ultimately its solvency,

were becoming more and more dependent upon its ties with dominion