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

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435 / Holding the centre, 1927–1937

enjoyed some ﬁscal autonomy (and would have liked more), ultimate

control over India’s external ﬁnances was kept ﬁrmly in Whitehall, even

after the promise of dominion self-government in the 1935 Act.

With other users of sterling, London relied not on rule but self-

interest. In three of the six white dominions, Australia, New Zealand

and South Africa, the local pound was now pegged to sterling, not

gold.

Here, the British market was all-important and commercial

banking was too enmeshed with the City to make any alternative

viable – although South Africa’s gold and its nationalist politics kept it

on the gold standard until 1933. Canada might have followed with its

dollar except for the scale of its debts in New York: the fall of sterling

against the American dollar had made this too much of a risk. Two

‘semi-colonies’ did follow: Egypt, which sold almost all its raw cotton

to Britain (and sold little else), and Iraq (a British mandate until 1932).

Lastly, there was a group of European states – the four Nordic coun-

tries and Portugal – for whom Britain’s huge share of their exports and

their dependence on sterling receipts, made pegging on sterling the key

to ﬁnancial stability.

Secondly, the attractions of sterling were greatly reinforced by

the overall success of its management. This was jealously guarded in

London and largely controlled not so much by the Bank as by the

Treasury and the ‘Exchange Equalisation Account’ whose funds it

supplied.

The object of the Account was partly to prevent sterling

rising or falling too sharply. But it was also meant to ensure that ster-

ling’s value was kept at a level that allowed ‘cheap money’ – interest

rates of around 2 per cent – to prevail in Britain. A cheap money policy

helped Britain recover from depression more quickly than most other

economies (the main exception was Japan) and much more quickly than

the United States. Financially conservative governments (pursuing bal-

anced budgets) reassured overseas holders of sterling. The result, so it

seemed, was a virtuous circle. The willingness of sterling bloc countries

to keep substantial balances in London helped to strengthen the pound.

The balances allowed London to keep up sterling’s value, despite the

large deﬁcit in Britain’s balance of payments, without drawing down

its investment overseas. Indeed, they even permitted some modest new

issues to sterling countries abroad – as the tacit pay-off for their discre-

tion and loyalty.

In the depths of the crisis in 1931–2, the British government had

taken a second decision no less far-reaching than ‘going off gold’. At the

436 / ‘The great liner is sinking’

Imperial Conference in 1930, the Labour government and its Cobdenite

chancellor, Philip Snowden, had dismissed the idea of a graded tariff

on imports to give dominion producers a privileged share in the British

market. But, as economic prospects grew bleaker, the appeal of pro-

tection in Britain, once conﬁned to sections of the industrial economy,

became almost irresistible. Even the City, where free trade sentiment

had usually been strong, had now been won over.

Over the protests

of its rump of free traders, the National Government (whose leaders

had decided to seek an electoral mandate in October 1931) agreed to

impose a new general tariff. The clinching argument was that action

was needed to check the huge wave of imports and a further run on the

pound.

However, Neville Chamberlain’s import duties bill in Febru-

ary 1932

offered to delay tariffs against British Empire countries to

allow time to arrange a system of mutual preferences. This was the

purpose of the Ottawa Conference in 1932.

The Ottawa system marked the double departure of Britain

from free trade. The British had adopted unilateral protection to save

their balance of payments and the value of sterling, and to guard what

remained of their agriculture against an impending disaster. With the

Ottawa system they emerged as the leader of a large trading bloc,

whose members favoured each other by discriminatory tariffs – the

so-called ‘imperial preference’. Needless to say, this did not mean that

London imposed its commercial agenda – we shall see in a minute that

the City’s commercial empire had very mixed fortunes after 1930.If

the British delegation had hoped for ‘empire free trade’ – giving their

manufactures free entry to dominion markets, they were quickly dis-

abused. Dominion leaders were determined to protect their own ‘infant’

industries, and would not have survived had they failed to do so. They

were (as always) deeply suspicious of London’s ofﬁcial ‘machine’ – the

bureaucratic phrase-mongers who would tie them in knots – and its

political masters. As Joseph Chamberlain’s son, Neville Chamberlain

might have expected a warm Canadian welcome, especially from Prime

Minister Bennett, a Canadian tory. But Bennett, said Chamberlain (pri-

vately), ‘lied like a trooper and . . . alternately blustered, bullied, sobbed,

prevaricated, delayed and obstructed to the very last moment’.

The

British delegates found themselves conceding preferential access to the

British market. What they got in return was far from free entry: it was

more like exemption from the still higher tariff rates that were piled on

non-British imports. Hence the best estimate is that, while the Empire

437 / Holding the centre, 1927–1937

countries increased their share of Britain’s imports by around 10 per

cent, their share of British exports grew by only half that ﬁgure: the

effects on British output were marginal.

The Empire market, despite

much excitable rhetoric,

could not be the saviour of the British export

economy.

Yet British leaders were not entirely dissatisﬁed. They wanted

to protect Britain’s own ﬂoundering agriculture, but could hardly have

done so without some concession to dominion producers. They may

have thought that offering imperial preference would help to silence

demands for a general devaluation of dominion currencies against ster-

ling, with dangerous consequences for its strength and stability. Ensur-

ing the dominions’ access to the market in Britain would make it less dif-

ﬁcult for them to remit what they owed in interest and dividends. They

had also checked the drift upwards of dominion tariffs against British

goods. Most of all, perhaps, they hoped that the agreed lowering of

tariffs among all Empire countries would create a zone of recovery that

would encourage other states.

Meanwhile, they pressed on with the

making of bilateral agreements with those non-Empire countries with

whom their commercial relations were close. Denmark (which com-

peted with Canada in supplying bacon to the British breakfast-table)

was given a ﬁxed share of the market in return for its promise to buy

British coal.

Similar agreements were made with the other Scandi-

navian countries. In 1933, the so-called Roca–Runciman pact allowed

Argentina, which sent 40 per cent of its exports to Britain, to keep

almost all its pre-Ottawa share of the British market for chilled beef.

The price the British attached for throwing this lifeline (no other market

existed for Argentine beef) was that almost all the foreign exchange that

Buenos Aires earned from Britain would be used to remit the interest

and dividends from the large British investment in the country’s rail-

ways and utilities. These had been blocked by Argentina’s exchange

control since the onset of depression.

Imperial preference and the pacts London made with the ‘agree-

ment’ countries helped to stave off the worst effects of depression and

also the danger that other countries would retaliate against the British

recourse to devaluation and protection.

They softened the blow of

export weakness elsewhere – against Japanese and Indian competition,

the closing of Germany, and universal high tariffs. But, by 1937,itwas

clear that they could not reverse the relative decline of British economic

power since the First World War. In the ten years before 1914,the

438 / ‘The great liner is sinking’

deﬁcit on merchandise trade had usually been balanced by the income

that poured in from investments overseas, so that when other invisi-

ble trade was added the result was a large current account surplus. In

the 1930s, this ceased to be true, as imports surged up and invisibles

fell back. This reﬂected in part the senescence of parts of London’s

commercial empire – its huge holdings in railways and shipping, now

largely unproﬁtable – and the loss of income from commodity trades.

Though the British kept their grip on telecommunications

in other

new industries like civil aircraft and oil (on which global pre-eminence

would come to depend) they were much less well placed. Nor could the

British deter even their closest trade partners from the quest for new

markets (as Australia looked to Japan), and greater self-sufﬁciency in

industrial goods. Neville Chamberlain admitted as much. The domin-

ions, he noted in May 1936,

have reached an important turning-point in their

history . . . It must be brought home to them that their most

important market, namely the United Kingdom, could no

longer absorb their expanding production, and in years to

come would take a diminishing rather than increasing share

of their production . . . If the Dominions in future were to

be able to ﬁnd employment for an increasing population,

they must develop their secondary industries.

Yet, for the moment at least, the British held on. London

remained the centre of a great commercial system commanding almost

one-third of world trade.

It was no longer the ‘Queen City’ of its

Edwardian heyday: the United States was too powerful. It frustrated

the British attempt to devalue the pound against the American dollar –

by devaluing the dollar. Its huge gold reserve, the new gold-backed

dollar (revalued against gold in 1934) and its massive industrial power

made its enmity dangerous in economic affairs. At moments of cri-

sis, capital lodged in London might ﬂee to New York. But it seems

premature to assume that America had taken Britain’s old place as

the pivot of the world economy. The American commitment to free

trade (under the Reciprocal Trade Agreement Act of 1934) was more

rhetoric than substance.

America remained mired in depression and

recovered much more slowly than Britain. And, while the Americans

had invested abroad at a much higher rate than the British between

439 / Holding the centre, 1927–1937

1924 and 1931, the roles were reversed thereafter when US investment

slumped almost to nothing.

In a world economy without a single great

centre, the British were still a great economic power, able to muster

huge foreign resources and call up old debts. But the Achilles heel of

their system – the lack of a war-chest in American dollars, and the

frailty of the pound once Europe lurched towards war – would soon be

revealed.

The Empire state

How did opinion in Britain react to the upheaval and stress that afﬂicted

the British world-system after 1929? There was some reason to doubt

whether an electorate now based on universal adult suffrage (women

under thirty were enfranchised in 1928) would respond sympathetically

to the calls for rearmament or approve the confrontation with Germany,

Italy and Japan over the fate of ‘far-off countries of which we know

nothing’. Beset by economic misfortune at home, would the British

electorate regard the furious parliamentary arguments over Indian self-

rule that raged from 1930 until 1934 as an annoying distraction and

India itself as an unproﬁtable burden better quickly laid down? Would

a fully democratic electorate repudiate the coercive and authoritarian

methods on which imperial rule still had to depend? Would the feeling

of kinship towards ‘overseas Britons’ survive in an age when migration

had ground to a halt? With the violent contraction of world trade,

had the old argument of empire – that it helped to secure industrial

employment at home – now gone by the board? Would the public see

the Empire as an obsolete shell, a set of futile global commitments

bringing neither proﬁt nor honour? After all, the most striking effect

of depression on the British economy was the apparent decline of its

external dependence. Exports had absorbed one-quarter of output in

1914. Twenty years later, that proportion had halved. Had Britain

turned inward?

There were certainly many Conservatives who feared the

advance of ‘socialist’ sympathies in the new mass electorate, and the

careless indifference of ‘socialist’ governments to the value of empire.

They liked to contrast the tough-minded realism of Conservative atti-

tudes, and their genuine devotion to the imperial ‘ideal’ (a nebulous

relic to which many laid claim), with the na

ıve sentimentality of their

440 / ‘The great liner is sinking’

Labour opponents. In their nightmare scenario, an electorate enraged by

economic disaster might return an ‘extreme’ socialist government that

neglected the navy, alienated the dominions, succumbed to the blan-

dishments of Gandhi in India, and abandoned Britain’s claim to great

power authority in Europe, the Middle East and East Asia. In reality,

of course, the electorate showed little interest in such drastic solutions.

The Labour ministry of 1929–31 was a minority government that had

won fewer votes at the 1929 election than the Conservative party. When

its leaders threw in the towel in August 1931 and agreed to an all-party

coalition to meet the economic emergency, they split from the bulk of

the Labour party which refused to cut unemployment beneﬁt to bal-

ance the budget. The electorate endorsed the new ‘national’ government

at the general election of October 1931, and did so again – although not

quite so enthusiastically – in November 1935.

The result from 1931

onwards was governments (under Ramsay MacDonald, Baldwin and

Chamberlain) that were Conservative-dominated and depended upon

huge Conservative majorities in the House of Commons. Thus, while it

was true that the economic, political and international crises of a ‘low,

dishonest decade’ evoked an outpouring of radical, socialist and com-

munist comment, and the ‘decadence’ of Western civilisation in general

and parliamentary government in particular united extremists of Left

and Right, this was barely reﬂected in the actual mobilisation of public

opinion or its electoral expression.

Perhaps part of the reason was that economic misfortune was

felt very unevenly across British society. Some regions – those where

the old staples of textiles, shipbuilding and coal were still strongly

entrenched – suffered acute unemployment and the deprivation that

followed. South Wales, Lancashire, Northeast England and industrial

Scotland were especially hard-hit. Here, political feeling displayed deep

alienation from the Victorian ethos of liberal capitalism, including per-

haps the Victorian conception of a free-trading empire. The sense of

betrayal was sharpened by the irony that it was in these old staple

regions that wages had been highest, labour unions strongest, and

awareness of Britain’s great place in the world most widely diffused.

But the critical fact was that, despite all their visible hardship, the ‘old’

industrial regions were not representative of the British economy as

a whole. The 1930s also saw the rapid expansion of the ‘neotechnic’

industries: electrical goods, chemicals, cars and (later) aircraft. Much

of this new industry was built on greenﬁeld sites in the Midlands and

441 / Holding the centre, 1927–1937

the South, and especially around London. It sucked in migrants from

the depressed regions of mainland Britain and Ireland.

For those in

continuous employment, the huge fall in prices after 1930 in many basic

commodities meant a large real rise in their standard of living perhaps

by as much as 30 per cent.

This new ‘disposable’ income fuelled the

demand for a vast wave of housebuilding (and the transport systems

that went with it) as well as for consumer products and leisure: cars,

telephones, electric cookers, toys, hobbies, the cinema and holidays.

One other key point should be noted. While depression had devastat-

ing effects on the skilled working class of the old industrial regions, it

left the middle-class ﬁfth of the population not only largely unscathed,

but also (because of the price fall) generally better off.

Political sta-

bility after 1931 was at least partly built on this relative middle-class

contentment.

At the time, of course, stability often seemed both elusive and

fragile. The famous East Fulham by-election in October 1933 saw an

anti-government swing of 29 per cent. In the Putney election in the fol-

lowing year, the swing was almost as large. Both raised the spectre (in

Conservative minds) of a great Labour triumph in the next general elec-

tion. They suggested the volatility of public opinion, and the political

hazards of more economic misfortune or diplomatic embarrassment.

They help to explain the efforts of Baldwin, the Conservative leader

(1923–37), to strike a conciliatory, reassuring, even sentimental note

in his public addresses, and lay claim to the centre-ground in British

politics.

Baldwin was understandably nervous that public perception

of disarray, uncertainty or precipitate action in economic policy, for-

eign policy or imperial questions would destroy the credibility of the

National Government, before and after he succeeded MacDonald as

prime minister in June 1935. But, as it turned out, there was no real

danger that opinion at home would become disenchanted with the costs

and burdens of the British world-system or with the sometimes machi-

avellian pragmatism that its upkeep required.

One reason for this was the broad public sympathy for the

goal of rearmament. Despite the emphasis given in the ofﬁcial debate

to the imperial threat posed by Japanese sea-power, it was the defence

of Britain itself that took centre stage in public discussion. As Neville

Chamberlain saw, reinforcing Britain’s air power to deter an aggressor

was the least controversial way of spending more on defence. There was

no real public debate about the cost of imperial (as opposed to home)

442 / ‘The great liner is sinking’

defence, or about the load Britain carried of far-ﬂung commitments. Per-

haps paradoxically, public support for ‘collective security’ – joint action

to uphold the principles of the League of Nations Covenant – chimed

with the notion of Britain’s great power obligations. The National Gov-

ernment wrapped itself carefully in this ideological cloak, so much so

that it was forced to disavow the attempt to reach an agreement with

Italy at the expense of Abyssinia’s independence – the abortive Hoare –

Laval pact. It was helped by the incoherence of the Labour opposition,

torn between support for collective security, opposition to armaments

and the paciﬁsm of its party leader, George Lansbury, until his displace-

ment by Attlee in 1935. On the other hand, the public mood promised

little support for a bellicose reaction to Italian and German demands.

There was nothing to resemble the naval scare of 1909 and the jingo

outcry that followed. The military threat to Britain’s overseas inter-

ests, the dominions, India or the colonies, remained conjectural and

speculative. Those who claimed otherwise risked being denounced as

scaremongers or worse. Thus the real constraint on the government’s

defence programme was not public pressure for more arms or less,

but the need, as it seemed, to limit public expenditure (to protect the

value of sterling) and avoid a worsening trade deﬁcit (if more export

production were switched over to weapons).

The economic pattern was similar. In the past, the part played

by the Empire in Britain’s prosperity had been sometimes ﬁercely

debated. Even those who conceded that command of the seas and of

the Indian sub-continent were vital ingredients of economic success

balked at the idea of the Empire as an economic community. Because

British trade and investment were global in scale and not simply impe-

rial (Britain’s European trade and Latin American investments were

among the obvious cases), imperial self-sufﬁciency held little appeal to

the economically literate. By contrast, free trade had a talismanic attrac-

tion as the source of cheap food (and thus higher working-class living

standards) and of the City’s pre-eminence in global ﬁnance. Those who

demanded an imperial tariff, offering preferential access to the British

market for the white dominions – the programme of Chamberlainism

before 1914 – met entrenched opposition. The claim that this would

bind the dominions more closely to their imperial mother-country cut

little ice. Then, and again in 1923, the electorate rejected protection. By

1930, however, the tide had turned almost completely. As the depres-

sion bit deeper, industry, agriculture, the trade unions and the City

443 / Holding the centre, 1927–1937

all swung round in favour. As foreign markets grew tighter or closed

altogether, the willingness of the dominions to offer reciprocal prefer-

ence looked much more attractive. In a world of trade blocs, colonies

acquired a new value – however inﬂated by economic illusion. The

claim that Lancashire’s battered cotton industry would suffer directly

from more Indian self-government – because Indian politicians would

increase the protection of their own cotton interests – threatened a back-

lash at home against London’s scheme for reform. Indeed, it seems likely

that the popular image of the Empire as the source for Britain’s food

and raw materials – Canadian wheat, Australian wool, New Zealand

butter – like South Africa’s revived reputation (for a much smaller band)

as a fount of gold-mining proﬁts, was really ﬁxed in the 1930s, even

if its roots were laid earlier. For investors, exporters and consumers

alike, the sterling economy had become indispensable. It was left to

The Economist and a few lonely voices to denounce the recourse to

protection and preference as an economic blind alley.

The turn to protection was not the only great change in Britain’s

relation to other parts of its world-system. At almost the same time as

the Cabinet agreed to press ahead with the tariff, the Statute of West-

minster was passing through Parliament. The Statute was meant to

settle once and for all the constitutional link between Britain and the

self-governing dominions. It renounced all claim by the British Parlia-

ment to legislate for the dominions (except with their explicit consent),

effectively conferring full sovereignty upon them. In substance, the issue

had been resolved at the Imperial Conference of 1926, when Balfour’s

subtle formula had acknowledged the equality of all the self-governing

states – Canada, Australia, New Zealand, South Africa, the Irish Free

State and Newfoundland – with Britain itself.

What remained to be

done was to set the new rule in statutory stone, if only to guard against

judicial perversity. The reason for this was that law still in force –

the Colonial Laws Validity Act 1865 – explicitly licensed the Impe-

rial Parliament to legislate if it chose for every part of the Empire and

forbade the dominions from passing laws repugnant to an Imperial

Act.

British ministers regarded the turgid report that emerged with

little enthusiasm as ‘an attempt to write by lawyers a very complicated

constitution which had better never been written at all’.

‘Personally,

I am rather sorry’, wrote the Lord Chancellor Sankey when the Statute

was passed, ‘but after Balfour’s declaration we had no choice.’

For

British politicians and ofﬁcials, the detailed spelling out of dominion

444 / ‘The great liner is sinking’

equality was a tiresome obligation imposed by the need to appease the

‘troublesome’ (Sankey’s description) South Africans and Irish. But they

saw little cause for concern except on two points. The ﬁrst was how the

new statutory deﬁnition of dominion rights might affect the status of

India (whose future dominionhood had been afﬁrmed by the Viceroy in

October 1929). The Cabinet was anxious that its right to declare India

a dominion should not have to depend on the (uncertain) approval of

the other dominions.

It was also uneasy that, under the draft statute,

a dominion could repeal an Imperial Act. As its main legal adviser on

India pointed out, once India was declared a dominion, the elaborate

statutory ‘safeguards’ by which London proposed to limit the powers

of its new responsible government could be cast off in a trice.

This

proved a gift later to the opponents of their Indian reforms. The other

source of anxiety was the likely effect of the Statute on the Anglo-Irish

treaty of 1921, the constitutional basis of the Irish Free State’s reluc-

tant allegiance to the British Crown. Among Conservative MPs (an

overwhelming Commons majority at the time of the Statute’s passage

through Parliament), mistrust of Irish intentions ran deep. Since the

treaty took the form of an Imperial Act, it was certainly arguable that

under the Statute the Free State parliament could repeal it at will.

As a result, when the draft statute was debated in November

1931, it made ‘heavy weather’.

Churchill, the grand rebel, appealed

to both strands of the Die Hard tradition, linking Ireland and India

in a Cassandra-like warning of impending decay. Ominously for the

government, he drew ‘ministerial cheers’ – support from the Conserva-

tive benches.

To ward off the danger of a deeply embarrassing retreat

(and an open division among the Conservative followers of the National

Government), all the stops were pulled out. Jimmy Thomas, the rough

diamond Dominions Secretary, warned that any delay would enrage

not just the Irish but the South Africans as well. The Attorney-General,

Inskip, insisted (inaccurately) that the legal standing of the Anglo-Irish

treaty was unaffected by the Statute (a view overturned by the House

of Lords three years later). A letter from Cosgrave, the Free State prime

minister, was read out in the Commons, denying any intent to alter the

treaty except by agreement. Austen Chamberlain, the party’s grandest

elder statesman and (like Churchill) a signatory of the treaty, declared

his faith in the Free State government. Baldwin, as party leader, warned

his supporters that delaying the Statute would deeply offend the domin-

ions ‘even the most British of them’, and shrewdly referred to the prize