Peden G.S. Arms, Economics and British Strategy From Dreadnoughts to Hydrogen Bombs
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Price also believes that the depreciation of sterling and fall in the gold
and convertible currency reserves that occurred in 1938–9 could have
been halted at any moment by impo sing exchange controls, instead of
allowing half of Britain’s war chest of gold and dollar reserves to be lost
in eighteen months before the outbreak of war. The sterling:dollar
exchange rate fell in 1938 from a high of $5.02 in March to a low of
$4.60 in September, and the Bank of England and Treasury used the
reserves to peg the rate at about $4.67, until losses became too great in
August 1939, when the rate fell to $4.10. Britain’s gold reserves fell from
£836 million on 31 March 1938 to £470 million on 22 August 1939.
Speculation against sterling over that period, Price argues, had nothing
to do with the state of Britain’s trade or econom y. He demonstrates that
exchange controls were being considered, reluctantly, by economists in
the Cabinet Office as early as October 1937, and that opposition to
adopting controls on the German model was led by the Treasury. He
takes issue with the official historian of financial policy, R. S. Sayers,
who commented that nothing could have been done to prevent
foreigners withdrawing their money at the outbreak of war anyway.
101
One problem with Price’s argument is that, given free movement of
sterling within the sterling area, exchange controls would have had to be
introduced by all countries within it, not just by Britain. Such co-
operation in the eighteen months before the war would not have been
impossible, but it would have taken time to arrange. Even after controls
had been introduced during the war, South Africa, the sterling area’s
major source of gold, was suspected of not co-operating full y. For
controls to have been effective all international transactions would have
had to be subject to government inspection, and postal censorship
would have had to be imposed. The economic cost would not have been
negligible; controls would have been an impediment to financing trade
outside the sterling area and would have had an adverse effect on
London’s position as an international banking centre, reducing invisible
exports in the form of income from financial services. At the end of July
1938 the Chancellor authori sed the Bank of England to make pre-
parations for exchange controls, but these were only to be imposed after
the outbreak of war.
102
Speculation against sterling after March 1938 was mainly influenced
by financial markets’ reactions to political events. In December 1938
101
Ibid., pp. xiii–xiv, 85–6, 134–5, 150–1, 163–4: R. S. Sayers, Financial Policy, 1939–
1945 (London: HMSO, 1956), p. 229. For a balanced account, with data, see R. A. C.
Parker, ‘The pound sterling, the American Treasury and British preparations for war,
1938–1939’, English Historical Review, 98 (1983), 261–79.
102
Sayers, Financial Policy, pp. 227–32, 314.
Retrenchment and rearmament 135
Sir Frederick Phillips, the official in charge of the Treasury’s finance
divisions, believed that nine-tenths of the movement against sterling was
due to distrust of it as a currency in the event of war.
103
However, Price
goes too far in claiming that speculation against sterling had nothing to
do with the state of Britain’s trade or economy. The adverse balance of
payments on current account in 1936 and 1937 (table 3.4) could be
attributed mainly to strong eco nomic recovery from the depression, but
the existence of a growing balance of payments deficit at a time when
Britain was borrowing to finance rearmament would have weakened
confidence in financial markets. Of the currency outflow of £268 million
in 1938 some £65 million, or about a quarter, was on current account
and therefore not the result of speculation or the defence of sterling.
With the ben efit of hindsight, one can see that exchange controls
would have been worth imposing before September 1939, although at
what point after 31 March 1938 this should have been apparent is hard
to say. Sterling depreciation and exchange losses weakened Britain’s
capacity to wage a long war. Nevertheless, as we have seen, the growing
sterling problem did not prevent a rise in defence expenditure from
£262.1 million in 1937/8 to £382.5 million in 1938/9 or to an estimated
Table 3.4. Balance of payments, 1930–8 (£ million at the end of calendar year)
(1) Visible
balance
a
(2) Invisible
balance
b
(3) Current
account
c
(4) Capital
account
d
(5) Change
in reserves
e
1930 283 298 15 87
1931 322 208 114 80
f
34
1932 216 154 62 91 29
1933 192 174 18 140 122
1934 220 188 32 42 10
1935 183 196 13 66 79
1936 263 223 40 251 211
1937 336 279 57 186 129
1938 285 220 65 203 268
Notes:
a
Export of goods minus imports of goods.
b
Net income from services and transfers of earnings.
c
Column 1 plus column 2.
d
All non-recurrent items, including new investment, payments on existing loans, net
short-term liabilities, and transfers between banks.
e
Column 3 plus column 4.
f
Includes £80 million assistance from foreign banks.
Source: Bank of England Quarterly Bulletin, 14 (1974), 47–52, at 49.
103
Parker, ‘Pound sterling’, 269.
Arms, economics and British strategy136
£750 million in 1939/40, or a growth in the planned scale of the armed
forces from the programme as approved in mid-1937 (estimated to cost
£255 million to maintain) to what had been approved by mid-1939
(£450 millio n).
The defence industries
The pace of rearmament from 1936 was determined chiefly by industrial
capacity and by the government’s policy of not interfering with normal
civil trade. Lord Weir, the industrialist and former secretary of state for
air who was consulted on the rearmament programme, advised ministers
in January 1936 that it could not be carried out in five years, as
recommended by the services, without affecting exports, unl ess semi-
war controls similar to those used in Ge rmany and Russia were
imposed. Ministers did not dissent when he said that such controls
would be politically impossible in Britain.
104
In September 1937 the
Secretary of State for Air, Lord Swinton, warned that a continuation of
the assumption that industry should not be int erfered with would
postpone the completion of the aircraft programme for two years, from
1939 to 1941. Nevertheless, it was not until 22 March 1938, after the
Austrian Anschluss with Germany, that the Cabinet took the decision to
cancel the assumption , and it was another twelve months before War
Office orders enjoyed priority over normal trade.
With regard to the effects of the Ten Year Rule on the aircraft
industry, the official historian of Brit ish war production, M. M. Postan,
believed that government orders for aircraft prior to 1935 were insuffi-
cient to sustain an airframe and aero-engine industry capable of
responding to the demands of rearmament for mass production of
modern designs.
105
Peter Fearon has pointed to evidence that the Air
Ministry’s policy from the mid-1920s of allocating contracts so as to
maintain a ‘ring’ of as many as eighteen firms in business prevented some
firms gaining production experience.
106
However, David Edgerton
and Sebastian Ritchie have shown that the British aircraft industry was
104
Defence Policy and Requirements (Defence Requirements) Committee (DPR(DR)C)
minutes, 13 Jan. 1936, CAB 16/123, TNA.
105
M. M. Postan, British War Production (London: HMSO, 1952), p. 5.
106
Peter Fearon, ‘Formative years of the British aircraft industry’, Business History Review,
43 (1969), 476–95; Peter Fearon, ‘The British airframe industry and the state, 1918–
35’, Economic History Review, 27 (1974), 236–51; Peter Fearon, ‘The vicissitudes of a
British aircraft company: Handley Page Ltd between the wars’, Business History,
20 (1978), 63–86; Peter Fearon, ‘Aircraft manufacturing’, in N. K. Buxton and
D. H. Aldcroft (eds.), British Industry between the Wars: Instability and Industrial
Development, 1919–39 (London: Scolar Press, 1979), pp. 216–40.
Retrenchment and rearmament 137
one of the strongest in the world and did not depend solely on domestic
orders. Britain was the largest exporter of military aircraft from the late
1920s to the mid-1930s, with exports accounting for 26.9 per cent of all
British production, including civil orders, in 1934 and 25.1 per cent in
1935. Moreover, there was a trend towards consolidation: Vickers
purchased Supermari ne in 1928; and by 1935 the Hawker Siddeley
group included the Armstrong Whitworth, A. V. Roe, Gloster and
Hawker airframe companies and the Armstrong Siddeley aero-engine
company. Successful design teams, notably Fairey in the 1920s and
Hawker in the 1930s, could make aircraft production a profitable
business. Similarly, aero-engine production came to be dominated by
Bristol and Rolls-Royce, wh o successfully specialised in the develop-
ment of air-cooled radial and water-cooled in-line engines respectively.
Prior to 1934 the British aircraft industry employed about twice as many
workers as the Germ an. Moreover, the German aircraft industry was not
notably more concentrated than the British in the 1930s, with eleven
firms of various sizes producing airframes (compared with fourteen in
Britain) and five producing aero-engines (the same as in Britain).
107
British aircraft production fell behind that of Germany in the mid-1930s,
but almost caught up in 1939 and was nearly 50 per cent higher than
Germany’s in 1940 (see table 3.5). The reasons for any shortcomings
Table 3.5. Military aircraft production in Britain, France, Germany, Japan, the USA and the
USSR, 1933–40
(1) Britain (2) France (3) Germany (4) Japan (5) USA (6) USSR
1933 633 n/a 368 766 466 2,595
1934 652
a
n/a 1,968 688 437 2,595
1935 893
b
785 3,183 952 459 3,578
1936 1,830 890 5,112 1,181 1,141 3,578
1937 2,218 743 5,606 1,511 949 3,578
1938 2,827 1,382 5,235 3,201 1,800 7,500
1939 7,940 3,163 8,295 4,467 2,195 10,383
1940 15,049 n/a 10,247 4,768 12,804 10,565
Notes:
a
In addition 298 were exported.
b
In addition 453 were exported.
Sources: Col. 1: Sebastian Ritchie, Industry and Air Power: The Expansion of British Aircraft
Production, 1935–1941 (London: Frank Cass, 1997), pp. 9, 90; cols. 2–6: R. J. Overy, The
Air War 1939–1945 (London: Europa Publications, 1980), pp. 21, 150.
107
Edgerton, England and the Aeroplane, pp. 24–8; Edgerton, Warfare State, pp. 42–4;
Sebastian Ritchie, Industry and Air Power: The Expansion of British Aircraft Production,
1935–1941 (London: Frank Cass, 1997), pp. 9–19.
Arms, economics and British strategy138
of the British aircraft industry are to be found in the years 1934 to 1938
rather than earlier. It was not until September 1936 that Swinton felt he
could say that as important a firm as Vickers was ‘at last fully alive to the
necessity of straining every nerve to carry out their orders’ under the
rearmament programme.
108
One problem was that, despite increasingly generous contracts, it was
difficult to persuade British firms to expand plant to the full extent
required, given their experience of being left with surplus capacity after
the First World War, when some firms, including one of the largest,
Sopwith, had gone bankrupt, and given that a reduction in orders could
be expected in 1942, when the rearmame nt pro gramme was due to be
completed.
109
A related problem was the need to prepare firms outside
the aircraft industry to take part in the greatly increased production that
would be required if war broke out. These problems were met by
creating a ‘shadow’ industry for aircraft production. Plans for creating
additional capacity for aircraft production had been dra wn up in 1929
and were implemented from 1936. At first the shadow industry was
intended to be made up of factories managed by automobile and other
engineering firms, which would be given ‘educational’ orders in peace-
time but whose main effort would be made in war-time. However, in
1938 the government decided to expand productive capacity by paying
for the construction of factories that would be managed by established
aircraft firms for an agency fee, and it was this expansion that made the
greatest and most immediate contribution to productive capacity. There
was also a rapid increase in sub-contracting from the spring of 1938,
when the aircraft firms were told by the Air Ministry that they should
aim to sub-contract at least 35 per cent of aircraft construction, whereas
10 per cent had been more normal earlier in the rearmament pro-
gramme. As firms gained experience, labour productivity increased.
110
Down to the spring of 1938 the Air Ministry had avoided p lacing
orders for obsolescent aircraft merely to boost production figures. On
27 April 1938, however, the Cabinet, under parliamentary pressure to
match German aircraft pro duction, authorised the Air Ministry to
accept as many aircraft as it could from the British aircraft industry, up
to a maximum of 12,000 machines over the next two years. The
Treasury readily sanctioned expend iture on plant required for the
programme. As a result of these measures the gap between British and
108
Secretary of State’s progress meeting, 15 Sep. 1936, Air Ministry records, series 6, file
26 (AIR 6/26), TNA.
109
Secretary of State’s progress meeting, 17 Sep. 1935, AIR 6/23, TNA.
110
William Hornby, Factories and Plant (London: HMSO, 1958), pp. 218–26; Ritchie,
Industry and Air Power, pp. 57–61, 91–105.
Retrenchment and rearmament 139
German production rapidly narrowed. The performance of Britain’s
aircraft industry compared very favourably with that of France, where
nationalisation was associated with a fall in production in 1937, and
where total production in the years 1936 to 1939 inclusive, 6,178, was
only 41.7 per cent of the British total (see table 3.5).
The conventional picture of Britain’s naval armaments industry is that
it contracted considerably after the First World War and by 1935 was
not capable of producing as many warships a year as it had done before
1914.
111
However, it still had the benefit of supplying the largest navy in
the world. Britain may have had to concede parity to the United States
Navy under the Washington and London naval treaties, but, as table 3.6
shows, Britain continued to order more warships than other naval
powers both before and after rearmament began in earnest in 1936.
Consequently, as Edgerton has shown, Britain had the world’s leading
naval-industrial complex. The industrial capacity involved extended far
beyond the shipbuilding industry as conventionally defined: for exam-
ple, 40 per cent of the price of a battleship represented the cost of guns,
gun-mountings and armour plate. In the 1920s and early 1930s wars hip
tonnage ordered avera ged about half of the average for the decade
1900–10. Some firms did not prosper – notably Beardmore, which
ceased to build warships (although it continued to produce armour and
guns) after 1930. Others did much bet ter. Vickers, half of whose turn-
over was in armaments, was the country’s third largest manufacturing
employer in 1935. From 1925 the Admiralty provided subsidies, direct
or through the pricing of contracts, to ensure that specialised industrial
capacity did not disappear: for example, for armour and shells. There
was spare capacity waiting to be reactivated in 1935 and, while there
were procurement bottlenecks in the supply of guns, gun-mountings,
armour plate and electrical equipment, the Admiralty had to spend only
a modest £12 million on new plant for private contractors, Admiralty
factories and royal dockyards between April 1936 and April 1939,
compared with commitments totalling £40 million made by the Air
Ministry in the slightly longer period April 1936 to July 1939.
112
By contrast, the War Office was very much constrained by lack of
industrial capacity. Of the 250 national factories created by the Ministry
of Munitions in the First World War, only three were retained through
the inter-war period, and these were held in reserve and not rehabili-
tated until 1936–7. Munitions production down to 1936 was shared
between the three historic royal ordnance factories at Woolwich,
111
Gordon, British Seapower is the fullest exposition of this point of view.
112
Edgerton, Warfare State, pp. 33–41; Hornby, Factories and Plant, pp. 202–3.
Arms, economics and British strategy140
Waltham and Enfield, and a much reduced private sector. There was
adequate capacity for manufacturing small arms and ammunition for the
army’s rearmament programme of 1936, but not for guns, shells or
tanks. Ten new royal ordnance factories were approved betwee n 1936
and 1939, but this capacity was based on the size of army planned in
1936, not the army as it was expanded after March 1939. Reflecting the
strategic priority given to air war, much of the new capacity for manu-
facturing guns was devoted to anti-aircraft requirements rather than
those of the field army.
113
The Air Ministry was allowed by the Treasury
to pre-empt War Office requirements for machine tools in 1936 and, as
part of the policy of non-interference with normal trade, the Treasury
tried to have War Office orders postponed until they could be fulfilled by
Table 3.6. Major warships launched (or conversions to aircraft carriers begun), 1922–35 and
1936–40
a
Britain France Germany Italy Japan USA
1922–35
Capital ships 2 1 (3 ¼ 1)
b
00 0
Aircraft carriers 3
c
10 053
d
Cruisers 21
e
18 6 17 23 21
Destroyers 62 56 5 40 59 21
Submarines 34 77 12 54 53 13
f
1936–40
Capital ships 5 3 4 4 2 2
Aircraft carriers 5 0 1
g
1
h
64
Cruisers 28 1 5 3 5 11
Destroyers 69 10 25 16 32 73
Submarines 39 6 140 62 27 33
Notes:
a
Excluding monitors and minelayers, and all surface ships of under 1,000 tons.
b
Armoured ships, popularly known as pocket battleships, each with a tonnage of about
one-third of the maximum for a capital ship under the Washington Treaty.
c
Not including two wartime conversions or HMS Hermes, the world’s first ship designed
from the outset as a carrier, which was launched in 1919.
d
Excluding Langley, converted from a fleet collier in 1920–1.
e
A further five were built for the Royal Australian Navy.
f
1924–35.
g
Launched 1938; construction suspended 1940.
h
Conversion of passenger liner begun in October 1940.
Source: Roger Chesneau (ed.), Conway’s All the World’s Fighting Ships 1922–1946 (London:
Conway Maritime Press, 1980).
113
Hornby, Factories and Plant, pp. 83, 89, 148–9; Postan, British War Production, pp. 7–8, 33.
Retrenchment and rearmament 141
the new royal ordnance factories, rather than being used to bring new
firms into munitions production. The Morris car company and the
London, Midland and Scottish Railway were asked to co-operate in
the design and production of tanks, but in April 1939 Sir Harold Brown,
the director-general of munitions production, reported to the CID that
‘until recently’ tank production had not been given a very high degree of
priority as the work conflicted with locomotive and railway wagon
work.
114
Regarding the rearmament programme as a whole, Weir identified the
supply of skilled labour as the most important bottleneck, and advised in
January 1936 that steps should be taken to secure efficiency in its use.
115
As in the First World War, changes in industrial practices – dilution –
could overcome shortages of skilled labour, but trade unions were
deeply suspicious that employers were trying to turn the situatio n to
their own advantage, and feared that unemployment would follow the
completion of the rearmament programme. The advice of the Ministry
of Labour was that direct government contact with the trade unions
should be avoided, as consultation would encourage the unions to
demand a high price as regards conditions and wages in return for co-
operation. The Ministry recommen ded using sub-contracting to take
work to areas where there were still reserves of unemployed labour, and
relying upon upgrading of individual skilled workers to better-paid
positions supervising the work of semi-skilled and unskilled labour. The
political atmosphere changed after the Anschluss and contacts between
the government and trade union leaders began the same month (March
1938). Even so, it was not until 28 August 1939 that the Amalgamated
Engineering Union and the Engineering Employers Federation at last
signed an agreement on dilution. As R. A. C. Parker argued, there were
real economic limits on rearmament.
116
As in the First World War, private capital was attracted to armaments
production by the prospect of profits, a sensitive matter for trade
unionists and the wider political public. Neville Chamberlain tried to
placate labour and voters in 1937 by introducing a new tax, national
defence contribution (NDC), to be levied on any increase in profits.
However, NDC as originally proposed would have hit firms that
were recovering after being severely affected by the depression, and
Chamberlain gave way to business protests and changed it to a straight
114
Peden, British Rearmament, pp. 169–71, 175.
115
DPR(DR)C minutes, 13 Jan. 1936 and DPR (DR) 8, memorandum by Weir, 27 Jan.
1936, CAB 16/123, TNA.
116
R. A. C. Parker, ‘British rearmament 1936–9: Treasury, trade unions and skilled
labour’, English Historical Review, 96 (1981), 306–43.
Arms, economics and British strategy142
5 per cent tax on all profits.
117
Robert Shay has described profiteering as
the final manifestation of the breakdown of co-operation between
government and industry.
118
However, he overstates the problem.
The inter-service Contracts Co-ordinating Committee recommended a
maximum profit of 15 per cent on capital employed in defence contracts,
and the aircraft industry’s average profits were 10 per cent in 1936 and 20
per cent in 1937. Under pressure of parliamentary criticism, the aircraft
industry agreed to forgo a third of their forecast profits for 1939, to bring
them down to 14 to 15 per cent. On the other hand, average profits on
War Office contracts in 1937 and again in 1943 were estimated at about
10 per cent on capital employed. The highest profits appear to have been
made on naval contracts: 27 per cent on cost between 1936 and 1939.
Insofar as increasing profits reflected increasing efficiency – and this
appears to have been the case at least in the aircraft industry – the nation
benefited from having increased production from scarce resources.
119
Shay believes that the government should have taken powers to
oversee the management of industry to expedite the changeover of pro-
duction from older to newer armaments, and to introduce the most
productive organisational methods. He noted that Chamberlain was
reluctant to incur the opposition of the Federation of British Industries,
and preferred to ask for the resignation of ministers: Swinton from the
Air Ministry in May 1938 and Inskip in January 1939, when they became
convinced of the need for government controls.
120
Shay appears to see
government as a potential deus ex machina for industrial problems, but
civil servants lacked the necessary skills to operate controls without the
wholehearted co-operation of businessmen. Departments like the Board
of Trade and the Ministry of Supply delegated many of their responsi-
bilities to business organisations both before and during the war.
121
To argue thus is not to say that nothing could have been done. Clearly
there were ways in which government controls could have transferred
capital and labour to rearmament. For example, private funds could
have been released to purchase government bonds, and the shortage of
building labour could have been eased, if the government had taken
action to curb the speculative house-building boom of the 1930s. The
Ministry of Labour advised in the summer of 1936 tha t, as things stood,
117
Daunton, Just Taxes, pp. 172–3.
118
Robert P. Shay, British Rearmament in the Thirties: Politics and Profits (Princeton
University Press, 1977), p. 290.
119
G. C. Peden, ‘Arms, government and businessmen, 1935–1945’, in John Turner (ed.),
Businessmen and Politics: Studies of Business Activity in British Politics, 1900–1945
(London: Heinemann, 1984), pp. 130–45, at pp. 139–41.
120
Shay, British Rearmament, pp. 291–2.
121
Peden, ‘Arms, government and businessmen’.
Retrenchment and rearmament 143
the shortage of building labour could be expected to be serious for at
least eighteen months (an accurate forecast: the boom broke at the end
of 1937). Nevertheless, nothing was done, apart from administ rative
action to curb local authority building. It seems that ministers did no t
wish to offend middle-class voters. In July 1939, when war was still not
certain, but the scale of rearmament was rapidly mounting, the Treasury
recommended measures to control building society loans, bank advan-
ces, new issue s on the stock exchange and company dividends, to ensure
that the government could continue to borrow without inflation. The
Treasury’s conversion to controls that would normally be anathema to it
reflected the extent to which it h ad lost control of the growth of defence
expenditure and was having to find new ways in which to preserve the
‘fourth arm’ of economic stability.
122
By 1939 British armaments production matched that of Germany in
important respects. Monthly aircraft production overtook that of Ger-
many in September. More surprisingly, British monthly tank production
was higher than German tank production in August 1939.
123
It is
tempting to argue that if British rearmament had begun earlier – if
Chamberlain had agreed to borrowing for defence in 1934 instead of
1935 – matters would have been very different in 1938 and 1939.
Historians are not alone in exercising hindsight. Bridges, who had been
the offi cial in charge of the Treasury’s division supervising defence
expenditure before he succeeded Hankey as Cabinet Secretary in
August 1938, remarked in December 1938 that there was nothing much
wrong with the scale of Britain’s preparations, but ‘I wish we had started
rearming a year earlier’.
124
Sir Roger Backhouse, newly appointed first
sea lord in November 1938, took the view that it had been a great
misfortune that rearmament had not started two years earlier; ‘even one
year would have made a great difference’.
125
That was true of building
warships that were not limited by treaty, of reconstruction of capital
ships, and of stores, such as reserve s of oil for the main fleet’s movement
to Singapore. However, as noted in previous sections, not all modern
armaments were available for production earlier than 1938–9, the most
important examples being monoplane fighters and tanks larger than
light tanks. The question of what armaments were to be produced was
also deter mined in part by strategy, and it is to strat egy, and its inter-
actions with economic considerations, that we now turn.
122
Peden, British Rearmament, pp. 83–4, 100–3.
123
Postan, British War Production, pp. 56, 107, 109–10, 471, 484.
124
Chief of Staff: The Diaries of Lieutenant-General Sir Henry Pownall, ed. Brian Bond,
2 vols. (London: Leo Cooper, 1972–74), vol. I: 1933–1940, p. 175.
125
Backhouse to Vice-Admiral G. H. D’O Lyon, 21 Nov. 1938, ADM 205/2, TNA.
Arms, economics and British strategy144