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

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425 / Holding the centre, 1927–1937

They had begun their retreat from the beleaguered outposts of the

old treaty-port system. But they regarded the Kuomintang national-

ism of Chiang Kai-shek as xenophobic and unstable, and dreaded a

wholesale assault on British persons and property. ‘A strong China is

not a necessity to us; indeed the preservation of Hong Kong, and, as

long as possible, of our remaining special rights in China, sufﬁces to

suggest the contrary’, was the cold comment in London on an enthusi-

astic despatch from the Peking legation expressing the opposite view.

Attacking Japan on China’s behalf thus had little appeal. The second

factor at work was a well-merited caution. Coercing Japan meant send-

ing a ﬂeet to Northeastern Asia at a time when the nearest fully ﬂedged

naval base was no closer than Malta. Few naval strategists would have

needed reminding that sending a navy from Europe into the Sea of

Japan was an exceptionally hazardous business. For the Russians at

Tshushima in May 1905 it had been a catastrophe.

Even courting a

quarrel (by the imposing of sanctions on Japanese trade) might expose

British interests to threats and reprisals that would be hard to fend off

without a strong naval presence, and unsafe to embark on without large

reinforcements to send if need be.

As a result, and with no hope of forging an Anglo-American

front, the British response was carefully muted. Japan was condemned

by the League, but took little notice. However, the need to strengthen

Britain’s East Asian presence was taken up by the Admiralty which

began its campaign for naval expansion and a ﬂeet large enough to ﬁght

simultaneously in Europe and the Far East. Hitler’s accession to power

in January 1933, and his open rejection of disarmament in October that

year, hugely strengthened its case. Even those who believed that Japan

would only be dangerous if Britain were already embroiled elsewhere,

now had to consider the renewed possibility of a conﬂict with Germany,

by far the strongest (if only potentially) of the European powers. It was

no longer a matter of an (improbable) war with France or Italy. If

Germany resumed its old place as a great military power, the Navy

would need to be able to impose a blockade (its weapon of choice)

or contain a new German ﬂeet built along pre-1914 lines. The Chiefs

of Staff had already denounced (in March 1932) Britain’s ‘defenceless’

position in East Asia. In November 1933, in the wake of Hitler’s pro-

nouncement, the Cabinet approved the creation of a ‘Defence Require-

ments Sub-Committee’ to consider what extra spending was needed.

Its proceedings record the drastic alteration of the geopolitical scene

426 / ‘The great liner is sinking’

since the halcyon days of 1926–31. But they also reveal the doubts and

divisions over how best to respond to the (still dimly glimpsed) new

patterns of power.

The argument turned on the relative dangers posed by Ger-

man and Japanese aggression. In the Admiralty’s view, Britain had to

be able to deter and defeat an attack by Japan, which meant a strong

Eastern ﬂeet to match the Japanese navy. Japan, after all, was now a

great island empire that stretched from the Kuriles to Taiwan and since

1918 into the Central and South Paciﬁc; and a mainland power that

ruled over Korea and the client state of Manchukuo (as Manchuria

was renamed). The disarmament terms of the Washington treaties had

barred new fortiﬁed bases in East Asian waters – a strategic boon to

Japan which had little to fear from Hong Kong or American bases in

Guam and the Philippines.

Even Singapore was poorly defended and

lacked proper dry-docking facilities. Yet the Royal Navy had to defend

Britain’s interests in China (in an era when new markets had excep-

tional value), its commercial sea-lanes, its Southeast Asian possessions

(and those of the Dutch, their strategic dependants), as well as two

great provinces of the ‘British world’ in Australia and New Zealand.

If it failed to do so, or suffered a setback in trying, the British world-

system would suffer a staggering and perhaps irreversible blow. For, in

a naval perspective, a defeat of this kind would quickly lead on to the

loss of British control in the Indian Ocean, severing Britain’s links with

its most powerful possession of all, and opening the East and South

African coasts to attack from the sea. The whole hinterland of British

world power, that had helped Britain sustain the brutal struggle in

Europe and the Middle East less than two decades earlier, would have

been swept from its grasp. The rest would soon follow. This apocalyptic

scenario was reinforced by the view that Japan had become a new ‘Prus-

sian’ state: aggressive, militaristic and set on regional domination

–

a suspicion that was strengthened by its further advance in North China.

Japan was a real and immediate danger, so this argument ran: the Ger-

mans would follow in several years’ time. But what was urgently neces-

sary was the decision to build up the navy to be able to deal with them

both simultaneously.

But not everyone believed in the scale or immediacy of the

Japanese challenge, let alone the wisdom of confronting it militar-

ily. Britain could not ﬁght two wars at once, said the Treasury ﬂatly.

Other expert opinion saw the Japanese threat as more economic than

427 / Holding the centre, 1927–1937

military, and hobbled by the resistance of Kuomintang China. Still

others insisted that the Germans remained the ‘ultimate’ enemy – the

phrase that crept into the Committee’s report. If they were deterred,

then the Japanese would not move. The ﬁercest attack on the navy’s

position came from Neville Chamberlain, now Chancellor of the Exche-

quer in the National Government. As Chancellor he was determined to

keep defence spending within bounds, since the public ﬁnances were the

bedrock of everything. But he was also (for a Chamberlain) surprisingly

sceptical about the real threat from Japan and the fear it evoked in the

Paciﬁc dominions. His favoured solution was a friendly approach to

Japan, perhaps even a pact.

The much more urgent priority in Cham-

berlain’s eyes was the protection of Britain in Europe, and against

attack from the air. This was best done not by expanding the navy but

by deploying a ‘deterrent’ – a large force of bombers to cripple any

potential assailant. When the Cabinet came to discuss the Committee’s

report, Chamberlain’s campaign for an Anglo-Japanese understanding

won little support. The objection was obvious – that it would wreck

Anglo-American relations with far-reaching effects on Britain’s general

position – and also decisive. But there was no real agreement on how

to proceed, perhaps because of the scale of the ‘Eastern’ commitment

required. Instead, Chamberlain was allowed to draw up the ﬁnal rec-

ommendations – a chance he seized with a vengeance. The result was

to cut back the sum proposed for the navy by some 60 per cent and put

it instead towards expanding the air force.

The sometimes angry debate in Committee and Cabinet

exposed the strategic dilemma of the whole British system. If the East

was neglected the whole empire might fall. If the West was exposed,

Britain itself was at risk. If both were defended to the level required,

Britain would be bankrupt. It was not surprising, perhaps, that policy-

makers looked for less drastic solutions, and hoped to get by. The

British and Americans both came to agree that the real restraint on

Japan was the Soviet Union, which had much more to lose from Japan’s

East Asian imperialism, and had the military power to strike Japan

where it mattered.

British ofﬁcials worked hard to persuade the Amer-

icans that they shared the same view of Japan as a threat and would

not jeopardise Anglo-American solidarity by an approach to Japan –

whatever Chamberlain said. They largely succeeded. When the naval

agreements came up for review in 1934–5, President Roosevelt con-

veyed by a nod and a wink that no objection would be made to Britain’s

428 / ‘The great liner is sinking’

naval expansion: Atlantic rivalry was suspended.

In Europe, mean-

while, the Admiralty won what it saw as a useful reprieve. Abandoning

the ﬁction that the Germans were bound by Versailles, it got Hitler’s

agreement that a new German navy would be kept at just over one-

third of Britain’s own strength – a concession that bought time for its

own naval programme.

When the Chiefs of Staff reviewed the state

of British defences at the start of 1935 (and before the agreement), they

made the grudging admission that there was enough naval strength to

ﬁght Germany and Japan at the same time – as long as France was an

ally. ‘With France as our Ally, the naval situation in Europe would wear

a different complexion, and the main British ﬂeet would be available

to defend our Empire in the East.’

Six months later, their view was

much darker.

What had happened in between was a third great shock to the

geostrategic foundations of the British world-system. In late 1934,a

ﬁerce dispute had blown up between Italy and Ethiopia on the border

between the Ethiopian Ogaden and Italian Somaliland. It soon became

clear that Mussolini had no intention of reaching a peaceful resolu-

tion and was set on the partial or total acquisition of Haile Selassie’s

empire. The French government was concerned most of all to avoid

friction with Italy (its long-standing Mediterranean rival) which would

weaken its hand in dealing with Hitler. In January 1935, it agreed

that Rome should be free to deal with Ethiopia as it wished. This

confronted the British with an unpleasant dilemma. As the strongest

League power and champion of collective security, Britain could hardly

look on while one League member state set out to swallow another.

But taking the lead to thwart the aggressor was just as unwelcome.

Britain should not be manoeuvred ‘into playing an isolated and futile

role of opposition’, said Robert Vansittart, the permanent head of the

Foreign Ofﬁce.

It was perfectly obvious, said a chorus of voices,

that the effort to do so would enrage Mussolini, and drive him out

of the League and into a compact with Hitler. Vansittart dreamed

hopelessly of an imperial deal: compensating an Ethiopian cession to

Italy with a tract of British Somaliland. The crisis, he said, was really

the fault of ‘our hogging policy’ in not giving the Italians one of the

German lost colonies. ‘I have long thought the distribution of this lim-

ited globe quite untenable and quite unjustiﬁable. Like fools we made

it worse at Versailles . . . We are grossly overloaded.’

There was no

French support for such an exchange, and, by August 1935, the British

429 / Holding the centre, 1927–1937

were contemplating the cost if the League imposed sanctions to restrain

Mussolini.

Quite apart from the danger of playing into Germany’s hands,

the risk of an armed confrontation with Italy was regarded with hor-

ror in the Admiralty. Britain was quite unprepared for a conﬂict, the

First Sea Lord warned.

The programme of replacements meant that

the navy’s strength would decline before it recovered at the end of the

decade, so that even the loss of two or three large ships in a Mediter-

ranean war would be calamitous.

Both he and Hankey, the power-

ful Secretary to the Committee of Imperial Defence, were determined

that Britain should avoid being dragged into ‘the miserable business of

collective security’ (Chatﬁeld’s phrase). What was needed was a two-

power ﬂeet to counter Germany and Japan, and good relations with

Italy. As matters fell out, the British had the worst of both worlds.

Under pressure, the Cabinet decided to apply certain sanctions to show

disapproval. But, fearing to take the decisive step of imposing sanctions

on oil, in December 1935 it despatched Samuel Hoare, the Foreign

Secretary, to concert with the French on a new compromise offer that

would give Mussolini effective control over much of Ethiopia: the infa-

mous Hoare–Laval pact. Amid a huge public outcry (the government

had just won re-election on a platform extolling its commitment to

collective security), Hoare was disowned, the pact cast aside and ‘light’

sanctions maintained. Amid continuing high tension in the Mediter-

ranean, the means and the will were lacking to challenge Hitler’s forced

remilitarisation of the Rhineland in March 1936. ‘If we are seriously to

consider the possibility of war with Germany’, declared the Chiefs of

Staff on 1 April, ‘it is essential that the Services should be relieved of

their Mediterranean responsibilities, otherwise our position is utterly

unsafe.’

In May, Mussolini declared the war in Ethiopia won. In

June, the British abandoned their sanctions. But the hope of restoring

Anglo-Italian amity proved very far-fetched.

‘There is now the possibility of a hostile Italy on our main

line of imperial communications’, reported the Defence Requirements

Committee in November 1935.

By the following year, although there

was some disagreement over Mussolini’s objectives, Italy’s hostility

(and its alignment with Germany) had become a new fact of geopolitical

life. The result was to force a drastic revision of imperial strategy. There

could be no question of a war on three fronts: the Navy would have its

hands full in the East and at home. The implication was brutal. Unless

430 / ‘The great liner is sinking’

French support was assured, the British could not hope to maintain

their naval command in the Mediterranean if a crisis arose in the East.

It was a tacit admission – despite public denials – that, faced with a war

in the East, the route round the Cape and not the short route via Suez

might have to be used. Britain’s Middle East empire would have to fend

for itself.

Of course, this was still just a grim calculation not an actual

reality. But it hugely reinforced the sense of strain and anxiety that had

begun to infuse British foreign policy as a whole.

It is important, however, not to exaggerate the scale of British

difﬁculties as they appeared at this stage. In effect, what had happened

was that, after the dream-like interval in which the peace of Europe had

seemed safe, the British found themselves back in the world of compet-

itive Weltpolitik they had known before 1914. The need to withdraw

from the Mediterranean to meet the German threat had been accepted

once before – in the great strategic rethink of 1912. The threat posed

by Germany in 1936–7 was still modest indeed compared with that

which had faced them in 1914. Of course, the real source of British,

and especially naval, alarm was the new fact of dispersal. In 1914,the

British could mass almost their whole ﬂeet in the Orkneys, in the knowl-

edge that the blockade of German sea-power would keep their Empire

secure. Now they must divide their sea strength in two at opposite ends

of the globe if their rivals coalesced. The most urgent requirement that

followed from this was to ease the friction with Italy, while pressing

on with the rearmament needed for a ‘new standard’ navy that could

face down the Germans and the Japanese, simultaneously if need be. It

was from this position of strength that British leaders hoped to restore

‘discipline’ to Europe’s diplomacy, and persuade the Hitler regime that

it would gain little by delaying a new general settlement. In the mean-

time, of course, they had to be cautious, and sometimes disingenuous –

as when they reassured the Paciﬁc dominions that they would guard

the Mediterranean as well as sending the ﬂeet to Singapore, come what

may. ‘Singapore’, said Lord Chatﬁeld, the First Sea Lord and profes-

sional head of the navy, ‘was ﬁrst class assurance for the security of

Australia.’

It was vital not to provoke their three possible enemies

into a real (as opposed to rhetorical) combination.

But, if they kept

up their guard, and avoided a crisis, the long-run alignment of forces

seemed set in their favour. ‘Welfare states’, remarked Alfred Zimmern

(he meant the democratic states of Europe, the United States and the

white dominions), ‘enjoy an overwhelming preponderance of power,

431 / Holding the centre, 1927–1937

conﬁrmed and increased by their command of the oceans, except for

the time being the Western Paciﬁc.’

Rejecting economic concessions

to Germany, Neville Chamberlain expected the improvement in world

trade (and the rise in world prices) to force an eventual retreat from

Hitler’s policy of arms and autarky.

Indeed, almost as much as before

1914, the British expected that their commerce power would have the

last word in any global confrontation – as long as they played their

cards well in the game of world politics.

The new economics of Empire

At ﬁrst sight, such conﬁdence seems strange. After all, the British econ-

omy lived in the shadow of depression as much as any other. There were

also good grounds for thinking that the British had been the great losers

from the economic catastrophe of 1929–31 and the huge contraction

in world trade that had set in thereafter – just as they had prospered

in the era of trade boom before 1914. Worse still, they had entered

the depression from a position of weakness: burdened by debt; with

their old staple industries of cotton and coal in decline; and with their

exports held back by the high value of sterling. Because the collapse

of world prices in 1930 was severest in commodities like grain, rice,

rubber and minerals, it was primary producers that were hardest hit.

As their incomes declined, so did their imports. For the British at home

this meant a triple disaster. Much of their export trade was directed

towards such primary producers, in their Empire especially. The great

commodities trafﬁc, and the reverse ﬂow of manufactures, employed

much British shipping – a critical source of invisible income. And a huge

amount of British capital was still invested in the infrastructure needed

to bring primary goods to market (railways, harbours, freezing works,

warehousing etc.) as well as in their actual production on plantations

and in mines. The slump in world trade threatened British wealth on

all fronts.

Indeed, it is easy to see the 1930s as marking the great water-

shed in Britain’s capacity to meet the economic demands of imperial

power, or to sustain a world-system of which it was the leader. As many

contemporaries observed, the engines that had driven the long age of

expansion up to 1914 now seemed worn out. British manufactures

lost their competitive edge and also a large part of their market. The

432 / ‘The great liner is sinking’

failure was most glaring in the sad condition of the textile industry,

especially Lancashire cottons. Before 1914, textiles made up around

40 per cent of British exports by value; and the British supplied two-

thirds of the world trade in cotton goods. By 1938, that ﬁgure had

fallen to around a quarter.

In India, by far Lancashire’s best market

in 1913, its sales had fallen by nearly 90 per cent by the end of the

1930s.

Overall, Britain’s share of the world’s manufactured exports

fell from 25 per cent in 1913 to 19 per cent in 1937, partly reﬂecting

the fact that its newer industries (like cars and pharmaceuticals) could

not ﬁll the gap left by the old and declining industries. Industrial weak-

ness was bound to do damage to British trade and traders. Without

competitive goods to sell, British trading companies that had played a

large role in the organisation of commerce in Asia, Africa and Latin

America found themselves under pressure from European, American

and Japanese rivals. Some went to the wall and their misfortunes spilt

over to affect London’s place in world trade.

These difﬁculties in the

export of goods were matched by the fall-off in the export of capital.

Partly because of the effects of the slump in the traditional ﬁelds of

British investment, partly because of public and private borrowing at

home, the amounts raised in London for overseas issues fell to perhaps

one tenth of their pre-1914 level

virtually all of it for sterling country

destinations. In the harsh conditions of the 1930s, the British seemed to

have abandoned the practice once regarded as vital to their commercial

success: priming the pump of economic development in less-developed

countries, and creating consumers for their export industries. Finally,

as if all this was not enough, it looked as if the long surge of population

growth in mainland Britain had ﬁnally petered out. The ‘export sur-

plus’ of migrants would no longer pour out to the ‘white dominions’.

Perhaps even more serious was the clear implication that, as a market

for foodstuffs (the staples of Canadian, Australian and New Zealand

trade), Britain was now stagnant.

Perhaps the old mutual interest in

markets, money and men between Britain and its ‘invisible empire’ of

trade (inside and outside the ‘visible’ Empire) was just fading away.

The causes went deeper than the apparent shortcomings of the

British economy. Much of Britain’s prosperity before the First World

War had been due to the relative openness of markets in Europe and

Latin America, as well as in Asia, where free trade was imposed by rule

(as in India) or by force (as in China). Free trading conditions encour-

aged the investment of capital, whose dividend could be paid from the

433 / Holding the centre, 1927–1937

proceeds of exports that reached the world market through London.

They made it natural for many primary-product economies to rely on

British shipping, insurance and banks to get their produce to market

and manage its sale. But, after 1918, there was no real return to the

age of free-ish trade. Instead, the disruptions of war, the burden of debt

(requiring new revenue sources) and the break-up of empires in Europe

and the Near East fostered economic nationalism: to safeguard domes-

tic prosperity against external upheaval and (in new states especially) to

reinforce weak political bonds with the glue of economic self-interest.

Agrarian protection became almost universal in Europe.

With the

onset of slump, things got far worse. Soviet Russia and Germany became

closed autarkic economies. The United States withdrew behind mas-

sive walls of protection – the Smoot–Hawley tariff of 1930. Existing

tariff barriers (as in the ‘white dominions’) rose higher. Exchange con-

trol became widespread, threatening the multilateral pattern of trade

with bilateral bargains and barter. None of this boded well for British

ﬁnance, trade and industry. Nor, at least in the short term, did another

new feature of the global economy, the industrialisation of Asia. It

was the intense competition of Japanese cottons, combined with the

growth of textile manufacture in India, which destroyed so much of

Lancashire’s market. Even in China, where mechanised production had

developed more slowly, it was a similar story. There, British cottons

sold barely 1 per cent of their 1913 ﬁgure in 1936.

Despite all these setbacks, the decade of depression in the world

economy did not bring a collapse in British economic power. But it did

lead to big changes in the way that it worked. The impact of the crash

on the New York stock exchange in October 1929, and the trade con-

traction that followed, were soon felt in London. Unemployment rose

steeply from 1.2 million in 1929 to 1.9 million the following year and

2.6 million in 1931. The balance of payments grew less healthy and then

crashed into deﬁcit. Public spending shot up to meet the new burdens of

borrowing and beneﬁts. As American lenders began to call in their loans

to meet obligations at home, they sparked a banking crisis in Europe

where too much had been lent ‘long’ on the back of American funds.

Soon, those who held sterling in London (attracted in part by the high

interest rates offered there) became anxious to sell it or exchange it for

gold (the pound was freely convertible) for similar reasons. By August

1931, the loss of gold was acute, while the ‘unbalanced’ budget stoked

fears of ﬁnancial collapse, as the government borrowed more to meet

434 / ‘The great liner is sinking’

its current outgoings. Governing without an overall majority, Ramsay

MacDonald accepted the need for an all-party coalition, a ‘national’

government to meet the emergency. What began as a temporary mea-

sure, to last for a few weeks, became a coalition regime that endured

for a decade. Likewise, its emergency actions to forestall the danger of

sterling’s collapse shaped an economic regime that lasted until it was

overcome by disaster after June 1940.

The National Government took two crucial decisions. The ﬁrst

was to abandon the ﬁxed price of sterling in gold, allowing the pound

to ‘ﬂoat’ against other currencies. In effect, the pound was devalued.

Since sterling was still the most widely used currency in international

trade (and thus a source of great proﬁt to the City of London), such a

move might have seemed exceptionally risky, to be reversed as quickly

as conditions allowed. But that is not what happened. Instead, sterling

was left to ﬂoat for the rest of the decade, while remaining convertible.

For much of that time, between 1933 and 1938, its value was stable,

and the pound kept its status as the principal medium of international

exchange. There were two reasons for this.

The ﬁrst was London’s success in forming a large ‘sterling bloc’,

whose members pegged the value of their currency to sterling, and kept

much if not all of their reserves of foreign exchange as sterling. This

formed a huge trading zone – the largest in the world – whose currencies

enjoyed a stable relationship. Parts of this zone had little choice in

the matter. The monetary affairs of Britain’s colonial territories were

run by local ‘currency boards’. A colony’s money supply was directly

controlled by the size and value of its sterling reserve in London. When

London devalued, so did the colony. Much the same was true – although

with considerably more argument – in the case of India. India suffered

badly from the fall in commodity prices and the fragile state of its

public ﬁnances (with their heavy dependence on customs receipts and

agrarian revenues) threatened to damage the value of the rupee – a

situation made worse by the protracted uncertainty over India’s new

constitution. A further large complication was India’s sterling debt –

the so-called ‘Home Charges’ – made up of pensions, loan interest

and the annual bill for the large British garrison, all of whose costs fell

on the Indian budget. London insisted that the Home Charges be paid,

whatever the price. It demanded that the rupee remained pegged to

sterling, and vetoed any idea of reducing its value in sterling terms. The

reason it could do so was that, although the Viceroy and his government